VoIP:

Market players and the challenges facing them

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005 Online: http://www.detecon-dmr.com/en/article/voip_2005_06_30 Askan Schmeisser Ulrike Eberhard In the VoIP growth market a large variety of market players meet: traditional telcos offering fixed, mobile or data communication, alternative carriers, cable TV providers, Internet Service Providers (ISPs), start ups etc. All these actors are trying to hold on to or gain market share and turnover in the voice communications market. What options do they have to ensure their successful -development in terms of the classical 4Ps of marketing (product, place, promotion, price)? VoIP- developments to date

Voice over IP (VoIP) was introduced years ago, but only since 2004 has the market started to develop significantly. Cisco reports, for example, that the first million ports took 18 months to sell, and the next two million just nine months. Yahoo! had more than 4 million VoIP customers in Japan at the beginning of 2004. Despite these success stories the number of VoIP minutes is still very small in comparison to those in mobile telephony or TDM.

Worthy of note are the number and variety of market players in this business. It can be seen that it is possible to be successful in the VoIP market with almost no network infrastructure.

Origins and market participation of the market players

The specific origins of each market player and the depth of their value chain is decisive for their success in the business of VoIP services.

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

Some market players have extended their classical, i.e. switched, voice business to cover Internet services (fixed network incumbents, alternative carriers and mobile operators). These tend to enter the VoIP market relatively late with the intention of protecting their endangered market share and revenues. Portals and Internet Service Providers on the other hand have their core competence in the sale of Internet Services and are complementing this with VoIP services with the main intention of supporting their turnover in the Internet Access and Services businesses.

Virtual VoIP providers dont actually have any past core competence in either data or in voice services. They use other suppliers networks to market their VoIP applications (e.g.Skype). Their service spectrum is being extended continuously to include voice connections between the traditional voice networks (PSTN) and the Internet. These developments mean danger for the core competence of VoIP specialists such as Sipgate and Vonage. The lack of direct customer contact in the early stages of the value chain further adds to the weak position of these market players.

Providers who, in contrast to the VoIP specialists, have direct customer contact at the early stages of the value chain have more freedom in the definition of quality parameters, bundling and price setting. The relevant points of interaction are the customers connection to the broadband network and the accompanying Internet connection. Incumbents and alternative access network operators supply broadband connections using DSL, Cable TV operators using bi-directional cable networks and mobile operators using the 3G technology (UMTS). Internet access is supplied at the same time as part of an integrated marketing concept. This option is only available to the ISPs to a certain degree. To achieve the same effect they have to sell DSL connections from established telcos under their own name (DSL resale). The VoIP specialists and virtual VoIP suppliers have the lowest reach in the value chain as they have no access to either of these access categories.

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

Customer requirements

The starting point for marketing are the requirements of the target customer segments, and these evolve from their previous experience with switched connections in the fixed or mobile networks. The combination of required components has to be defined for each segment and must be checked regularly (see figure 2). This is particularly important due to the fact that VoIP innovations can be developed and implemented very fast.

The marketing challenge for incumbents

The question for incumbents is not whether they should introduce VoIP in competition with their existing portfolio, but when and how. The challenge is to balance out two threats: cannibalisation of existing products on the one hand and lose of market share on the other.

The urgency of market entry with VoIP increases in the presence of the following external factors:

Falling input prices for > interconnect DSL wholesale

Price competition through > broadband flat rates high PSTN price level

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

Broadband penetration with > DSL >Cable 3G, WiFi Hotspots

Telephone numbers > absence of blocks in local network portability

Unbundling of the last mile > separation of PSTN and DSL connection bit stream access

Two strategies are possible: either the introduction of low price VoIP services in line with the virtual VoIP suppliers and the VoIP specialists, or to aim for higher value with services including additional features and functions in line with the positioning of PSTN services. The second strategy is being adopted by AT&T with CallVantage in the USA, for example. Using this strategy cannibalisation can be avoided through the supply of service bundles specific to individual target groups (e.g. international minutes bundle, connection mobility, applications) and flat rates.

Taking the low price strategy carries the risk of further price decreases and the transfer of a negative image to the incumbents entire product range. The cannibalisation effect can be reduced through the introduction of certain restrictions which extend the PSTN lifecycle. These could include, for example, best effort voice quality, limited mobility with the VoIP connection, or the introduction of a second brand.

Market challenges for alternative access network operators

Alternative access network operators such as Colt, BT Global Services and Arcor face the same challenges as the incumbents. At present only a few of these operators offer VoIP to their private customers; their focus lies on the sale of ISDN and DSL/Internet.

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

For small and medium sized enterprises some alternative carriers (e.g. QSC) are using VoIP services such as IP-VPNs and hosted PBX (outsourced telephone exchanges). The branch analyst Ovum forecasts that Hosted PBX will represent just 15% of the market for IP telephony in 2008. For longer term market development in VoIP services the private segment must thus also be approached. In contrast to the incumbents the alternative carriers do have the option of entering into agreements with existing VoIP suppliers for the joint marketing of DSL/voice bundles. Particularly in the case of a limited window of opportunity (due, for example, to the market entry of the incumbent) and the absence of network infrastructure components necessary for VoIP this strategy may become vitally important. The combination of alternative carriers to form a community, within which VoIP calls are free, could also provide competitive advantage, particularly over the incumbent.

Marketing challenges for call-by-call and pre-select suppliers

Call-by-call and preselect suppliers will face stronger competition than the incumbents and the alternative access network operators. Their low price position will be attacked by Internet Service Providers, virtual VoIP suppliers and VoIP specialists.

This effect will be curtailed by the different target market segments. The VoIP suppliers will target those segments which already have access to a broadband connection. Call-by-call and preselect providers will aim for the migration of their dial-up customers to broadband connections. The increasing DSL penetration will however reduce their market potential.

Entry into the VoIP market requires investments in the IP infrastructure and in VoIP network components by the call-by-call and preselect providers. In addition the customers DSL data traffic must be fed into the providers IP network by another carrier, Deutsche Telekom for example. The window of opportunity will only be open for a short time. As soon as broadband penetration has reached saturation point customer acquisition costs will increase due to equipment subsidies and advertising, and profits will fall. One condition for successful market entry must therefore be a core of dial-up Internet access customers, who are easy to win for DSL Internet access. Implementation using a consistent no frills approach, comparable with the low cost airlines strategy, promises success. In practical terms this means, for example, the use of Internet as the sole sales channel, a small selection of

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

simple, pre-installed IP telephones and simple price models.

Marketing challenges for mobile operators

Due to the fact that their data traffic share is comparatively low the mobile operators are even more dependent on their voice turnover than fixed operators.

This voice turnover faces double threats: on the one hand customers must be prevented from using the operators data services for voice telephony, on the other hand alternative mobile access opportunities such as, for example, hotspots, are endangering business.

However, mobile operators are still in a fairly comfortable position today as mobile VoIP continues to have technical problems such as quality of service (QoS) support and handover. VoIP does not yet come close to offering the mobility comfort offered by mobile networks.

The mobile operators are still following avoidance strategies. Here the strongest weapon is a prohibitive data price model which makes voice telephony via IP unattractive. It is also possible to prevent customers from installing VoIP clients on their smartphones. Long term strategies should however concentrate on hotspots and alliances with alternative operators.

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

Market challenges for cable operators

VoIP is not a threat to cable operators, it is an opportunity. VoIP enables them to increase the value of their services without the investment necessary for telecommunications services. The introduction of VoIP can be used by the cable operators as an additional differentiation measure and thus be used to increase customer loyalty, which is valuable as they are also facing increasing competition. In addition to satellite TV and the introduction of DVB-T they are also going to be attacked directly by the triple-play strategies of the telecommunications companies.

This is even though cable operators have a clear competitive advantage with a unique service proposition: only they have the ability to provide consumers with VoIP without a PSTN connection. Particularly in Germany, where the unbundling of DSL and PSTN by the regulatory authority is not to be expected short term, cable operators could transform this into a price advantage for the customer.

In order to sell VoIP a concentration on the existing customer base to upgrade their existing cable connections to include Internet and VoIP services is recommended. The marketing challenge lies in achieving customer contact as a large share of households can only be reached via agencies or landlords.

In terms of product policy more options are open for the definition of service bundles specific to individual target groups. TV/radio programs can be combined with different Internet bandwidths and VoIP services to make up attractive packages. In combination with intelligent price models this can lead to significant increases in turnover.

Market challenges for Internet Service Providers

The core competence of Internet Service Providers (AOL, Freenet etc.) lies in

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

the sale of Internet access and services without ownership of an access network. Customers benefit from the use of a wide range of price models (flat rates, time or volume dependent) as well as from subsidized equipment (e.g. DSL routers).

VoIP is also an opportunity rather than a threat for Internet Service Providers. In the short term they tend not to see it as an additional source of income but as a means for encouraging sales of their broadband Internet connections.

In the long term Internet Service Providers should however systematically develop their VoIP know-how i.e. extend their low cost offers based on soft clients to include IP telephony, numbering, connection mobility and additional services. This will strengthen their competitive position, particularly in a scenario where the regulator does actually separate PSTN from DSL connections.

Alongside customer acquisition VoIP can also develop into an additional source of income in the medium term. Particularly if the service is integrated into mail and storage services or other applications (gaming, dating) to increase its attractiveness.

Alliances to increase the size of the accessible community should be aimed for by smaller Internet Service Providers in particular. Co-operations with mobile operators (e.g. E-Plus and Freenet) may increase marketing success.

Market challenges for virtual VoIP providers

Virtual VoIP providers (e.g. Skype, PC2Phone, hotfoon.com) enter the market without their own infrastructure and offer free PC applications via the Internet worldwide which enable free telephony within their community. Using pre-paid accounts they are extending their offer to include calls in fixed and mobile networks.

As the providers do not have control over any network components they also have no control over voice quality. These services are therefore not an alternative to a primary telephone connection. When they however include value added services such as IM, voicemail or buddy lists they do have the potential to occupy a niche market as second telephones.

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

The survival of the virtual VoIP provider depends on the one hand on the development of priced value added services. On the other hand purchasing advantages in inter-network calls must be transformed into price advantages for the community. In both cases most other market players have the same opportunities. The medium term survival of the virtual VoIP providers business model is therefore in doubt. Their present success is based on the viral Internet marketing, the large number of installations and their customer data base. Sales co-operations with, for example, equipment suppliers could provide an additional chance for survival through a win-win constellation.

Market challenges for VoIP specialists

VoIP specialists such as Vonage or Sipgate are positioning their services to be a substitute for the existing telephone connection. They supply numbers which are accessible worldwide, IP telephones and soft clients for PCs, but they do not have their own networks. Acquisition covers private and business customers with simple basic telephony at low prices which, through bundling, become even cheaper for calls in the fixed network. A specialty is the commonly offered prepaid option.

VoIP specialists face strong competitive pressure comparable with that of the pure call-by-call and preselect suppliers. In the long term they can only remain competitive over price as their specialization prevents bundling with other services. Only the VoIP add on services offer a rather weak opportunity for differentiation in the consumer market. Alternative strategies would be co-operations with suppliers in the international business market with the objective of setting up IP-VPN solutions. A further, less risky, option is the wholesale model, i.e. the resale of IP/PSTN minutes to other carriers.

Outlook

In the coming years VoIP will remain a growth market. This forecast is repeatedly confirmed by new studies. For example, Gartner forecasts 15% average annual revenue growth for Germany from 2004 to 2008. The market players however continue to position VoIP as a (nearly) free service. It is thus not clear where this revenue is actually meant to come from. Incumbents, alternative access network providers as well as mobile operators are going to have to cannibalize their own business with VoIP in order to retain market

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

share and brands. Call-by-call and preselect suppliers as well as VoIP specialists and virtual VoIP providers are only going to be able to survive in their niches the segments with high price sensitivity as their access to customers is limited. The VoIP offers made by cable operators and Internet Service Providers could be a real alternative to a PSTN connection due to their customer access, but the migration must make sense to the customer and will not be justified by price alone.

Askan Schmeisser ... Ulrike Eberhard Ulrike Eberhard is Managing Consultant and Head of the Strategic Marketing group at Detecon. Her work concentrates on marketing strategies for different market phases, marketing performance, port-folio planning and pricing. Over a period of more than 10 years she has worked on these subjects in interim management positions for carriers and ISPs and for larger consultancy projects in Germany, Austria, France, South Africa, the UAE, China and Vietnam.

Published in "Innovation & Efficiency fot the Telco Industry", DMR 02/2005

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