November 2004

Think iPod, Not Wal-Mart BY Rich Tehrani

The barrier to entry for starting a VoIP service provider has come down. This is but one major reason why we are seeing tremendous pricing pressure among the latest crop of these providers. As everyone knows (I hope the VCs are reading this), you can’t make any money in a business where your fundamental differentiation is the ability to lower your prices more quickly than the next guy.

Enter services. After hailing them, demanding them, promising them, hoping for them, and begging for them for the better part of a decade, service providers are starting to listen. Vonage did a great job by allowing us to retrieve voicemail via e-mail as well as adding soft-client support. AT&T CallVantage went a step further, allowing conference calls with up to nine users. Z-Tel has the ability to upload your Outlook contacts and dial them by name using voice recognition built into the network. Vonage recently started allowing you to have a VoIP 800 number. I am very impressed with the services finally being offered by the latest providers.

The question is will these services be free or paid in the future? Vonage has a great mix of free and paid services. For $4.95 a month you can have the 800 number or a number in a separate area code. CallVantage recently added the latter service and calls it Simple Reach and also charges $4.95/month.

Let’s face it; we need to add features to VoIP service because telecommunications is a commodity. We have reenergized the market by using the Internet as a transport mechanism but when the excitement fades, who will be left standing?

The leader in the race is definitely Vonage as they have tremendous share of mind. CallVantage comes next. Following them are about half a dozen strong players and then from there it gets cloudy. The smaller players will have to differentiate themselves to play this game and adding services more quickly than others is the best way to generate the word of mouth and buzz needed to compete against colossal marketing budgets from the likes of AT&T and Vonage.

So, beyond a host of services such as distinctive ring tones, the ability to turn off your kid’s phone (except for emergencies) after bed time and other software-based services, what else can today’s service providers do? They can start thinking about music. I am not talking about turning on the radio. I mean, take a look at Apple.

What they have done over in Cupertino is no less than pure genius. Invent a chic mp3 player and a unique music download service and use the service to sell the devices and vice versa. Are you with me? Who would have thought such a thing was possible five years or so ago when music buyers were downloading free music by the gigabyte via Napster?

Apple took a chance, had a vision and executed, and the VoIP market should be watching closely. If you want to make it big in this market, start thinking about devices. There are a host of companies that OEM WiFi phones for example. Some of the designs are truly gorgeous. Partner with these companies and start selling these phones at retailers with two months of free VoIP service. At the end of the term, guess what, you’ll likely have a new customer.

Of course there is more to it. Make sure your WiFi phone has IM and SMS built into it so that it is so compelling that parents will have more pressure on them to buy a WiFi phone than an Xbox at Christmas. We as an industry need to start thinking inside the box — the consumer electronics box that is. Selling services is great but no one is excited about iTunes, they are excited by the iPod.

What’s next? Why reinvent the wheel, let’s borrow from the cellular providers. They buy you a new device every couple of years if you sign a two-year contract (at least this is how Verizon Wireless works). Compelling, isnt it? Once again use the consumer electronics device to sell your service. Hook your device into your service so tightly that no one else can break your stranglehold on consumers.

Lowering price is fine and this Wal-Mart mentality makes sense for the short-term. Rest assured that if you aren’t investing in new services and working to get really interesting phones on the market, you won’t be around to enjoy the party. I proclaim 2005 the year that consumer electronics and VoIP intersect and in the end, we will see the iPod/iTunes synergy continuing to push VoIP forward.

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