Tuesday, March 20, 2007

Has VoIP Peaked? 8 Reasons Why I Think So


That's my short answer, and here are 8 reasons why.

Before I start, I'm not saying that VoIP is dead - far from it. Having an analyst's perspective, I see a lot of things, and it just strikes me that a lot of stars have lined up now that collectively tell me that the winds of change are shifting. Furthermore, I'm not a technical or a financial analyst, so I'm not basing this on stock market indicators, but I'll bet you could find enough there to support what I'm thinking.

I'm just going to give you the basic ideas here - I'll be here a long time if I went into the details. That's another conversation, and hey, we all have to make a living.

Here we go - in no particular order....

1. Verizon/Vonage - whether this case holds up or not, Vonage is getting boxed in - or out - depending on your view, and they are no longer the threat they were early on. They've pushed as hard as a startup with lots of money and market support would allow, and at the end of the day, they barely have 2% of the landline market. I think the Verizon case makes this official, and they could really close this chapter by acquiring Vonage outright.

2. Order has been restored - related to Vonage, Humpty Dumpty has been put back together, and the U.S. telecom market is ruled by 2 mega carriers. When was the last time anybody talked about RBOCs? We went from 7 to 4, and now it's basically just 2, with Qwest as an asterisk. Cable and mobile - same deal - just a handful of big operators who control the market - and largely true too, for ISPs. Disruption has come, but has not changed the status quo that much for VoIP. The likes of Vonage were supposed to destroy the obsolete RBOCs, but at the end of the day, he who controls the last mile and has the customers, wins.

3. Consolidation is largely done. Building on this theme, we're down to a handful of big carriers, and a handful of big vendors. Most of the good, proven companies have been taken, and the remaining players are large, with deep pockets. When Cisco spends $3.2 billion for WebEx, you have to wonder are we heading for a bubble? It's too late in the game for the big players to develop their own solutions, and they have to acquire the missing pieces, not just to grow, but to keep them away from their competitors. Don't get me wrong - there's more consolidation coming, but when you see big deals like this, that's a sign to me that the barriers to entry are going to get very high now. That may be good for the companies in the winner's circle, but it's bad for innovation and competition. That's why Open Source and disruptive media are so hot now - it's not too late there - but I think it is for VoIP.

4. Absence of successful IPOs. Imagine how the prospects for VoIP would have looked if Vonage's IPO was a hit with investors. VoIP has evolved to the stage where there should be lots of successful IPOs happening now. Again, it shows you how hard it is to make money in VoIP, especially to the point where you can be a public company. I'm starting to think that Acme Packet's fantastic IPO was the exception rather than the rule. And they have good news coming out this week that supports how well they're doing. Of course, that's the problem right there. If VoIP was a successful market, Acme would be the rule and not the exception. Don't get me wrong - there could well be some good IPOs coming this year - such as Veraz, Sylantro, BroadSoft and NexTone. I think all of these have a great chance of success. But that hasn't happened yet, and as I'm seeing things right this minute, that's how I feel.

5. Jeff Pulver. Without a doubt, the most successful man in VoIP, right? And Jeff's going to share his vision of the future this morning at VON. I don't know what he's going to say, but I don't need to know. Anyone following Pulvermedia knows that Jeff's focus - and passion - has shifted to video. It's not clear to me what his vision is for VoIP now, but as I've said before, Jeff's intuition and timing is usually very good. Follow the money? Perhaps. It's also worth noting that if anyone should know how to create successful businesses around VoIP, it's Jeff. While there's never any guarantee of success in a business like this, even Jeff has had difficulty making money in his VoIP enterprises. He's started a number of innovative ventures - Free World Dialup, iPeerX, and most recently, Tello, but none have been game changers. Let's hope things are different with Vivox!

6. The demise of Voiceglo. They ceased operations a few days ago, and I take this as another sign of a market top. Voiceglo has not been a factor in this market for some time, and a lot of people felt this was just a stock play. Say what you like, but I think they had a very innovative concept early on, and I was one of their earliest supporters. They're a great example of how difficult it is to build a viable business once you've started out being a free service. I'm citing them here because the business was run by investment bankers. This may not be the ideal foundation for a nextgen provider, but as a rule of thumb, when the bankers say it's time to go, it's time to go.

7. Wireless has thrived and not been hurt by VoIP. I've always said that while VoIP is a big, exciting market, wireless is an even bigger, more exciting market. Landline VoIP is a good place to start, but the real growth potential for VoIP is in wireless. Despite all the economic attractions of VoIP, the mobile carriers have done quite nicely without it. Sure, we're seeing "minutes stealers" out there - which at least makes things interesting, but so far, VoIP hasn't had much impact at all on how wireless operators do business.

8. Analyst firm coverage. I know of 3 well-known industry analyst firms with strong VoIP coverage that are in varying states of difficulty, and I suspect they are not alone. With fewer vendors and carriers to support their high-end services, something has to give. No surprise there. Rising tides lift all boats, but what comes up, must come down.

Ok, so what do we do now? I'll first say that I'm still pro-VoIP - don't get me wrong. I just think the market has changed. I recently have contributed to a dialog started by fellow blogger Luca Filigheddu on what I think has made VoIP successful (and not, as well).

My basic take is this. VoIP really isn't an industry. It's a technology around which a lot of businesses have had to reinvent themselves to adapt to the disruptive potential of IP. VoIP has had a good run, but many of the incumbent players are still standing, and still have the customers. In a way, VoIP has been its own worst enemy by making it easy for everyone and anyone to get into the game, and offer a service that costs next to nothing to provide, and gets cheaper all the time.

This could still work if the quality of VoIP was truly better than what people are used to using. Sometimes it is, and sometimes it isn't, and companies of all sizes are finding that it's harder to do than it looks, so this is not going to be a quick transition. In that scenario, only the strongest can really survive, and that's what we're seeing now.

I do want to end on a positive note, and here it is. VoIP as we know it has peaked in my view, but it's just one chapter along the way to an all IP world, which I do believe we'll have. There's a lot of talk about Voice 1.0 vs. Voice 2.0, and I think that's a big part of the story. Much of the VoIP we've seen has been tied too much to the TDM world, and modeled on Voice 1.0 thinking and habits. Voice 2.0 - which can mean a lot of things - is the basis the next wave of innovation.

Much like where VoIP was 5 years ago, Voice 2.0 companies are at today. They have the benefit of VoIP's progress to build on, which is great. However, a lot of them really aren't about VoIP, at least the way we've known it. Examples? Grand Central, Iotum, Talkster, TruPhone, DiamondWare, Flat Planet Phone Company. These are just a few examples of course. They're all different, but they're all about voice, and they're really all applications built around specific business problems. They're not trying to be complete platforms or systems, which is much harder to do.

So, maybe this is where VoIP goes next. I'm still not sure, as I don't really know how you build a whole business around these. But at least they can stay below the radar of the mega players long enough to develop into viable businesses. Of course, I'm only talking about the voice market here. There are tons of exciting things happening in other spaces, especially video, but I'm not as steeped in that market yet. You'll have to ask Jeff about that!

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ipcom said...

Posted by: vic

You make very valid points... I've been thinking that VoIP is going to constantly grow, but you make very solid points business-wise. Although I still think that because the technology is easy for someone to come in, there's still room for specialty companies to come in and maybe work in partnerships with the big Internet or networking companies.


ipcom said...

Posted by: Kameran Ahari

Hi Jon.

I enjoyed reading your blog posting. Looking back, I think VoIP peaked back in the telecom meltdown.

"Has VoIP Peaked?" I think that depends on how you frame the term peaked. Do you mean the aggregate number of VoIP companies, the increase in number of new VoIP related companies, the total number of VoIP IPO companies, the aggregate revenue of VoIP related buyers / sellers, total number of VoIP landlines, total number of VoIP subscribers, total number of VoIP phones, total number of VoIP mobile phones, �..or perhaps the total number of free VoIP public IM-based users such as Skype, etc.

I agree with your observations and symptomatic description of what "is not happening" to VoIP.

I think I would add the following add a business perspective to your comments.

1. I personally think VoIP was too contaminated by the very same b2b community (OEM technology supply side selling into the incumbent carrier model). The majority of VoIP players came from within the telecom industry (supply & demand side). The telco way vs. the net head. The majority treated VoIP as something like the next new ATM standard. The general approach taken was the traditional Push model �"build it and they will come." Only a couple of companies have attempted to leverage the technology to redefine the landscape. Only a handful of companies where willing to truly innovate and break all the rules. I think Skype would fall into this category. These guys looked at the issues and said how could we use technologies such as VoIP, P2P, and existing NAT traversal techniques to offer easy to use web-based communications for almost zero cost. I don't think they ever set out to sell to a carrier or be a carrier. I am not saying the strategy behind the Skype brand was premeditated and calculated; certainly not on day one. Sure, being at the right place at the right time helps. Nevertheless, one thing is for sure � they were not thinking conventionally. Whatever the net effect was Skype captured a new source of competitive advantage and leveraged it to circumvent the traditional supply chain. And not to sell a cheaper solution back into carriers.

2. For the most part, the majority of VoIP players positioned the technology as a cost optimization play. In other words, they started by building the traditional voice switching infrastructure cheaper, so that the carriers could optimize their networks to deliver the same service. How did that happen?? By listening too closely to RFP/RFQ process. Back to the same telco supply chain way of building / selling. Why would a carrier cannibalize its own service ahead of optimizing operations? The majority fell into this trap (a/k/a past experiences biases). We can throw stones at Vonage's circumstances. However, one must give Vonage credit for being one of the first service entities to roll out some innovate features like voice e-mail and a classical e-commerce service model. Moreover, building a brand from the edge of the network.

3. Going on seven years, the demand side of the industry continues to consolidate worldwide (buyers �a/ka/ carriers). China and India are the exceptions. The consolidation on the service side is staggering in some hemispheres and demographics. If you do an industry concentration ration (CR4) for the U.S. market alone, a couple of tier 1 carriers effectively own 80%-90% of the market pretty much across all three segments. Perhaps not a monopoly yet, but certainly a duopoly. What does this do to the supply side (OEM side of VoIP)? As you know, AT&T and Verizon don't need 200 VoIP infrastructure suppliers. Especially not when they are finally letting go of the voice business model and moving into content delivery. I think Nortel just announced dismal 07 forecast. Not again! Who next Lucent/Alcatel. The OEM consolidation is still lagging the demand side (service providers). I saw a web site that tracks the number of VoIP companies that are not around each year. I think the last time I checked there were 100 fewer VoIP companies than a year ago.

4. Fundamentally, the investment community and investors look for growth industries and sustainable business models. I would not categories the supply / demand side of this industry as growing.

5. VoIP falls under the tech umbrella, which is still digging itself out despite some renewed investor irrational exuberance for growth IPOs still in the RED. I posted an earlier blog that shows the number of unprofitable companies in this segment that have filed for IPO http://gotastrategy.typepad.com. I think aside from the VCs that want to purge their backlog, the skepticism runs high for any companies in this segment. Moreover, we are seeing the same consolidation across almost all segments of the software industry.

6. Where was innovation?? I am very adamant that the terms cheaper, faster, and better do not constitute innovation. Only in the past year, have I seen a handful of VoIP companies recognize the opportunities and threats from new business paradigms (such as open source) and potential for web integration for applications that have nothing to do with the old voice business model.

I think the real beneficiaries of the technology are going to be companies like Adobe (
Flash), eBay/Skype, Zimbra, and a handful of established internet giants who will leverage VoIP to optimize their core business models / applications. Furthermore, most of these converged applications will not have anything to do with LD services or carriers.

Thank you for your sobering perspective. Much overdue. We certainly share a number of the same views. I like the one benchmark I use often myself is �"count the number of notable VoIP related IPOs as a percentage of total companies that have participated since 97-98 timeframe (not counting acquisitions)." That pretty much characterizes the significant of the Technology relative to breakthrough innovation.

..Kameran Ahari

ipcom said...

Posted by: irwin lazar

Interesting comments Jon, I posted my thoughts on my blog as well.