Thursday, April 7, 2005

AOL - Can ISPs Compete With VoIP ? - Less Worried Now

Before getting to today's news about AOL, I just wanted to say I'm less worried now about the Red Sox. What a difference one day makes, and the season is only 3 games old. I won't comment all that often on baseball, but just needed some closure from my Tuesday posting. For Sox fans, there is nothing sweeter than knocking Rivera out of a game, esp when he came in with a lead - and in Yankee Stadium.

I won't dwell on this any further, but to me the game was a bit like watching VoIP chipping away at PSTN - one batter at a time. I'll leave it at that for now.

On to AOL. The launch of their Internet Phone Service has been widely covered, and I just wanted to add some brief thoughts to the mix.

First is the simple fact that ISPs represent a third option for getting VoIP. Most homes get the service from either a telco or a cableco. In this context, I'd put virtual operators like Vonage in the telco category since they're essentially offering telephone service - they don't offer video, and they don't offer broadband. That said, of these three types of providers, I would argue that a savvy ISP is the best positioned in terms of understanding how consumers use the Internet, and where it fits in their communications spectrum. In theory, AOL should be miles ahead of the RBOCs, MSOs and IXCs on this count. Of course, one could quickly throw cold water over that simply by saying AOL has been bleeding dial up subscribers for years and has not done a good job of bringing them to broadband.

So, of course, AOL needs VoIP to stem this tide. And what better reason is there to adopt broadband than VoIP? One could also argue that AT&T does not set a good precedent, as they have little to show for all their marketing and brand clout, with little more than 50,000 VoIP subscribers. That said, however, AOL has a much larger subscriber base to work with than AT&T, even if roughly 80% are dial up. With roughly 23 million total subscribers, AOL's customer base is on par with the RBOCs and MSOs, and way ahead in terms of broadband subscribers, at about 5 million. I'll take 5 million broadband subscribers any day as a base to work with - it's theirs to lose, so to speak.

Let's not forget AOL's huge IM community - again, something that the RBOCs and MSOs don't have. This is another key piece in the puzzle for how the Internet generation communicates. Again, I would argue that the DNA is there within AOL's subscriber universe for them to understand and create the kind of user experience that VoIP is built for. Early reports indicate they have done so in terms of a service that is easy to use and feature rich. They also have precedent on their side. Much of their dial up success was built around an easy to use, intuitive service. For those customers who have stayed with them moving to broadband, there should be comfort in continuing with this formula for VoIP.

To protect their vulnerable subscriber base, they have had to come to market with a competitive offering. They seem to have done this attractive pricing, LNP and E911. Under the hood, they have taken the best of breed approach by partnering with Level 3 and Sonus.

Being based in Canada, it's worth noting that AOL Canada followed the same path, partnering with Allstream when they launched their TotalTalk VoIP service in December last year. That said, AOL knows their forte - branding and a big customer base - it's just good strategy to outsource the rest.

Of course, you need to be an AOL member, so it's bit like cable and telecom that way. The sweet spot will clearly be with current subscribers, with the hope that VoIP drives more of their dial up subs to broadband. I suspect they will have a harder time attracting new subscribers from outside the AOL fold, but that would appear to be a secondary priority at this time.

Time will tell, of course, how well this strategy plays out. One thing is certain - the VoIP market will not stand still.Verizon just launched their lower priced service, VoiceWing 500, which is another step towards lowering the price bar for VoIP. The other IM players, such as MSN and Yahoo, will of course be watching closely, and VoIP is no doubt in the mix there. And of course, the VoIP pure plays will have to keep pace, especially if they have a lot of overlap with AOL subscribers.

1 comment:

ipcom said...

Posted by: Ash Chopra

Jon,

I've resurrected my old blog as well at http://www.bitpad.com, and odly enough I took a somewhat critical look at AOL's IPS announcement yesterday. Let me know what you think. I am surprised at how positive most of the industry pros are to AOL late entry --- I'm tempted to take even money that AOL won't be getting hitting the AT&T #'s anytime this year, even if they are able to leverage the 22M+ US-based ISP subscribers (unless the encapsulate TW's Digital Phone sign-ups into the IPS #'s for a larger bang!).

On a side note, with Level3 stating it wants to get out of the wholesale VoIP business, does that mean AOL is going to be using a basically grandfathered platform? Or will they have to bring the service in house in the mid-term?