Should VoIP Start Ups Start To Worry?

When the very people whose business you are supposed to put you out of business don’t take you seriously, you know you are in trouble. VoIP start-ups should not take the comments of SBC CFO Rick Lindner lightly. In an interview with Reuters he said, “The fears of what may happen there are overblown.” The incumbents confidence comes from the fact that they are pretty apt at adapting to any new technology that threatens their existence. Remember DSL!

I find it quite amusing that only those who have no experience in the phone business or those who have not tussled with the phone companies are making wild eyed predictions that voice will be free. Ebay CEO Meg Whitman might just be trying to justify the mega-billion price tag for Skype.

Port blocking and other traffic grooming techniques which I have written in the past are clearly going to make things difficult for anyone who threatens the incumbents livelihood. What we will see is move away from the billable minutes paradigm to flat rate, which in the end may not be such a bad thing at least for cable companies, who are used to the flat rate life.

There are some tell tale signs of looming trouble in the VoIP start-up land. A new report from Infonetics Research, likely to be released tomorrow predicts that by 2008, there will be 24 million subscribers and $8.4 billion in sales. In comparison we had sales of around $255 million and 1.1 million users in 2004. Infonetics says that for now the cable companies are in the driver seat, and are increasing their share in the consumer VoIP market place. Vonage’s share of the over market in the 2Q 2005 skidded from 36% in Q1-2005 to 32%. Time Warner’s share of the total voip market for the same period was up 4% to 25%. Imagine, when Comcast finally gets it VoIP-on!

Kevin Mitchell, the Infonetics analyst told me that in areas where Comcast has started rolling out the service, the demand for its digital phone (a consumer name for VoIP service) is pretty high. “I don’t understand the fascination with Vonage and why Skype got such a high valuation,” he says. Even if Vonage does go public or get acquired, I wonder what are exit options for the newer and smaller players such as Sun Rocket. Things are not looking good in the small and medium sized business category either. And I have not even taken into account what happens when Bells finally get their VoIP act together.

“The incumbent telcos have insubstantial subscriber share at this time, but we expect them to make a bigger impact in coming years, because triple-play services will all be based on broadband infrastructure, and legacy PSTN access will continue to slowly churn away.”