Trends in the VoIP Market

When looking at VoIP market data, it’s very important to make the distinction between the three different groups in society, each of which are very different users :
Service Provider, Enterprise and Residential Customers

Service Providers

For example, phone companies, broadband providers, cable operators. These companies are the means by which the traffic is carried. In effect they are the portion that sits in the middle. A person can make a call on a normal ‘TDM’ phone to another person on a ‘TDM’ phone.

However, the Service Provider may take that call, convert it from C7 to a VoIP protocol, pass the call over IP, then convert it back at the other end. Service Provider usage of the VoIP market as a means of transmission has grown rapidly over the past decade, and especially in the past 2-3 years.

Key Growth Drivers Are :

1. The lower cost of operating VoIP networks when compared to traditional networks

2. Improved market perception of VoIP

3. Lower costs per minute of VoIP (especially into emerging markets, eg South America, Indian sub-continent)

4. Keeping up with the competition – even very traditional operators realise they must invest now to protect their market share

5. The rapid fall in the market price of VoIP equipment (increased competition and a lively second hand market means market prices are as much as 50% lower than they were 2 years ago)

The graph below indicates recent analyst estimates of the growth of VoIP in terms of transmission. As can be seen, growth is set to accelerate throughout 2007, as more and more service providers upgrade their legacy networks and migrate traffic away from traditional switched interconnect onto their IP networks.

So, for example, a call from Los Angeles to rural Massachusetts, which would have attracted high long-distance charges, can now cost as little as 0.25c/minute. The impact on the market has been phenomenal, with wide-scale falls in pricing of as much as 80% over the past 2 years.

Therefore, the voice service provider model is evolving at a rapid pace, with the main catalysts being lower operating costs and broader acceptance of new technology. We’ll be keeping a close eye on this advancement over the next 2-3 years as VoIP overtakes traditional switched telephony as the choice of transmission.

Enterprise

For example, multi-national corporations, small, medium and large companies

This is where we start to get into the origins of a VoIP call, ie. who is actually making that call. To date, origin growth of VoIP in the business sector has been somewhat lackluster, not least because enterprises have been given little incentive to change. It would have meant procuring expensive equipment, which had a reputation for being somewhat unreliable, with limited cost savings attached.

Add to this the fact that many service providers have been reluctant to migrate corporate customers onto new platforms (which they could foresee leading to heavier price erosion) and you have little reason for growth of the VoIP market.

However, the market is changing, and on a broad scale. It is now relatively inexpensive for a corporation to use VoIP technology, and over time the cost savings over their traditional communication networks more and more justify an investment.

In terms of multi-nationals (MNC’s), these companies have considerable buying power in terms of their communications spend, and hardware vendors are contacting them directly to gain a chunk of this VoIP market. For example, an MNC can now manage their own VoIP network, maintaining their own least cost routing with very little human resource. For a company with an annual spend of $1m+ on communications, there are considerable opportunities for cost reduction :

(a) Reduced expenditure on private leased lines, as IP transmission offers increased efficiency (no need for separate voice and data networks)

(b) Maximise cost savings through direct relationships with voice suppliers, rather than using a single service provider for termination of minutes

(c) Use of internet telephony where private networks are not required, eg for transmission where maximum security is not required

(d) Fewer 'adds, moves and changes' (often costing $500 a time) are required with an IP infrastructure than with a traditional voice or data network – for example, VoIP protocols mean that a device such as an IP phone can dynamically receive an IP address (it doesn’t have to be configured into the device)

(e) Combined support services for both voice and data networks within the organization (as they are a single entity)

Whilst initially growth of VoIP in the corporate sector was slow, larger corporations are now seeing the benefits listed above as more and more material, leading to further investment in VoIP infrastructure.

Consumers

The consumer VoIP market revolution is taking place! How many of you have heard of Skype or Vonage, or feel embarrassed when someone talks of these services and you know very little?

Consumer VoIP began as a niche technology, used by a community of like-minded individuals who could communicate with each-other free of charge all over the world via their computers. Early Voice Over IP service was patchy, and quality was poor. Very few providers made use of echo canceling devices, meaning a conversation over IP was often frustrating, especially when it was long-distance and combined with a speech delay.

More recently the number of operators in the VoIP market, offering such services has grown at a substantial rate, and it’s now possible to talk to friends, family and colleagues all over the world for free. On the surface it’s easy to question how this phenomena can encourage commercial entities to operate such services. However, the model is not quite so straight-forward.

In the early days of the VoIP market, Skype started up as a community based tool, where user-groups could communicate for free rather than spend a lot of money making a call through their telephony provider. As time went by, word spread, and more and more individuals signed up for this service.

The 'Skype community' grew at an exponential rate. In essence, all you needed do to join this VoIP market was sign up free for the service, download Skype’s software, and your PC now had an online phone that you could use to contact anyone else with the same technology, PC to PC, for free. As Skype’s user database grew and grew, so did its value in terms of potential customers.

One limitation of the PC – PC voice service was just that – most people still did not have access to a Skype service, or would need to dial-up through an ISP to gain access. You were not likely to be able to contact somebody on their PC all of the time, unlike a traditional telephone.

Therefore, Skype developed a service that allowed a user to call from their PC to a fixed line or mobile telephone number, rather than directly to another PC. This ‘off-net’ call attracted a per minute charge, though generally considerably less than using the traditional telephony provider in your home.

In the past 2 years, this service has grown at a rapid rate, and Skype have therefore become a powerful commercial entity. They have also introduced other applications of Voice Over IP that lead to other sources of revenue.

Growth Of Competition/Summary

Skype, however, are not alone in offering this service in the VoIP market. A large number of operators have emerged, all offering basic PC-PC service for free, with added-value bolt-ons.

Competition is fierce, but there is now a whole new market of service providers who are strongly challenging and attacking the super-normal profits that had been earned by the traditional service providers. Some of these providers have seen their traditional voice revenues decline as much as 75% over the past couple of years, and this is what has prompted them to join the VoIP market revolution themselves.

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