How Can A Small Consumer VoIP Provider Survive

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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 in its nascent days when Internet telephony meant a scratchy voice conversation over two computers. Whereas VoIP has been used by Telcos to carry voice traffic over long portions of their networks for years, it is now positioned to become the standard technology used to carry voice traffic over the last mile from every consumer's home. Increased broadband penetration and advances in VoIP technology make this possible, and now there is a long line of VoIP providers out there looking for 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 barriers of capital needed for switches and network operation centers (NOCS).) nor the regulatory barrier of being a Local Exchange Carrier. So will the industry be marked by many small nimble players? What is the likelihood of survival for small consumer VoIP service providers?

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.

Article Source: http://depositarticles.com/

RNK Telecom is a privately held phone company offering wholesale and residential telecommunications services including VOIP Services. They market ReVoS, an Internet telephony product which offers superior International Calling.

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