The Future of Consumer VoIP: Leveraging Internet advances for profitable consumer voice services

• Publication date: June 2010

"It is important to distinguish between a profitable business that successfully sells VoIP services and a profitable VoIP business. Successful VoIP businesses are driven by other services the company offers, and by services that align with customers' perceived needs – not by the VoIP business alone." In the early 2000s, telecom industry experts widely expected VoIP to change the dynamics of the voice communications business. But a decad...

"It is important to distinguish between a profitable business that successfully sells VoIP services and a profitable VoIP business. Successful VoIP businesses are driven by other services the company offers, and by services that align with customers' perceived needs – not by the VoIP business alone."

In the early 2000s, telecom industry experts widely expected VoIP to change the dynamics of the voice communications business. But a decade later, the largest providers of consumer Internet voice services are, with one exception, conventional telecommunications companies. Some are pioneers and innovators, some are not. What they do share, however, is a market strategy that doesn't rely solely on price.

This report provides an overview of the current state of the consumer VoIP market, examines VoIP business successes and failures, and explores how evolving IP communications – mobility, convergence, femtocells, cloud computing, ultra-fast broadband, and open devices – are opening new opportunities for successful consumer VoIP services.

Key Insights
• The most profitable over-the-top VoIP providers are those that quickly leveraged their success into building their own networks.
• Successful VoIP providers offer multiple communications services, as well as services aligned with the key needs of targeted markets.
• Consumer VoIP is most successful in the most regulated (non-Communist) markets.
• The core network is still a key opportunity for service providers to differentiate.
• Telecoms have more natural advantages in the VoIP business than incumbency. They understand consumer expectations, and the migration to all-IP networks allows them to leverage network consolidation.
• The pressure is on VoIP service providers to make VoIP mobile. Driven by growing mobile handset capabilities and broadband subscriptions, and continued high prices for international calls, the market for mobile VoIP is developing quickly.
• The mobile handset is coming into its own as a platform for converged communications.
• The rapidly growing number of mobile smartphones creates opportunities to integrate voice interaction into a wide range of applications, as well as creating opportunities for other types of intelligent, converged appliances – reinventing the home phone, for example. Amazon's Kindle e-book shows the opportunity for mobile communications-equipped "appliances" at mass-market prices.
• Consumers increasingly want services customized to their needs, preferences and priorities – giving VARs, software companies, and Internet companies, as well as voice service providers, opportunities increase their value to specific markets and customers.
• Emerging markets present big risks, but offer big VoIP opportunities because many people in these countries are bypassing conventional telephone service for mobile and VoIP.

Use this report to:
• Identify profitable business opportunities, strategies and markets for consumer VoIP.
• Understand what works and what doesn't in the VoIP business.
• Analyze successful VoIP business models.
• Examine the challenges facing VoIP service providers.

Discover
• Who are the winners and losers in consumer VoIP?
• How many VoIP subscribers and broadband (wired and mobile) users are there in China, Europe, Japan and the US?
• Who are the key VoIP players in these regions?
• What are the opportunities in specific regions?
• How can providers leverage Internet evolution into specific services that consumers value?
• What are the challenges facing VoIP providers, and what are the strategies they need to meet them?

Global Voip Industry

Table of Contents
The Future of Consumer VoIP
Executive summary 12
VoIP – The disruption that didn't disrupt 12
Consumer VoIP provider strategies 12
The VoIP market in China 13
The VoIP market in Europe 14
The VoIP market in Japan 15
The VoIP market in the US 16
New VoIP opportunities in Internet advances 17
Choosing a path to consumer VoIP business success 18
Chapter 1 Introduction – VoIP: The disruption that didn’t disrupt 20
Summary 20
Introduction 20
Market disruption: more than technology change 21
Successful consumer VoIP businesses show opportunities 21
The future of consumer VoIP 22
Chapter 2 Consumer VoIP provider strategies 24
Summary 24
Free phone calls do not generate profits 25
Over-the-top consumer VoIP companies struggle for profitability 26
Vonage 26
Deltathree 29
Mobile VoIP delivers similarly disappointing results 30
Vyke 30
Truphone 30
New players 31
Ooma 32
The future of pureplay consumer VoIP 34
8x8 35
Traditional telecoms companies 38
AT&T 38
Comcast Cable 41
SoftBank BB 44
France Telecom 45
Skype 46
Chapter 3 The VoIP market in China 50
Summary 50
Introduction 51
Technology outlook 51
Broadband penetration & growth 51
Fixed voice line decline 51
Consumer VoIP penetration & forecast growth 52
Consumer voice providers, VoIP providers 54
Market drivers, challenges, barriers, and cultural and social considerations 55
VoIP opportunities 55
Regulatory climate 56
Chapter 4 The VoIP market in Europe 60
Summary 60
Introduction 61
Technology outlook 62
Broadband penetration & growth 62
Fixed voice line decline 63
Consumer VoIP penetration & forecast growth 64
European telecommunications industry landscape 65
VoIP providers 67
BT Group 67
Deutsche Telekom 68
Skype in Europe 70
France Telecom: lead change instead of following it 71
Iliad SA 72
OTE 76
TDC 76
European VoIP opportunities 78
Regulatory climate 79
VoIP regulation 79
Chapter 5 The VoIP market in Japan 82
Summary 82
Introduction 83
Technology outlook 83
Broadband penetration and growth 83
Consumer VoIP penetration & forecast growth 84
Consumer voice providers, VoIP providers 85
NTT 85
SoftBank 86
NTT affiliates 88
KDDI 88
Cultural and social considerations 90
Opportunities 91
Challenges 92
Regulatory climate 93
VoIP regulation 93
Chapter 6 The VoIP market in the US 96
Summary 96
Introduction 97
Technology outlook 97
Broadband penetration & growth 97
Consumer VoIP penetration & forecast growth 98
Telecommunications industry landscape 99
Consumer voice providers, VoIP providers 100
Market drivers, challenges, barriers, and cultural and social considerations 102
Unique market opportunities 103
Regulatory climate 104
A history of strategic deregulation 104
The debate over Internet regulation 105
VoIP regulation 106
Chapter 7 New VoIP opportunities in Internet advances 108
Summary 108
Introduction 109
The network: the essential enabling infrastructure 110
Bundling is a natural evolution for network operators 111
Video services drive successful bundling strategies, and three is the best number 111
The challenge with bundling: profitability 113
Network openness is another avenue to success 113
Google validates the importance of the underlying network 114
Google's history as Internet and VoIP provider 114
With the exception of Skype, Internet companies have not been successful with voice 115
Just saying you're a consumer services provider doesn't make you one 116
The size of Google's opportunity depends on who the competition is 117
Femtocells: enabling infrastructure for extending mobile phone into the home 118
Femtocells enable more mobile phone calls – not just indoor mobile phone calls 119
Simplicity is key for femtocells 121
Incentives for adoption 122
Capabilities: 21st century VoIP is mobile 124
The obvious short-term opportunity: cheap mobile VoIP calling 125
The long-term opportunities: fixed-mobile convergence, new mobile services with integrated voice 126
C 127
apabilities: Convergence fights eroding profitability with added value and convenience 127
Opportunities through convergence 127
Challenges: market education, business alignment, and ease-of-use 129
Capabilities: Cloud telephony enables advanced functionality at basic prices 131
The personal PBX 131
Cloud telephony challenges: price, differentiation, and establishing the value proposition 132
Capabilities: Intelligent voice changes the focus from ‘how much it costs’ to ‘how much it does’ 134
Delivery: Apps that go beyond simple voice integration 134
Delivery: Open handset platforms offer the opportunity for competitivelypriced special-purpose appliances 136
Opportunities in medical applications 136
Hiding in plain sight: reinventing the home phone 137
Specialized device and app challenges: price, channel conflict, usability and security 138
The future: KDDI’s Polaris life device 139
Chapter 8 Choosing a path to consumer VoIP business success 142
Summary 142
Paths to success 142
Three building blocks for business models 144
Company examples 144
Consumer VoIP service examples 146
Chapter 9 Appendix 149
Bibliography 149
Index 155
List of Figures
Figure 2.1: Vonage financial performance ($m), 2004-2009 27
Figure 2.2: Vonage Q1 2010 ARPU, marketing costs and new subscribers 28
Figure 2.3: Over-the-top VoIP companies revenue and losses (latest available, $m) 34
Figure 2.4: 8x8 financial performance ($m), 2005-2009 37
Figure 2.5: AT&T U-verse TV and voice subscriber growth, 2008-2009 39
Figure 2.6: AT&T U-verse subscriber bundle uptake, 2009 40
Figure 2.7: Comcast and Vonage VoIP customers (000s), 2005-2009 42
Figure 2.8: Comcast digital voice subscriber growth, 2006-2009 43
Figure 2.9: France Telecom service take-up (%), 2008-2009 45
Figure 2.10: Skype revenue and user account growth, 2005-2009 47
Figure 3.11: Consumer mobile and fixed lines in China (m), 2009-2014 52
Figure 3.12: Consumer VoIP users and revenues in China, 2009-2014 53
Figure 3.13: Chinese telecom services pricing and regulation 57
Figure 4.14: Broadband subscribers in Europe (m), 2009-2014 62
Figure 4.15: Consumer mobile and fixed lines in Europe (m), 2009-2014 63
Figure 4.16: Consumer VoIP subscribers and revenues in Europe, 2009-2014 64
Figure 4.17: Iliad subscribers and ARPU, 2006-2009 74
Figure 4.18: Iliad revenue, profits and margin change, 2006-2009 75
Figure 4.19: TDC customer segmentation by service (%) 77
Figure 5.20: VoIP and mobile broadband subscriptions in Japan (m), 2009-2014 84
Figure 5.21: Japan VoIP service market share for key operators (%) 85
Figure 5.22: SoftBank consolidated business profitability, 2006-2009 87
Figure 6.23: US consumer Internet subscribers (m), 2009-2014 98
Figure 6.24: Consumer VoIP subscribers and revenues in the US, 2009-2014 99
Figure 6.25: US handset-based VoIP market share for key operators (%) 101
Figure 7.26: TV companies lead in triple play ARPU 112
Figure 7.27: Global femtocell access points and users (m), 2009-2014 119
Figure 7.28: The business case for femtocells 120
Figure 7.29: SoftBank revenue, 1995-2009 – the impact of free DSL modems and VoIP service 123
Figure 7.30: Global VoIP and mobile broadband subscriptions (m), 2009-2014 124
Figure 7.31: Changing communications preferences for 15-25 year olds, 1990-2010 129
Figure 8.32: Building blocks for Consumer VoIP business models - summary 144
Figure 8.33: Building blocks for Consumer VoIP business models – company examples 145
Figure 8.34: Building blocks for Consumer VoIP services 147
List of Tables
Table 2.1: Vonage financial performance ($m), 2005-2009 27
Table 2.2: Vonage Q1 2010 ARPU, marketing costs and new subscribers 28
Table 2.3: Over-the-top VoIP companies revenue and losses (latest available, $m) 35
Table 2.4: 8x8 financial performance ($m), 2005-2009 37
Table 2.5: AT&T U-verse TV and voice subscriber growth, 2008-2009 40
Table 2.6: AT&T U-verse subscriber bundle uptake, 2009 41
Table 2.7: Comcast and Vonage VoIP customers (000s), 2005-2009 42
Table 2.8: Comcast digital voice subscriber growth, 2006-2009 43
Table 2.9: France Telecom service take-up (%), 2008-2009 46
Table 2.10: Skype revenue and user account growth, 2005-2009 47
Table 3.11: Consumer mobile and fixed lines in China (m), 2009-2014 52
Table 3.12: Consumer VoIP users and revenues in China, 2009-2014 53
Table 4.13: Consumer fixed VoIP subscribers (m) in selected European countries, 2009-2014 65
Table 4.14: Iliad subscribers and ARPU, 2006-2009 74
Table 4.15: Iliad revenue, profits and margin change, 2006-2009 75
Table 5.16: SoftBank consolidated business profitability, 2006-2009 87
Table 7.17: Percentage of consumers that are interested in services targeted to their special interests 134