VoIP solutions are readily available to anyone with a high speed Internet connection, and the only hardware needed is an Analog Telephone Adapter (ATA) and a phone. For most consumers, utilizing a calling plan from a VoIP service provider is the best solution. Most VoIP service providers will provide the ATA hardware (or software) for free, and monthly charges range from free on up.

Peer to Peer VoIP

The least expensive VoIP solution would be using a computer on a peer to peer network. Offered from such VoIP service providers as Skype or the Gizmo Project, the software is free to download and calls within the network are free worldwide. Calls to PSTN numbers are charged at a low VoIP rate. Peer to Peer VoIP is a software solution, meaning that no ATA is required, and your phone is a pair of earplugs and a microphone plugged into your computer. The downside is that call quality is lacking compared to some of the hardware VoIP solutions available.

The “Pure Play” VoIP Service Provider

Over the past few years, a new generation of upstarts has introduced themselves into the residential VoIP arena. Probably the most successful (at least popularity wise) would be the VoIP service provider Vonage. Thanks to their lavish spending on advertising, the technology of VoIP is becoming mainstream, and the general public is beginning to realize that if the circumstances are right, Voice over IP can be a viable cost saving alternative to the Plain Old Telephone System (POTS).

Vonage, Packet8, and SunRocket are just a few of many companies that are pure-play VoIP service providers. They have no interest in selling you cable TV, conventional telephone service, or cellular minutes. Monthly plans range anywhere from $7.00 to $40.00 and calls are free in the U.S., Canada, and in some cases Europe. International rates vary with many countries as low as 2-3 cents a minute.

These are the companies that have pioneered residential VoIP for the consumer and with their low monthly calling plans, the companies that will keep the giants in the Telecommunications Industry honest.

Telco’s as VoIP Providers

Just as deregulation and the advent of cellular technology in the past, VoIP is poised to revolutionize the Telecommunications Industry. And the large telephone companies, even the cellular phone companies are entering this new era kicking and screaming.

Telco’s like AT&T, the regional Bells and others are happy to provide broadband internet access through DSL, but very few are willing to unbundle the internet service from their conventional telephone services. They could do it technologically, and a few local phone companies are offering DSL on the “local loop”, without the wire with the dial tone. The fact is, having a broadband connection that requires you to also buy a conventional telephone connection pretty much defeats the purpose, thus making VoIP through DSL impractical for most people.

That said, the Telco’s see the writing on the wall and are slowly beginning to implement Voice over IP telephony. AT&T and Quest Communications offer residential VoIP solutions starting at $25.00 and $30.00 respectively, just slightly higher than a pure VoIP service provider. All of the basic features such as call forwarding, speed dialing, and 3-way calling are included, and premium services like virtual phone numbers, conference calling, and call filtering can be had for an additional charge. International rates seem to be somewhat higher than pure play rates, though only by pennies.

VoIP and Cable Companies

If anyone is in a position to win the Telecommunication wars, it’s the cable companies. Massive consolidation in the cable industry has led to huge privately owned networks that in many cases make it unnecessary to route calls over the public Internet. Quality of Service issues can be handled in house, and after all, companies like Cisco Systems pretty much built the Internet and are largely responsible for the development of Voice over IP Telephony.

Cable companies as VoIP service providers have the ability to bundle voice with high speed data and digital cable TV, and are even now running introductory offers of all three for 99.00 a month in some markets. But be careful, introductory offers end and VoIP plans with the cable companies are some of the most expensive to be had.

While VoIP service providers like Comcast and Time Warner generally receive good reviews for sound quality, monthly calling plans cost $40.00 and $45.00 respectively. Not bad when looking at a $70.00 phone bill from Bell South, but over twice as much as a pure-play VoIP service provider. No doubt, a good reliable broadband connection through a cable modem is the ideal VoIP solution (wireless notwithstanding), but you don’t have to use your cable company for VoIP.

In the end, it all depends on whats important to you. If all you need is to call a friend in China on the same network, then a peer to peer VoIP service provider is for you. If you live in an area where it’s offered, a telecom VoIP solution promises lower bills than their conventional connections, provided you can drop the land line.

For those that have cable modems, the choice of VoIP service providers is vast. For the monthly cost of another broadband connection, cable companies will come out to install the equipment and rewire every jack in your house. And they are just a service call away. Alternatively, the pure play VoIP providers offer the lowest rates around, and the quality is usually just as good.

Just remember, it’s all in the pipe. Calls will be as clear as your VoIP service providers’ network is uncongested.

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The Cable TV companies have a strong position in the telephony market. They already have a large embedded base of customers. They also have a local presence, with field installers regularly driving around neighborhoods and customer service locations in every town in which they have a franchise. Having the field installers is a major advantage since they can install VoIP service and also hook up inside wiring so the service experience is no different than before. Therefore a person doesn’t have to be the least bit technically inclined to adopt the service, thereby opening the market to the masses. The pure-plays like Vonage just can’t reach the mass market like this.

Cable companies also have huge brand awareness in their markets. What is also potentially important is that they are perceived as a utility company and people are used to getting phone service from this type of entity. There is a familiarity and comfort level of going to a utility company for phone service.

They also have tremendous strength in both billing and customer service. While some may hate the cable company because they have lengthy time windows for showing up for an installation, may show up late, and may keep you on hold at the call center, the Cable companies are in actuality very good at managing the complexities of their operations. For example, RCN entered some markets years ago as an alternate cable provider thinking they could leverage people’s dislike of the cable companies’ service record and do it better; instead they ended up realizing how very complex it is and ended up doing it worse. If a company wants to scale as a major VoIP provider, they will have to manage the complexities of billing and customer service. The cable companies have been down this road already.

Here is what could be the biggest factor to why the Cable companies will be most successful at VoIP and ruin the chances of other smaller entrants – They provide a broadband connection. Since this is required for VoIP, the incumbent provider has the first dibs on providing voice service. Also, since broadband connections have high margins and VoIP has low margins, broadband providers could treat voice service as a loss leader to get and keep customers on their high-speed connections. NetZero, for instance, is giving away free telephone numbers and low priced VoIP service presumably with the hopes of signing on users for their ISP. Voice service could in fact become so commoditized that it will be given away with broadband service the same way email is today. If this becomes a reality, there would be very little market opportunity and a bleak survival outlook for smaller pure-play VoIP service providers unless they could offer a differentiated value proposition.

The Local Phone Company also shares many of the same advantages as Cable in that they have strong brands, ability to bill effectively, established customer service, and field technicians. They also should provide the greatest comfort level to people for providing a phone service. However, the Phone Companies have dismal showing compared to the Cable companies who have the greatest number of VoIP subscribers. Verizon VoiceWing and AT&T CallVantage each have only 5.5% of the 2.9 million pure-play VoIP subscribers (Telephia Q2 2006). Those 320k subs are dwarfed by the Cable Companies like Time Warner Cable who alone had 1.6 million VoIP customers as of October 2006. Why have the Phone Companies had such a dismal result? Internal confliction between POTS and VoIP is one reason. They can not put emphasis on a low margin VoIP product in their core offer and have struggled to create an effective bundled product strategy with advanced services. They are also expending more resources and internal focus on better broadband offerings than DSL and trying to break into video services. Nonetheless, they still hold second and third positions for share of pure-play VoIP subscribers and have deep pockets, which will allow them to far outspend a small VoIP provider to get mindshare.

Vonage, with 53.9% of the 2.9 million pure-play VoIP subscribers, is spending a ton of money to get mindshare and customers. This is good in that it raises awareness of the product category, which helps a smaller pure-play. However, it also presents a huge challenge for smaller providers to compete head to head for customers when a single provider has such a dominant voice.

There are a number of challenges facing a smaller VoIP provider. Small providers have to compete for share of voice against companies that are spending a lot of money. As far as the business case goes, VoIP has relatively small margins and the ROI for marketing campaigns and generating brand awareness is a challenge. Yet without spending money on marketing, it is difficult to capture customers.

Then there is the challenge of the market size. Pure-play providers don’t have local installers and technicians, which limit the market to those who have the technical savvy to set up the service or the willingness to do so. If the target market is defined as people who have the technical savvy to set up VoIP on a home network, then this market is comprised largely of younger people. This group is increasing mobile based and has little use for a landline phone. Also, consider how the overall telephony market will change over the years. People in college now that will be graduating over the next couple of years and getting apartments are 100% mobile based and have never had a landline phone. Thus the market for pure-play VoIP will be shrinking as fast as it grows.

However, there is still an opportunity for small VoIP providers in this challenging market. The opportunity is to focus on niche markets and leverage specific advantages of VoIP that are particularly important to specific customers segments. In such segments, word of mouth advertising is a viable strategy if the service can meet a strong need. This solves the dilemma of investing in media to build a strong brand and maintains better profitability.

ReVoS Internet phone service is an example of a small VoIP provider taking just this strategy. They are focusing on a niche segment of people who make a lot of international calls. ReVoS offers VoIP service, which includes unlimited international calling to over 40 countries including the standard VoIP product offering for $24.95 per month. They have also developed a VoIP product that works over a mobile phone that doesn’t require a broadband connection. This is geared to people of international origin who, by the way, have the greatest propensity to use cell phones of any demographic in the U.S. This niche makes sense since carrying long distance call traffic is an inherent strength of the VoIP networks. Also these customer groups are better reached through a niche strategy and would be missed by mass-market strategies. This market is comprised largely of people living in the U.S. who have moved here from other countries. These are tight communities where word of mouth can flourish and the value proposition is strong when saving people money on high cost international calls. This is an example of how a small VoIP provider can successfully compete against much more formidable competitors such as the Cable Companies and Vonage.

However, the future of the telephony industry and the role that VoIP takes still needs to be fully defined and there are many uncertainties. There is a long list of unknowns, which include such things as Google getting into Voice and whether Microsoft includes a softphone and VoIP service as a standard part of their operating systems. Fixed Mobile Convergence (FMC) is another technology wildcard that could change the shape of the competitive landscape. The overwhelming penetration of mobile phone service and mobile carriers’ ability to steal the show with a FMC offer is very real. This may be the competing technology that upsets the MSOs stronghold on VoIP. The question then becomes which bundled product offer is greater 1) Broadband and VoIP or 2) Mobile phone and VoIP. Another thing to consider is how Wireless VoIP (wVoIP) could change the competitive landscape and underlying telephony ecosystem if municipal hotspots and/or WiMax take off.

Whatever the future the holds, the economies of the telephony industry are likely to place a few large carriers in control of the majority of the market. People want simplicity in their lives and the winners will be those who provide the most seamless solutions to people’s basic communications needs. For smaller VoIP providers to survive and make profit, they will need to meet strong niche needs that get overlooked by the mass adoption strategy, have a well defined and differentiated value proposition (Recall ESPN Mobile’s problem), efficient operations to control cost and low margins, low churn in order to compensate for limited total average revenue per subscriber (ARPU) absent a larger bundled product strategy, and the ability to benefit from viral marketing within the target markets. With all of this in place, there is a chance of survival for small VoIP providers.

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