Why So Many Consumer VoIP Service Providers Struggle

It's been a rough year for VoIP Service Providers, at least in the consumer space.  We saw SunRocket abruptly shut down this summer when they failed to raise the money they needed to continue operations.  We saw Vonage suffer through a barrage of patent lawsuits and continued hounding over customer service and 911 deficiencies, and increasing costs for acquiring subscribers.  What's going on...why is consumer VoIP now a rough neigbhorhood?

I think it comes down to three reasons:

1. No barriers to entry for competition
2. No sustainable competitive advantage (some would argue there is a competitive disadvantage)
3. Not enough attention to details that matter to customers.

Let's face it: consumer VoIP is a commodity business.  Anybody can license the technology to get into the business, and putting up a few VoIP servers in colocation space with Internet access, buying VoIP gateway services from Level 3, is a game anybody can play.  To get into it you have to believe you have an angle that nobody else has (unlikely), or that you can market it better than anybody else.  Most folks who think they are going to run the next big VoIP service aren't marketing experts at all...they are just technologists who think it is cool that they can bypass the telcos for phone service.  The problem is that everyone else can do it, too.

Skype was the one of the more successful entrants into the VoIP business because they DID have a new angle. Their proprietary peer-to-peer architecture gave them some cost advantages over traditional VoIP players, and these cost advantages are reflected in their fee structure.  They were the good, cheap Korean car in a world of expensive, bad cars from Detroit.   

But most consumer VoIP players don't have the kind of differentiation that Skype has, and as a result, they are having a hard time creating a sustainable business.  Vonage's cost of subscriber acquisition has grown steadily over the past six quarters, a sure sign of increasing competition.

What's more, many VoIP players really do think that it is as simple as turning on a few servers, buying some software licenses, and buying Internet and gateway services from Level 3.  At least, that's what they think at first.  The truth is, there are lots of bothersome details to worry about in a VoIP service, details that matter to customers, and VoIP providers are often tempted to take shortcuts with them, as Vonage did with 911, and continues to do with security.

Most VoIP providers ignore Quality of Service issues as well, asking customers to "Bring Your Own Bandwidth", and not managing that bandwidth to make sure that the VoIP calls don't get stomped on by other traffic, thereby ruining voice quality at times.  They subscribe to the theory that "as the customer gets access to more and more bandwidth, VoIP quality issues will disapper."  While this may be true in the long run, I've been hearing this theory for 12 years and we are still on that long run and the finish line is not in sight.  What is really happening is that as more bandwidth is added to consumer broadband connections, consumers use it for more and more bandwidth-hungry applications, like YouTube, and bandwidth is still scarce for VoIP packets.

The other problem with BYOB is that the connection is not managed for maximum up-time, and as a result you get more service outages than you would prefer to have for a phone service.  Face it, we like the security of having a phone service that always works.  Having three or four days of outages on your cable internet access, as I have had on my Comcast connection in the past year, makes for an unsatisfactory phone service, which is why most folks that I know don't rely on their VoIP line as their sole phone service, supplementing with either wireless or wireline phone service.

The bottom line on all of this is that consumer VoIP providers got so excited about the technology that they forgot that neither the market nor consumers care about the technology.  The market cares about competitive advantage and barriers to entry, and consumers care about getting a good service for less money. 

This doesn't mean that all consumer VoIP players are on the path to fail.  I already mentioned Skype as having a competitive advantage.  The Cable players also have some advantages as well, since their plant is already paid-for by video services.  I also think that the cable players are paying more attention to details like 911, security, and quality of service.  And I think Comcast is right to market their VoIP service as "Digital Voice" rather than "VoIP", because consumers don't care about the technology. 

So, all is not lost in the VoIP world, as some players are making progress.  But it's the ones that are paying attenting to fundamentals that are making strides:  barriers to entry, competitive advantage, and providing a good service for the money.

Comments

[omfut]

Great post. Nobody could have summarized the voip business model as well as u did. I mean- u are right on the money, most of the times we techies just get carried off with a cool hack or idea. Nonetheless, we miss the point that user's give a damn for the hack or technology. I guess using VOIP as a cheap alternative to Telco model is not going to sustain. We need more services than cheap calling.

Cheers,
omfut