Outlook grim for independent VoIP market

Growth in VoIP services is exploding, but independent competitors in Canada are being marginalized as they battle against collapsing prices, stiff competition and the bundled service options of cablecos.A recent report from Infonetics Research notes that hosted VoIP and managed IP PBX services worldwide grew 52% in 2007. But the prospect of an independent player emerging to challenge the cablecos' dominance appears a distant prospect."Quite honestly, I don't think anyone in Canada has meaningful stand-alone VoIP service," Jon Arnold, principal of J Arnold & Associates, a consultancy specializing in IP communications, tells Network Letter. "To be a pure play landline VoIP service a pretty tough market to make a dollar in."Arnold expects the market to get even tougher in the coming months, as cablecos like Shaw Communications start offering wireless services and bundle those in with their existing cable television, internet and voice services. Worst of all, the cablecos don't appear to be in the VoIP business solely for the revenue. "It really is a competitive tool to go up against the telcos," Arnold explains.In addition to the cablecos, independent VoIP providers must compete head-to-head with the telcos' existing residential offers. "The telcos here have just got such a stranglehold," the analyst says. "There's no room for independents to breath."Although Bell Canada is quietly marketing VoIP services and Primus Telecommunications Canada is also a player, Telus has chosen to give the technology a pass altogether. This has helped to make cablecos, the only ones who can really play seriously in this market.The onset of VoIP as a legitimate alternative, he adds, has also conspired to turn the market into a commodity business, where prices will continue to decline until independent providers are nothing more than a footnote in Canada's telecom history.From ‘darling to dog'The best known brand among alternative VoIP providers is Vonage Holdings Corp., which has 2.6 million active subscriber lines in Canada, the United States and the United Kingdom. Although Vonage continues to grow revenue, it's saddled with $253 million in debt and reported a net loss of $7 million for the second quarter of 2008, despite deep cuts to operating expenses such as advertising."I've never seen a company go so quickly from being a darling to a dog," adds Arnold. Vonage does not break out separate numbers for Canada, but he says it's likely that the Canadian operation has been converted to nothing more than a simple branch plant."My feeling is Vonage Canada is being downsized and scaled back," Arnold says. "Anyone who follows the company knows that they have to cut back. They just have to find a better way to do things."Stephen Dorsey, president and CEO of Montreal-based VoIP provider, babyTEL, says that the Vonage model is "too dangerous and too expensive" to work in an environment where the cost of delivery is so low. "Essentially what they're doing is buying customers at today's price and that price is going to come down."Arnold says that the possibility still exists that Vonage could be acquired by a private equity firm. But potential buyers are sure to take a long hard look at its business model and long-term viability. "If Vonage doesn't get their things in order, I could see them exiting the business."A model that works?Although no killer business model is likely to emerge in Canada to challenge the cableco's dominance in VoIP, opportunities appear to exist in the development and launch of creative new applications and pricing models. BabyTEL, for example, recently took a big step into the social networking market through its launch of a VoIP-driven telephone service on Facebook. "You can go to Facebook and invite friends and get a phone and instant messaging and you can make calls and leave messages," says Dorsey.In addition to its new Facebook offer, babyTEL also offers an enterprise and standard residential VoIP service and currently boasts over 100,000 users. Dorsey says his company's viral approach to customer acquisition enables babyTEL to keep costs - and prices - low. "The bottom line is we're growing virally, we can grow as fast as we want with minimal investment in terms of new users," he explains. "And we expect to convert a percentage of that base to paid services."Dorsey adds that babyTEL will soon launch a premium service that will enable Facebook users to dial into the public network. "If people want free calls, that's fine with us. But as soon as they want to break out into the public network then we are coming out with starter package at $5 a month and 100 minutes."Arnold doesn't think that "any of the independent providers have much to talk about", but pointed to Telio, a Norwegian company, as one player that's developed a workable VoIP business strategy.Telio's success is largely attributed to its fixed price offer, which includes free calls to Western Europe, the United States and Canada. The company has more than 150,000 subscribers and is targeting the small and medium sized business segments for expansion. It is also creating a new platform to enable a video-based VoIP service.

Outlook grim for independent VoIP market

News | 09/02/2008 11:54 am EDT

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