The impact of technology on a traditional method of communication
"{VoIP represents the} most significant paradigm
shift in the entire history of modern communications since the invention of the
telephone."
-Michael Powell, Former Chairman FCC
Industry Background
Voice over Internet Protocol (VoIP)
uses Internet Protocol (IP) to route voice and other mediums of communication
over the internet. It is quickly
becoming a substitute for the traditional Public Switched Telephone Network (PTSN). The combination of the telephone and the
internet allow for greater efficiency and is expected to have a profound impact
on the telecommunications industry (Mehta). The abilities for VoIP were
originally limited as it only allowed for computer-to-computer calls, but the
emerging market in VoIP technologies has lead to growth in all companies
supporting the industry, enabling users to make calls phone-to-phone,
phone-to-computer, etc. over the internet.
VoIP service has been mainly provided by pure play firms such as Skype
and Vonage. However, cable internet/ digital service providers and other
telecommunications providers are also key players in the market accounting for
more than half of all VoIP minutes in the
Market Participants
and Partnerships
VoIP is a new market that is
fragmented, highly competitive and quickly growing due to low barriers to
entry. This combined with large expected growth has lured many new entrants to
the market. Recently, some of the
biggest names on the web have investigated VoIP. Google recently launched
Google talk, which allows people to speak with and instant message people on
their buddy list (Mills). The company also teamed up with VoiceOne, a company
that provides VoIP, so that Google users may click to talk with advertisers on
the site. (Mills) Yahoo! Messenger and MSN Messenger are also entering into the
foray hoping that their large networks will provide a built-in customer base
for their service.
Smaller
companies are looking to differentiate their products in an attempt to lure
users away from the large name brands. A company called JAJAH is offering a
different way to connect its customers and since its release in February 2006
the company has seen tremendous growth.
Instead of having a phone connected
to a broadband connection or using a VoIP software program, users can go to
their website, input their phone numbers and destination number and the service
rings both of their phones. (JAJAH) The
main benefits of JAJAH lie in its simplicity; there is no software to be
downloaded or microphones to be used. (Reardon)
Lycos is trying to differentiate itself with a large multimedia
offering. The company recently announced that it would team with Globe7 and
would offer over 300 video clips including movie trailers and news events.
Lycos is also trying to increase its value proposition by offering a free
Specifically
the small and medium business market (SMB) is still up for grabs. There is no
set leader (VoIP system meets expectations), yet a recent agreement with
CompUSA and bandwith.com could be huge for the SMB market (First VoIP
Retail). It would be the first offering
specifically targeted at small businesses and would include such features as
intra-office calling and Microsoft Office integration.
With the emergence of VoIP technology various partnerships
between different types of software, hardware and service providers are increasing
substantially. Recently Avaya MultiVantage Communications Applications and
Microsoft have partnered to bring the voice capabilities of Avary to Microsoft
software (
There is also much anticipated growth
for VoIP equipment; the global market is expected to grow 35% in 2005 which is
indicative of growth in the service area as well.
VoIP companies have
taken a diverse approach to advertising. Vonage is a popular name with
aggressive advertising and a familiar theme song. Skype, however, relies on
network effects and has not advertised at all.
In the VoIP market there are many
upcoming trends and reasons for adoption of the service. VoIP offers a lower
cost structure leading to a substantial amount of companies entering the
market. Many telecommunications providers are planning to enter the VoIP
market; in particular, ATT is hoping to use VoIP to gain back market share in
local calls (Mehta).
Key Technologies
The possibility of using VoIP over a wireless
connection would allow greater access to the service and create more
opportunities for providers. With
these phones, people can now make telephone calls anywhere there is a Wi-Fi hot
spot. Sales of Wi-Fi phones in 2004 were about 100,000-150,000 units. There has been a recurring growth in the sale
of these phones; a recent survey found that 23% of telecommunication firms use
WVoIP and another 30% are planning on adopting the service. Skype and Netgear announced the first Wi-Fi cell phone
in January this year, (Terdiman) and Vonage also has a Wi-Fi phone that is
accompanied by a service contract. The
next step is for wireless internet is to be available in an entire region
rather than just a small private network in a home. In early April, the city of
Business Models
Vonage and Skype are both leading
third party, pure-play service providers with two very different types of VoIP services and value propositions.
Vonage’s market is targeted at small businesses and commercial customers
whereas Skype’s target market is individual customers and has a very
personalized feel. With an increased value proposition of additional features
and aggressive marketing, Vonage has become the most popular commercial VoIP
access service provider (Shaw) reaching over one million users today (vonage.com).
Skype’s appealing slogan “you can talk to anyone, anywhere for free forever”
(skype.com) attracts most of its customers.
Skype.com has over 40 million registered users today and
is acquiring approximately 150,000 users a day (skype.com). It is a user-friendly
service that is easy to learn and use. Skype allows one to individualize their
own account with a personalized ring tone and picture very much like MSN
messenger. SkypeOut is a separate service that allows Skype users to reach
traditional landlines and mobile phones at a much-discounted rate. Along with
SkypeOut, there is SkypeIn, which allows traditional landlines and mobile
phones to call a regular number and receive the call while using Skype. SkypeIn
and SkypeOut are available via Skype.com by adding money to one’s account much
like a prepaid calling system.
Vonage.com has a different method to attract customers.
Vonage prides its all-inclusive service on the amount of extra and advanced
features it has to offer to its customers. Vonage customers must pay for an
account before using the service. The company’s promotional strategy is one
free trial month of service before they officially register. Vonage has an
increased value proposition by including such features as caller ID and call
waiting etc. at the standard rate (vonage.com).
Competitive Advantage
VoIP
offers a value proposition that far surpasses their traditional telecommunication
competitors. There are three key values: low cost, useful features and
familiarity. A traditional Verizon home
package for unlimited US,
The nature of all fast
paced technologies offering the best price and the most convenient service are
not means of a sustainable competitive advantage. Reliance on network effects is not going to
be useful when VoIP becomes widely used.
To achieve sustainable competitive advantage companies must establish
successful relationships with their customers and offer a superior value
proposition over their competitors.
Buyer-Supplier
Relationships
It is more economically enticing for existing consumers
to maintain their relationships with their current cable service providers who
offer discounted packages combining digital cable, digital voice (VoIP) and high-speed
internet access. Comcast for example offers a package which includes digital
cable, digital voice and high speed internet access for $99 a month, a savings
of over $57 if you had purchased the services individually. These savings,
combined with the ease and familiarity of one bill are an enticing deal. Its
effects are showing as local service providers capture 81.8% of all VoIP
minutes over their lines in areas where they actively advertise their digital
voice service. (VoIP)
Risks and Weaknesses
It
is evident that VoIP offers many advantages to traditional phone services
however it is not perfect. The main problem with VoIP stems from broadband and
cable internet connections failure to work during power outages. It is
impossible to make any calls when the connection is down (US FCC). VoIP phone
numbers will not be listed in White Pages, Internet Directories or Directory
Assistance (411). Many customers complain that there is little to no customer
service for these firms and some find it a hassle to take their VoIP adapter
with them when they travel to make VoIP calls (“Listen out…”). In addition, the
sound quality is not equivalent to a landline; however, due to desensitizing
perception of quality from cell phone usage this is not a sizeable problem.
Calling Emergency numbers like 911 was a huge problem during connection
failures; however, the FCC in June 2005 imposed the Enhanced 911 (E911) on
providers of VoIP services. This feature delivers all 911 calls to the local
emergency call center and provides the center with the customers call back
number as well as location information (US FCC). On top of all of this,
companies such as Vonage and Skype must be weary of the increasing competition
as well as the cable industry’s desire to regain market share it is rapidly
losing to satellite operations (Mehta).