5 reasons why VoIP providers will go Bust

Recent news has highlighted that VoIP service provider SunRocket has gone bust. This is no case of bad management – more and more VoIP providers will fall off the face of the earth in the coming months and years.

Before getting into the why and the who, let’s look at the different types of VoIP providers. Pure Play VoIP providers are those that provide VoIP via an adaptor to “bring-your-own-broadband” customers. Examples are Vonage, Packet8, SunRocket, Lingo, Netzero, Packet8, and Earthlink. PC-Centric VoIP providers are those that provide VoIP on PC platforms, typically as an extension to an IM client. Examples are Internet portal and PC messaging providers such as MSN Messenger, Yahoo! Messenger, AOL, Skype, and Google Talk. Facilities-based VoIP providers are RBOCs (the primary Local Phone companies) and Cable MSOs such as AT&T CallVantage, Verizon VoiceWing, Comcast Digital Voice, and Time Warner Digital Voice.

Being a Pure Play VoIP provider is tough, for the following reasons:

  1. Low barriers to Entry – It is very easy to become a VoIP provider. With an IP-PBX such as Asterisk, a bunch of T1 lines, call termination agreements, an authentication server, a web server for user management, software, anyone can start a VoIP service. As a result, there are many VoIP providers in the market, leading to much competition.
  2. High Customer Acquisition Costs – As easy as it is to become a VoIP provider, getting customers is a difficult task. A lot of people don’t know the company or have reservations about VoIP. Second, Pure Play VoIP providers have no brand recognition or trust relationships with customers. As a result, they have to market heavily to get customers. In contrast, PC-Centric VoIP providers can leverage their huge user base to gain a foothold in VoIP. For example, AOL, Yahoo, and MSN simply leveraged their IM customer base by adding VoIP to IM clients and by promoting it on their web properties. Likewise, facilities-based VoIP providers have access to a huge customer base that they can market at low-cost.
  3. Lack of bundled service – This is where Pure Play VoIP providers are hit the hardest and the reason why Pure Plays will sink while Facilities-based and PC-centric providers thrive. Facilities-based VoIP providers such as AT&T and Verizon already have already have voice, video, data/Internet plays so they are able to offer bundled services with VoIP as an add-on. Likewise, Cable MSOs have video and data/Internet plays, and can provide VoIP/voice as an add-on in a bundle of services.
  4. Expanding scope of PC-Centric VoIP providers – not only are new players joining the VoIP bandwagon, but existing PC-Centric VoIP providers are expanding into the Pure Play VoIP providers’ turf. Skype used to be only on the computer, but is creating an ecosystem of cordless phones, WiFi phones and gateways, to go beyond the PC.
  5. New Game-changers: IP-PBXs are entering the home, especially open-source software such as Asterisk that can be loaded on any computer and you can connect a traditional POTS phone to it.

All these reasons point to a gloomy future for Pure Play VoIP providers. Now let’s look at how these providers compare in terms of market share.

voip-provider-landscape.JPG

As this dated market share report on from Telephia shows, only Vonage has significant market share. The small players will find it very hard to survive because they don’t have enough scale. VoIP has high gross margins (low incremental cost of service), but to make money when fixed costs are relatively high very high, one needs a lot of customers. If customer acquisition costs are too high, which it likely is for these small unknown pure-play VoIP providers, then no amount of customers are going to help you – eventually you will run out of money. I believe this is exactly what happened to SunRocket.

The future is bleak for these pure play VoIP providers with little market share – they will be acquired or fade into obscurity soon. Ironically, Vonage, the pure-play VoIP provider in the news for patent infringement, may be the unlikely survivor.

2 Comments

  1. Vonage in particular will not go bankrupt. They offer advantages that my cable company (Time Warner) doesn’t provide. #1 is portability. I cannot take my access anywhere I go around the world like I can with Vonage. #2 is pricing. My cable company is $5 more expensive per month (with triple play bundling) but is $15 more expensive per month if I get it by itself. Even more important is my international calls with Vonage are half the price of those with my cable company. On top of that, Vonage now offers a flat rate ($6 to $15 per month) for international calling!

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