Blog Post

(VoIP) Forecast Calls For Pain

Frost & Sullivan says that the North American VoIP residential revenues will hit $4.07 billion by 2010, up 1300% from 2004 sales of $295.1 million. Do some math here, you can very quickly find out that the numbers paint a pretty bleak picture for most VoIP providers. They are forecasting VoIP lines to grow from 1.5 million in 2004 to 18 million. By all estimates, 2004 the total US VoIP lines were about a million. Given the late start of Canadian VoIP, I find the 1.5 million number hard to believe. But that’s me nitpicking.

$4.07 billion divided by 18 million lines works out to annual VoIP revenues of $226 per line. Or about, $18 a month. “Residential subscribers are likely to replace second lines with wireless or VoIP,” Frost & Sullivan Senior Analyst Lynda Starr said in a statement. What she did not say – if her forecast is true, then residential VoIP is nothing but a cheap tack-on service. Unless you are bundling VoIP service with cable or DSL service, or packaging it as a part of some triple-play offering, there is little chance of making money in this game. Research from In-Stat supports this. Nearly half of US telecom customers are buying some sort of a bundle from their service provider, up from just one-third in 2004. SBC softphone for $10 a month? I will take that!

And if you are a VC looking to cash-in on the VoIP madness, think again!

16 Responses to “(VoIP) Forecast Calls For Pain”

  1. James, great response. I wonder if anyone here saw Level 3’s Charles Meyers presentation at VON. If anyone has an incentive to overhype VoIP it’s Level 3. Instead what was presented were some very troublesome stats – 80% of people are satisified with their current service, interest in purchasing has only gone up 2% points from 24 to 26% in the last 10 months.

    After the early adopters get their service, I think the Vonage play goes flat and growth almost exclusively depends on the MSOs making voice a priority. The CLECs took 6-10% share in their markets pretty fast, then couldn’t get over the hump. Same thing will likely happen to consumer VoIP without a compelling triple play.

    VoIP will happen with or without Vonage et al, but when the market depends on growth by cable companies, you’re not going to see any hockey sticks. OTOH, there’s a chance the peer-to-peer players will move more quickly and take a lot of minutes off the network. Meanwhile business VoIP is a total muddle – not much happening yet.

    Re: Tom H’s note on “75% profit margins” – yeah, right, tell that to people who were selling $2,000 T1s a few years ago!

  2. Funny that companies offering triple play expect premiums for VoIP based voice offerings simply because of converged billing, and no additional innovations?

    Cheap is the only differentiator for standalone companies like Vonage, but consumers will come to expect value added services on top of triple play providers if the ARPU is to go up.

  3. James Brehm

    All of this is very good debate but I am wondering when VoIP service providers will start touting VoIP as anything but cheap phone service. Although VoIP is much more, it has yet to hit any projections yet because it is still a cheap way to get to a dialtone.

    Has the person who discounted the Frost & Sullivan report 100% even read every page of it? Sounds like a knee jerk statement…the same kind of statement that has caused false growth projections in the past.

    While I’ve seen ridiculous hockey sticks on VoIP over the past 4 or 5 years a lesson learned might be caution when forecasting.

    It appears that some people on this blog think that everyone in the VoIP game will be rolling in profits in a couple of years. If this is the case I’ll be happy for you, but the same executives of CLECs that we’re lighting each other’s cigars with $100 bills a few years ago aren’t all waving from their Bentley’s to each other as they drive down easy street. (Anyone remember the hype around how CLECs would change the world?)

    Stop thinking about profits in a few years, and give the customer what they want. The customer wants a dialtone…a single bill….simplified billing…bundled services…a single portable number…wireless capability…etc. Give ’em what they want and they will $pend. Continue with the “cheap phone” and RBOC replacement mentality, and VoIP will never hit its promise.

  4. The arguments always seem to assume that VoIP is a standalone replacement for standard PSTN. I don’t think this is the case. The key fact is that all services are gradually moving to delivery over IP, and with broadband in the home, VoIP can be delivered right to the end audio device. The question on take up is not network dependent, it is device dependant and there are already hybrid devices out there (e.g. BT). Nokia are developing a mobile phone for release later this year, N91, which has WiFi, as well as mobile access, thus the control will be in the hands of the user/device rather than the network. I can choose to make a call over VoIP or over PSTN/PSMN (or the device could choose for me). The operators tried to control the manufacture of the devices (e.g. Vodafone branding agreements) but now the device manufacturers will be in the ascendency again.
    There is a lot of spectrum out there and the device as an intelligent router puts a lot of power in the hands of the device provider.
    So, VoIP will not replace PSTN/PSMN immediately, but will complement it, gradually taking service revenue (due to lower cost of delivery) and eventually everything will be over IP (or maybe something else, but I doubt it). I see this happening quicker than people might think.

  5. While I stand behind my forecast, before dismissing it, I direct commenters to more insight to be found within Frost & Sullivan’s North American Residential VoIP Market research service. VoIP is moving beyond early adopter into the mainstream, but is likely to remain a second-line replacement despite 30-50% of subscribers’ porting their phone numbers to VoIP-based services, demonstrating some primary-line replacement. All is not bleak based on various market drivers discussed in the report although VoIP-based services have a long way before reaching ubiquity.

  6. here is the thing. if they add say 100 users to 200 users, its growing, but not that much in larger scheme of things. i think you are nit picking on the semantincs here. and why the hell should i reveal my source. you take this information for what it is. or not.

  7. Thomas Hirsch

    Om – First you say that VoiceWing is “not growing.” Now you say VoiceWing is “not growing that much.”

    Why not reveal your source? Did the source commit a crime? Does the source work for a VoiceWing competitor? Does the source even exist?

    How often does a person signing up for VZ broadband also sign up for VoiceWing?
    Is VZ broadband growing much?

    Om — Either be exact or your blog loses almost all its value. We do not need more unsubstantiated opinions, of which there are far too many now.

  8. thomas, i am a reporter, and i don’t reveal my sources. i have on good authority that they are not growing that much. by the way, voicewing is a standalone for those who don’t live in the verizon footprint. i think when they make it part of their triple play package, it could sizzle.

  9. Thomas good points, except Voicewing is not a business that is growing… it won’t grow because right nnow the price pressure is too much, and will continue that wy for some time. as i said, the standalone offerings will have a tough time in the market.

  10. Thomas Hirsch

    Note that Verizon charges current customers $29.95 for VoiceWing — but that increases to 34.95 after 12 months.

    Note that VZ has in effect increased prices even more because Canada is no longer included in the unlimited plan.

    VZ recently dropped its mid-range ca 25.00 VoIP plan. It also offers a 19.95 plan but that only includes 500 minutes so very, very few people will consider that.

    The fact that Verizon can increase prices significantly must indicate very strong demand for VoIP.

  11. Thomas Hirsch

    Om — How can anyone predict where VoIP (or anything else) will be 5 years from now? I would discount the Frosty report 100 percent. You say independent VoIP providers don’t have a chance. Wrong. Keep these factors in mind:

    1. The main cost for Vonage now is acquiring customers. Once you have them, the monthly fee is about 75 percent profit. So, big profits ahead.

    2. Now, as VoIP is trying to become mainstream, it offers all kinds of special features free. Expect that to change big time in the years ahead. My local provider, Sprint, charges $9 per month for CallerID. Expect VoIP providers to start charging for special features in a year or so.

    3. Deltathree right now is slightly profitable while receiving about $4 to $9 per month from the VoIP lines it runs for others. DDDC is profitable because it keeps customer acquisitions low by letting the front companies (such as Verizon) do the acquiring.

    4. Note that Verizon’s VoiceWing has increased charges significantly in the past few months. Non-VZ customers are charged 34.95 (plus tax) per month.