How can a small consumer VoIP provider survive?
There is a lot of buzz about VoIP internet phone service. On the consumer side, everyone is getting a lot of exposure to Vonage commercials, as well as triple play offers from cable companies. From a technology standpoint, VoIP is now much more mature than it was in its early days when Internet telephony meant a voice conversation between two computers. While telcos have used VOIP services to carry voice traffic over large portions of their networks for years, it is now positioned to become the standard technology used to carry voice traffic the last mile from every home. consumer. Increased broadband penetration and advances in VoIP technology make this possible, and there is now a long list of VoIP providers looking to get a piece of the action. They range from giants like Verizon and Comcast to relatively small unknowns. For the first time in the history of telecommunications, it is possible to be a telephony provider without the huge capital barriers required for switches and Network Operation Centers (NOCs) or the regulatory barrier of being a Local Exchange Carrier. So will the industry be marked by many small, nimble players? What is the probability of survival of small consumer VoIP service providers?
Cable TV companies have a strong position in the telephony market. They already have a large integrated customer base. They also have a local presence, with field installers regularly touring neighborhoods and customer service locations in each city in which they have a franchise. Having the field installers is a huge advantage as they can install the VoIP service and also connect the inside wiring so the service experience is no different than before. Therefore, a person does not have to be the slightest bit technically inclined to adopt the service, thus opening up the market to the masses. Pure games like Vonage just can’t reach the mass market this way.
Cable companies also have strong 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 their phone service from this type of entity. There is a level of familiarity and comfort to 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 long windows to show up to a facility, they can be late, and they can keep you on hold at the call center, the cable companies are actually very good at managing the complexities of your operations. For example, RCN entered some markets years ago as an alternative cable provider thinking it could take advantage of people’s dislike of cable companies’ service history and do better; instead, they ended up realizing how complex it is and ended up making it worse. If a business wants to scale as a major VoIP provider, it will have to manage the complexities of billing and customer service. Cable companies have already been down this road.
Here’s what might be the biggest factor why cable companies will be more successful in VoIP and ruin the chances of other smaller players: They provide a broadband connection. Since this is required for VoIP, the incumbent provider is the first to provide the voice service. Also, since broadband connections have high margins and VoIP has low margins, broadband providers may treat voice service as a loss leader to get and keep customers on their high-speed connections. NetZero, for example, is giving away free phone numbers and VoIP services on the cheap, presumably in the hope that users will sign up for their ISP. In fact, voice service could become so commercial that it will be given away with broadband service in the same way that email is today. If this becomes a reality, there would be very few market opportunities and a bleak outlook for survival for smaller 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 must also provide the highest level of comfort for people to provide telephone service. However, the Phone Companies have a dismal performance compared to the Cable Companies that have the most VoIP subscribers. Verizon VoiceWing and AT&T CallVantage each have only 5.5% of the 2.9 million pure VoIP subscribers (Telephia Q2 2006). Those 320,000 subscribers are dwarfed by cable companies like Time Warner Cable, which only had 1.6 million VoIP customers as of October 2006. Why have phone companies fared so dismal? The internal conflict between POTS and VoIP is one reason. They cannot emphasize a low margin VoIP product in their core offering and have struggled to create an effective packaged product strategy with advanced services. They are also spending more internal resources and focus on better broadband offerings than DSL and trying to get into video services. However, they still rank second and third in pure VoIP subscriber share and have plenty of money, which will allow them to spend much more than a small VoIP provider to gain mind share.
Vonage, with 53.9% of the 2.9 million pure VoIP subscribers, is spending a ton of money to gain shared mindset and customers. This is good because it increases awareness of the product category, which helps a smaller pure game. However, it also presents a major challenge for smaller providers to compete head-to-head for customers when a single provider has such a commanding voice.
There are a number of challenges that a smaller VoIP provider faces. Small providers have to compete for voice share against companies that spend a lot of money. As far as the business case goes, VoIP has relatively small margins and ROI for marketing campaigns and building brand awareness is challenging. However, without spending money on marketing, it is difficult to acquire customers.
Then there is the challenge of market size. Pure game providers do not have local installers or technicians, limiting the market to those who have the technical knowledge to set up the service or the will to do so. If the target market is defined as people who have the technical knowledge to set up VoIP on a home network, then this market is primarily understood as younger people. This group is increasingly mobile and has little use for a landline. Also, consider how the overall phone market will change over the years. The people who are now in college and who will graduate in the next few years and get apartments are 100% mobile and have never had a landline. Therefore, the pure VoIP market will shrink as fast as it grows.
However, there is still an opportunity for smaller VoIP providers in this challenging market. The opportunity is to focus on niche markets and take advantage of specific VoIP benefits that are particularly important to specific customer segments. In such segments, word of mouth advertising is a viable strategy if the service can fill a strong need. This solves the dilemma of investing in media to build a strong brand and maintain better profitability.
The ReVoS Internet telephony service is an example of a small VoIP provider following this strategy. They are targeting 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 offer for $24.95 per month. They have also developed a VoIP product that works through a mobile phone that does not require a broadband connection. This is aimed at people of international origin who, by the way, have the highest propensity to use cell phones of any demographic in the US. This niche makes sense since carrying long-distance call traffic is an inherent strength of mobile phones. VoIP networks. Furthermore, these customer groups are best reached through a niche strategy and would be bypassed by mass market strategies. This market is largely understood as people living in the US 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 one example of how a small VoIP provider can successfully compete against much more formidable competitors such as cable companies and Vonage.
However, the future of the telephony industry and the role that VoIP assumes have yet to be fully defined and there are many uncertainties. There’s a long list of unknowns, including things like Google getting into Voice and whether Microsoft includes a softphone and VoIP service as a standard part of its operating systems. Fixed Mobile Convergence (FMC) is another technology wild card that could reshape the competitive landscape. The overwhelming penetration of mobile phone service and the ability of mobile carriers to steal the show with an FMC offering is very real. This may be the competing technology disrupting the MSO’s stronghold in VoIP. The question then becomes which combined product offering 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 the underlying telephony ecosystem if municipal hotspots and/or WiMax take off.
Regardless of what the future holds, the economies of the phone industry are likely to put a few large operators in control of most 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 communication needs. For smaller VoIP providers to survive and turn a profit, they will need to satisfy strong niche needs that the mass adoption strategy misses, have a well-defined, differentiated value proposition (remember the ESPN Mobile problem), efficient operations to control low costs and margins, low churn to offset limited average total revenue per subscriber (ARPU) in the absence of a larger packaged product strategy, and the ability to benefit from viral marketing within target markets. With all of this in place, there is a chance of survival for small VoIP providers.