Questioning the future for Vonage. Are you a believer?
Dear Vorticians,
Two news items this week that raise a big question in my mind.
First was the report that Vonage, one of the early leaders in the Internet telephony market, is planning a $600 million initial public stock offering. Second was the introduction of Google's new instant messaging service, dubbed Google Talk. What's the connection? I'll get to that in a moment (but the word "Talk" is a big hint.)
First, a question for you. Would you invest in Vonage? Related to that, a larger, underlying question: What does the future hold for Vonage? And an even bigger, more fundamental question: What does the future hold for Internet telephony?
You'll have to forgive me for not being very excited by the news that Vonage is going public. Given the shortage of tech-related IPOs, we should celebrate the news of anyone's coming out party, but I have very real questions about Vonage's future success. I wonder what it is that the company can offer down the road that will protect it from the brutal price competition inherent in the voice-over-IP-market, as well as other bruising market forces. Maybe you have the answer to that.
First, let's give credit where credit is due. Vonage has become the public face of Internet telephony. It shook up the big, established carriers and it has done a masterful job of marketing and building an ever-expanding customer base. The money raised through an IPO will help fuel that marketing engine and give the company the wherewithal to consolidate - through customer acquisition and the acquisition of other rivals - its position in the market.
But a variety of market factors cloud my future view of the company.
* VoIP is a market built on price. Vonage undercut the traditional providers of telephony, but even they have fired back. AT&T, Verizon and others have launched VoIP services and they've pushed Vonage's prices down over time. How does Vonage - or any VoIP provider - prevent price scrapping from eroding revenues? As if that were not bad enough, recall that in the brutal long distance wars of years ago, the cost of acquiring new customers increased dramatically along with the rate of customer churn.
* The cable companies will become even more protective of their turf and it will become harder to use them as a channel. (Especially in light of recent regulatory/legal moves.) As the telcos roll out fiber services that can support IP television, it will become even more important for cable companies to have strong packages of data, TV and voice. They're not going to want Vonage siphoning off those voice dollars. The same is true for those local telcos who'll own the other broadband option. (The FCC has gotten what it always wanted: a duopoly of broadband providers.)
* Skype, the 'free' VoIP service, continues to grow like a weed, particularly among younger 'customers'. How do you compete against free? What's to prevent the next free service from emerging?
* There doesn't seem to be much of a feature war to win. What can you offer callers in the future for which they'll be willing to pay extra? As competition increases, more and more of the features will be bundled and the opportunity to cash in on them lost.
* VoIP is a global market and there will be global competitors who can easily extend their services to the US, targeting key markets or ethnic groups.
* With Google Talk, IM users can also make IP calls. (There's the connection!) And Google's not the first here. Other instant messaging services also offer voice capability, including the big fish of AOL IM. That takes away even more voice minutes.
Let's see: competing against the cable companies, the telcos, the portals (Google, Yahoo, MSN), free services, global providers.. can it get much tougher than that?
When I consider all these things, I wonder what all the Vonage fuss is about. What am I missing? What will it take to enjoy long-term success in the VoIP market?
Moreover, is there a future for Internet telephony as a standalone market? Or does VoIP simply become a feature in the new world of communications?
Drop me a note here or, as always, let me know what you are thinking at jgallant@vortex.net.
Bye for now.
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Comments
I completely agree with your analysis John. VoIP will decimate the revenues of the big telco's, but will do so by being free. Skype has a customer base the size of a small country, and network externalities (the biggest network means that newcomers are more likely to find their friends on it) mean it may survive and even thrive, but it is a community proposition rather than a voice proposition which now has to compete with the big guns of community services. New pure-play peer-to-peer free VoIP services are dead before they start.
Vonage has a short-term future, so its IPO is well-timed - it will allow its creators to escape with some money for their hard work - but I will not be investing.
The real crime is the money being invested by the big telco's in centralised VoIP switching, which is yet more shareholder money down the drain. Skype demonstrates that the internet and particularly the bandwidth and computers at its edge are now good enough to support distributed transaction processing, starting with voice transactions. I expect to see a lot more of these distributed low-cost business models attacking incumbents with parkfuls of big iron, partly because I'm working on them myself.. Even Google is under threat from these models.
Posted by: Tom Foale on August 26, 2005 02:36 PM
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