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Should VoIP Start Ups Start To Worry?

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When the very people whose business you are supposed to put you out of business don’t take you seriously, you know you are in trouble. VoIP start-ups should not take the comments of SBC CFO Rick Lindner lightly. In an interview with Reuters he said, “The fears of what may happen there are overblown.” The incumbents confidence comes from the fact that they are pretty apt at adapting to any new technology that threatens their existence. Remember DSL!

I find it quite amusing that only those who have no experience in the phone business or those who have not tussled with the phone companies are making wild eyed predictions that voice will be free. Ebay CEO Meg Whitman might just be trying to justify the mega-billion price tag for Skype.

Port blocking and other traffic grooming techniques which I have written in the past are clearly going to make things difficult for anyone who threatens the incumbents livelihood. What we will see is move away from the billable minutes paradigm to flat rate, which in the end may not be such a bad thing at least for cable companies, who are used to the flat rate life.

There are some tell tale signs of looming trouble in the VoIP start-up land. A new report from Infonetics Research, likely to be released tomorrow predicts that by 2008, there will be 24 million subscribers and $8.4 billion in sales. In comparison we had sales of around $255 million and 1.1 million users in 2004. Infonetics says that for now the cable companies are in the driver seat, and are increasing their share in the consumer VoIP market place. Vonage’s share of the over market in the 2Q 2005 skidded from 36% in Q1-2005 to 32%. Time Warner’s share of the total voip market for the same period was up 4% to 25%. Imagine, when Comcast finally gets it VoIP-on!

Kevin Mitchell, the Infonetics analyst told me that in areas where Comcast has started rolling out the service, the demand for its digital phone (a consumer name for VoIP service) is pretty high. “I don’t understand the fascination with Vonage and why Skype got such a high valuation,” he says. Even if Vonage does go public or get acquired, I wonder what are exit options for the newer and smaller players such as Sun Rocket. Things are not looking good in the small and medium sized business category either. And I have not even taken into account what happens when Bells finally get their VoIP act together.

“The incumbent telcos have insubstantial subscriber share at this time, but we expect them to make a bigger impact in coming years, because triple-play services will all be based on broadband infrastructure, and legacy PSTN access will continue to slowly churn away.”

24 Responses to “Should VoIP Start Ups Start To Worry?”

  1. VoIP is just another service, it will be free or close to free sooner or later. Vonage doesn’t even have a billing system that would let it offer pricing to fit for different customers. The pure-plays won’t be around for long, as the cable and the big boys will squeeze them out. Cable companies will offer the free voice just to make sure their video and data customers don’t leave ship. They key for the industry is working out the billing systems (online) for the additional services that will soon be coming that customers are actually willing to pay additional for.

  2. Because any VoIP user can call (or get calls from) any phone anywhere, there isn’t a big incentive for users to cluster onto the same carrier, nor is there a critical-mass requirement for carriers. So there are lots of VoIP carriers, making phone service (VoIP or not) pretty much a commodity business — and the advantage in a commodity business goes to the established big players.

    The one problem the incumbent telcos have is that they’re extremely reluctant to cannibalize their existing non-VoIP business. Some of them will end up losing lots of subscribers, especially to the (also incumbent) cablecos. (It’s happened before. My telco “forgot” to tell me about its new competitively-priced long-distance plan, hoping I’d just stay on its expensive one forever. It lost my business to a long-distance carrier.)

  3. VoIP is a service and it will likely be free in the not too distant future, connectivity and presence is what you will still pay for and the incumbents SHOULD have that sewn up (if they’re not too busy pissing away money on IMS infrastructure and content portfolios!)

  4. i re-read some of the comments above…agree US long distance rates have been beaten down…but try a number of international destinations makes sense to use VoIP…ever tried calling from one foreign country to another using a US plan cell phone? cheaper to fly to the destination…so if these rates get rationalized VoIP is much less attractive

  5. Kimo Crossman

    There are some excellent points here, but realistically it’s hard to imagine a scenario where SBC would actually admit that they were doomed publically.

  6. I help buyers negotiate technology contracts – msotly software and outsourcing related. I love the tech industry because you have ingenious start ups from the most unexpected places…open source vendors from Scandinavia, offshore vendors from India – which challenge incumbents and force innovation and more rational pricing. I hope the Bells fight the battle through more rational pricing not through blocking tactics. Buyers are fairly loyal, but they are not stupid.

  7. Didn’t Kevin Mitchell used to be a left-fielder for the Giants & Padres? ;)

    Personally, I’m waiting for the wireless phone companies to start offering phones that can switch between wireless and VoIP over a home WiFi network. I would pay a few bucks extra for that, and it would still save me money, because I wouldn’t be paying as much as I am for Vonage. Verizon already does VoIP with VoiceWing. They ought to find a way to combine wireless and VoiceWing service together.

    What I could really use, though, are a few Bluetooth repeaters around the house, so that I can walk anywhere with my headset in my ear and not miss anything…

  8. Only to-day Betanews reported that Flaws have been discovered in the Skype VoIP system although skype claims that the flaws have been patched. Nobody can claim that the patches would not have the flaws. Often the flaws have more patches then the original software. It is a shame that people will find justification for a price tag of billions of dollars for a flawed system. The fact is that the VoIP technology is not needed when there are cellphones. As a matter of fact the advent of cellphones should have led to the redevelopment of the internet service method that would have made the Personal Computers including Laptops obsolete. This method is discussed at

    that would have meant an unflawed system of on-line business files freedom from identity thefts. I get daily emails telling me that my ebay and paypal email numbers have been changed. I don’t even have email and ebay accounts. Many people are using my name to do business in my name. But there is nothing I can do about it because Paypal and ebay would not take my complaints without my password. Obviously I do not have a password since I have not opened an account. I get emails at all my email accounts that there is a suspicious activity at my Paypal and ebay accounts and they have been suspended. I get such emails from banks too. Scares the hell out of me. funny there is no account of such activity in my credit reports.

  9. What startups are we referring to anyway? Vonage, et al can hang it up as far as I’m concerned. I’ve never even considered saving $10 a month for worse service. Vonage has always been nothing but a phone company wannabe, IMO.

  10. When voip goes wireless, we enter a whole new ball game. And I think it will be like cellular on steroids. That’s when we start knocking balls out of the ballpark.

  11. People, i think the best thing to do is go and re-read what aswath is saying about the current value proposition of the voip services. I could not agree more with him. I have used a ton of these VoIP services, and none come close to replacing the convenience of my cell phone. at $80 for nearly unlimited calling, anywhere and anytime, i am not sure I need anything else.

  12. While it is always prudent to observe what any 800 pound gorilla will be grabbing for, we should remember centrex the PBX killer, boy, that was great to sell against. Remember little teensy things like product/service packaging and good customer service will always win with people who have a bad taste from all the excellence their telco has delivered in the past.

  13. I always ask the question “who do you trust?”. POT providers, why should I trust them? In most of the European countries they have been quite sucessful monopolists initially as service providers and later as infrastructure owners. The price for the consumer has been too high.

    If infrastructures were built to meet citizen/user requirments, and services providers could purchase access to these infrastructures at a cost without being in competition with the infrastrucuture provider, then citizens/users would benefit. We have yet to see this in practice.

    VoIP services over the Internet is the first time we have the chance to monitor infrastructure independant services. If only the infrastructure providers could manage to stay away!

  14. VoIP service providers need to worry because they are not offering VoIP service; but instead they are offering directory service and NAT traversal. Both of them are incidental services and not worth charging for as demonstrated by the current crop of service providers offering them for free. Since “equal access” is built into IP networking, there can not be a monopoly.

    As far port blocking, the question is whether the ISP is offering internet access or something else. If it is the former, they should only control the amount of resources consumed at the networking layer rather than base the control logic based on the nature of applications. Even if they do, they will fail because it is contrary to the layering principle.

  15. I recently cancelled my Vonage account – – after being a customer for more than a year. Occasional service outages, hiccups on the phone line during “peak” hours, Vonage’s inability and unwillingness to work on the quality of international calls – screw that, an SBC phone line with a phone card for international calls is more reliable, and cheaper, too.

    Granted, the phone company charges you for little things like 3-way calling and caller ID, but they’re not that important to me.

  16. FWIW, I have Lingo at home–unlimited local and long-distance, unlimited to Mexico (where I have family), and virtual line in Mexico (so they can call me for free) all for $40/month. As soon as 911 service is up to par with my landline I will cut my Qwest line immediately!!! I have no use for regional monopoly telcos. They just charge me fees and offer me high priced add-ons (all free of course with VOIP) that I do not need or use.

  17. Telcos understand, and are built for, scale. 500,000 paying customers is peanuts. Try provisioning, billing, servicing, maintaining 15 million. I agree with Om, the incumbents have the upper hand.

  18. It’s free until the company offering the free service goes bankrupt. This “Free” concept is a nice catch phrase, but really the costs are there – billing, QoS, support, engineering, etc.

    I’ve always questioned why a Verizon or Bell South would let a third party voice app ride their expensive networks without compensation.

    On the flip, I can see ISP’s and advertising funded services (i.e. future Skype and Google) providing “free” phone services. Again, that is if they can ride the last mile.

    Last mile is critical, IMO. And the last mile IS NOT FREE!

  19. Marlin May

    Will tactics like port blocking be effective in a world where folks are using GoogleNet (or Yahoo!Net, even eBayNet)? In essence, if the telcos and cablecos put up enough roadblocks, could they find that they’ve been routed around?

  20. EVERYONE is suggesting that voice will be free. And I have to be honest, I can’t imagine that it WON’T be free at some point. Then again … I’ve never worked in the phone business nor tussled with the phone companies …