‘Strong Growth’ Projected for Consumer VoIP

The consumer Voice-over-IP market in the U.S. has gained enough traction to attract the attention of one of Wall Street’s most prominent investment banks, which issued an exhaustive study examining projected growth rates, industry pricing, potential regulatory hurdles as well as technological and market forces.

In a 68-page report, Deutsche Bank (DB) has concluded that, as broadband penetration increases, prices come down, service innovations and quality improves and basic awareness is raised through marketing by independents like Vonage and Lingo as well as efforts by incumbents (telco and cable), the overall consumer VoIP is poised for “continuing strong growth” at the rate of 1 million new subscribers per quarter.

“Given the excitement surrounding VoIP, the aim of this article is to try to understand where the market for residential service stands today – where growth is occurring, who has the subscribers, and what the pricing environment tells us about the future of the market,” according to Andrew Kieley and Viktor Shvets, the two analysts who penned the report. A copy was obtained by TMCnet.

DB estimated U.S. residential VoIP users grew from 1 million to 1.2 million at year-end 2004 to 1.6 million to 1.8 million at the end of the first quarter of 2005 with a bulk of the market (80-90 percent) concentrated among the top six service providers: Vonage (550,000), Time Warner Cable (372,000), Cablevision (373,482), AT&T CallVantage (75,000) Primus Lingo (70,000), Packet 8 (57,000).

To be sure, industry figures aren’t detailed enough to determine what portion of the residential market is purely consumer or small business. In addition, DB also excludes users of Skype’s fee-based “Skypeout” service, albeit projects the peer-to-peer service has about 1.8 million paying subscribers based on the company’s claims.

“From a nice replacement service for international long distance calling a few years ago, VoIP is increasingly viewed as a fixed-line replacement product by the mainstream American public,” the DB analysts wrote.

Indeed, independent surveys confirm that VoIP awareness is increasing in the residential market. Only 26 percent of households surveyed in April previously heard about VoIP service, according to TNS Telecoms. But by June, that percentage was up to 30 percent, according to a separate survey by Telegeography.

In examining pricing trends in the U.S. VoIP market, the report also concluded that a two-tiered market has already emerged with independent service providers now pricing service between $20 to $30 per month while cable and telcos offering service at a higher range of $30 to $40 per month. However, even at the higher range, the bundled and unbundled services from the telcos and cable operators still represent a savings from telco’s existing fixed-line plans that feature unlimited long distance – a standard feature of VoIP.

Additionally, DB has already seen evidence of “significant” pricing degradation. “This asks the question as to the extent to which lower pricing can be sustained on an ongoing basis,” the analysts wrote. DB forecasts the break-even point for most VoIP products as low as $15 per month.

Given the pricing pressures, service providers will need to provide incentives other than price and one of the most promising developments is the wireless VoIP offering. The helps to explain the intense interest with IP Multimedia Subsystems (IMS) at the most recent Supercomm show earlier this month. But in this sense, the U.S. market lags behind Europe and Asia (especially in Japan.)

As for regulatory hurdles, DB believes the industry will continue grow in a vacuum “with regulators over time catching up with the technology” given the FCC stated intentions to have a light approach to the burgeoning market. That said, municipalities have already begun to balk at the potential for lost tax revenue as a result of higher VoIP adoption.

In conclusion, DB believes that while independent service providers will gain some inroads in the short-term in eroding the sub-base of traditional fixed-line customers, incumbent operators will eventually crowd out the newcomers, as what happened during the ISP ‘revolution’ during the dot-com era.

“This is likely to replay itself in the VoIP market, although the overall business opportunity is so large (estimated at over 25 million households) that the best-positioned non-facilities based operators will not only survive but join ‘the club,’” the analysts concluded.

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Robert Liu is executive editor at TMCnet. Previously, he was executive editor at Jupitermedia and has also written for CNN, A&E, Dow Jones and Bloomberg. For more articles by Robert Liu, please click here.

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