US VoIP Market

Barron’s writes:

VOIP gradually has become good enough to become the backbone of some corporate-communications networks. Voice quality on an Internet call, in most cases, now equals that of calls placed via the old circuit-switching network. And the spread of broadband Internet access has set the stage for an assault on the vast consumer-telecom market by VOIP firms.

“It feels like the early days of the cellular business, or the cable business,” enthuses Sandy Miller, a managing director at 3i, a Menlo Park, Calif., venture-capital firm that has invested in Vonage of Edison, N.J., a privately held VOIP provider. “It’s as large a potential new market as I can think of anyplace across technology.”

And because the new technology routes calls in “packets” — clusters of data — it allows users to tap into nifty new services, such as calls that follow you from phone to phone, voice mail sent to your e-mail in-box and cheap conference calling. Many of those aren’t available through old-fashioned circuit-switched networks. Recently, several companies have announced plans to offer VOIP over Wi-Fi — letting consumers make voice calls over the ‘Net via a wireless connection to their laptop, desktop or hand-held computer.

Perhaps most important from an investor’s point of view, VOIP allows new competitors into the phone business. The Bells, in particular, face a flood of rivals, ranging from well-capitalized cable outfits to shoestring-financed startups and resuscitated dot-coms once given up for dead. The coming free-for-all will change the face of the U.S. telecom business. This is, in short, a very big deal.

To be sure, the voice-over-Internet protocol revolution has a long way to go. For starters, to use VOIP, the customer must have broadband-cable or DSL Internet access, or be in the franchise area of a cable company providing phone service. That is a target market of less than a quarter of U.S. households, although the number is increasing. (About 22 million American households now have broadband access; the total will hit 47 million by the end of 2007, according to AT&T.) And VOIP still hasn’t gained much traction among those who could use it now. At the end of 2003, there were perhaps 150,000 residential VOIP customers. Even if you assume 100% annual growth, the figure wouldn’t hit two million until 2007 — and that would be less than 2% of 109 million U.S. households.

Nonetheless, the early results are eye-opening. Vonage, the market leader in consumer VOIP services, had 7,000 consumer customers at the end of 2002. Now, it has north of 155,000, the total is increasing at the rate of 20,000 a month and CEO Jeff Citron says 350,000 is reachable by year end. AT&T, which is rolling out its Internet-based CallVantage service, expects one million residential and business users by the end of 2005. By then, almost all of the major and secondary cable companies will be offering Internet-based telephone service of some sort. Even the Bells are jumping into the fray, initially with service for business, but eventually for consumers too, as the Bells’ residential customer base shrinks.

The article discusses five markets for VoIP: carrying long-distance and international calls, corporate VOIP networks (IP-PBX), PC-to-PC Internet telephony, prepaid calling cards and the home market.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.