The business model for most current Internet telephony companies is flawed from the outset.
Will Vonage, the leader of the pack, have a long-term future as a business? Well, that depends on them executing a strategic shift as they move out of their growth phase (still some time away). They may have already blown it.
At home, we use Vonage as our landline telephony service. For those who don’t follow the world of IP-based telephony providers, Vonage is a company that gives you the equivalent of full-service landline telephony, just using an Internet connection and an telephone adaptor box. I’ll write up our experiences some other day, but for now all you need to know is that Vonage is the clear market leader in broadband telephony in the USA.
What’s the problem with their business model? Two things.
Revenge of the Regulators
Firstly, they were trying to arbitrage the regulatory environment. There are major costs associated with obtaining a traditional land line or long distance service. These include emergency service fees, universal service taxes, various random carrier cost-recovery fees assocaiated with regulatory impositions like number portability, and local and state taxes.
Vonage are currently experiencing a blizzard of regulatory assaults in establishing their PSTN look-alike service throughout the USA.
Since their VoIP service looks like the PSTN and smells like the PSTN they are having a hard time arguing that the existing regulations should apply to the technology (analog copper lines) rather than the application (speak to someone not present addressed by a telephone number). This regulatory cost advantage may be unsustainable, and regulatory fees are already appearing on Vonage bills.
A ceiling on their potential success
More fundamentally, their business model is about arbitrage of the access fee component of traditional telephony. Because there was only a single pipe into each household, and that pipe had a single purpose (PSTN telephony), monopoly rents could be extracted. But the margin of advantage that Vonage offers will be squeezed by the success of their own business model: the more people who join Vonage, the greater the pricing pressure there will be on incumbents. Furthermore, Vonage will have to build out an infrastructure in proportion to the number of subscribers they receive. The incumbents already have their equipment and business support services in place and paid for: they only need cut back on operational costs.
Vonage should re-define the market
The shift Vonage need to make is to stop trying to copy the PSTN on IP. The whole point of the Internet is to enable unforseen innovation at the end points. Instead, they need to take a leaf out of Skype’s book and do something that the PSTN cannot do. This could be integration with presence, encryption, higher voice quality, voicemail stored at the end points, etc.
They may find this switch hard or impossible to execute on because the Cisco ATA-186 adapter boxes are so inflexible and limited in their functionality.
Ultimately, the future of telephony belongs to a centralized directory service provider such as MSN, Yahoo! or AOL, or a decentralized system such as Skype. Vonage will get their footnote in the history books — and maybe even a chapter — but they won’t be the victor writing the history of the new telephony.
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I ponder whether the most successful centralized directory will be associated with a [network] service provider. This function would be best served if de-coupled from the service provider. For instance, look at Four11. They are simply a directory service and little more. They are of no threat to any service provider. Limiting a directory to the membership of each disjoint service provider means I have to play a shell game to find a listing. Of course, I imagine you could employ a search engine (if the service providers had open interfaces to their listings).
If TPv6 becomes widely adopted, I think there is no need for a directory. Even otherwise, current technologies can be used to get directory information and overcome the NAT traversal problem, thereby marginalizing all forms of service providers. The problem is that most of VoIP pudits still speak of service provider based architecture.
Aswath
Posted by: at November 5, 2003 08:33 PMYou don't even need IPv6 to have a service provider-less landscape. As you say, most people are still using the language of service provider based architectures and somewhat meaningless terms like PC-to-Phone and Phone-to-PC.
People will adopt VoIP due to new features, not to save money or replace their existing PSTN for the sake of doing so. People adopted cel-phones to gain a new capability: mobility. There will have to be an equally compelling reason to adopt VoIP. And there will be, as some bright person will figure it out and create offerings that really work. Somebody will get it right.
The current direction is so focused on replacing the existing telco. Perhaps a better strategy is to consider products that offer VoIP bells-and-whistles, but also augment and integrate with your old PSTN line, to give even more reason to buy that product/service (because, remember it's not just about saving money or ditching the PSTN line).
Posted by: at December 10, 2003 10:39 PMYou don't even need IPv6 to have a service provider-less landscape. As you say, most people are still using the language of service provider based architectures and somewhat meaningless terms like PC-to-Phone and Phone-to-PC.
People will adopt VoIP due to new features, not to save money or replace their existing PSTN for the sake of doing so. People adopted cel-phones to gain a new capability: mobility. There will have to be an equally compelling reason to adopt VoIP. And there will be, as some bright person will figure it out and create offerings that really work. Somebody will get it right.
The current direction is so focused on replacing the existing telco. Perhaps a better strategy is to consider products that offer VoIP bells-and-whistles, but also augment and integrate with your old PSTN line, to give even more reason to buy that product/service (because, remember it's not just about saving money or ditching the PSTN line).
Posted by: at December 10, 2003 10:39 PMI disagree with most of the statements made in this article for the following reasons:
1. The potency of the afore-mentioned "regulatory assaults" has been recently severely altered via newer regulations resulting in a big win for voip-based providers of tradtional services.
2. Most of the statements in here assume that Vonage is actually -trying- to forge ahead by being inventive via the use of new technologies and redefinition of service. They aren't. They're using existing technology to provide an alternative to the crappy service and pricing schedules defined by incumbents.
3. Vonage has, and continues to new customers due to cost savings. Not to try to represent the majority, but this is exactly why I switched. Clearly the $39.95 unlimited ld / canada offer is superior to any offering by any incumbent. Studies by Gartner and others show that this is pretty much all it takes to break people away from incumbents. I'm sure this is even more clearly defined with the large number of Candian Americans who are H1B or otherwise. The cost of one call becoming equivalent to your entire bill is not something most people pass up.
4. The service they provide actually -does-
have higher voice quality, and they specifically have to add line noise to give that sense of traditional copper. All voip providers with a reasonable infrastructure do this. It's not news.
5. Your argument -for- new services directly contradicts itself when you talk about integrating directly with PSTN. What advantage would this give Vonage or it's customers?
The only barrier to success for Vonage is essentially that not everyone has broadband. If they want to, as you say, "be the victor writing the history of new telephony", they'd co-package with broadband services who don't already currently offer voip or plan to.
Posted by: at December 16, 2003 05:36 PMRemember one thing... money talks....if somebody offers a better product cheaper and backs it up with customer service... it sounds like a recipe for success. The only question should be... how much stock should I buy ??? This sounds like the next Microsoft of the telecommunications industry. Does anybody remember all the fiber optic cable laid out in the 1990's ??? Think about it.
Posted by: at January 10, 2004 03:17 PMI'm not fsmilisr with all of the techno lingo used in this forum.....but I'll tell you my reason for switching to Vonage from Southwestern Bell. I switched because I nevr got a phone bill from SBC that was lower than $80. All I had to do to switch to Vonage was to hook up my cisco box to my router and that was it...all for 24.99 a month..and I get 500 minutes of free long distance not to mention all of the free extras that SBC has been raping me for for years. SBC acts like each of the extras is a costly feature to offer.....yet Vonage gives them away for free. What does that tell you. Another good reason is the virtual phone numbers. I live in Houston and have a Provo, Utah virtual number....thereby saving our relatives $60 a month in long distance fees.Watch...in a while SBC will be offering VoIP to its broadband customers....and probably ask Vonage to implement it. Read the writing on the wall....VoIP is here too stay....the dumb telco's better sit up and take notice or they'll loose their shirt.
Posted by: at January 14, 2004 09:02 AMIf it is as promised why hasn't everyone replaced those Bell bastards with Vonage. Aren't their competitors of Vonage? How long will it be before Vonage will offer broadband isp service as a throw in?
Posted by: at April 12, 2004 03:47 PMI want to add to the other side of the arguement. I was an avid proponent of Vonage's offering and still am a proponent of the idea, but there are some serious hangups for some folks. Here is why I discontinued service:
1) They don't support tranmission of data over their system. I have 4 DirecTV boxes (3 of them with TiVo) and none of them can make data calls. When I spoke to TechSupport about it, they informed me that they were not currently supporting those products on their system. Although they provided me with the usual gemmit of prefix options, none of those helped.
2) When multiple users start utilizing your home network for internet access (especially down/up loads), voice quality really goes down the tubes. The good news is that this may be resolved by using a QoS router, such as the Linksys 8-port home router.
3) I started having voice quality problems, even when the cisco-ATA box was connected directly to the cable-modem. When I ran Vonage's diagnostics software, they reviewed it and told me that too many packets were being dropped. When I reviewed the data myself, it turns out that packets were getting dropped (1%-10%) at each hop on the public network, which included at least 3-4 telcos. This ended up being the last straw for me because how does a single person get major telcos to improve the packet loss on their networks? Besides that, Vonage was the only service affected by the packet loss. There was no measurable loss of data speeds for web browsing or down/up loading.
Believe me, I have tried everything I could think of before deciding to call it quits with Vonage. I am still a proponent of VoIP because I know it is the near-future, mass-alternative to PSTN. So, if anybody has suggestions for improving my situation, I would be more than happy to go back to Vonage. My wife's friends and family are all in Canada and our SBC phone bill is about $60/month. My equivilent bill with Vonage was about $50/month. Not much of a savings, but every little bit counts for us these days. Plus, I want to go back to helping the idea of VoIP being the mainstream.
Posted by: at April 26, 2004 11:35 AMVonage works for me, sort of. I can make calls, the voice quality is fine, etc. The price is right. The problem is the quirks that happen often enough to be an annoyance for me and a show stopper for my wife:
- Dropped calls. For long holding time calls, like the MeetMe-style calls for work, about once a week the call drops. I can reconnect, no problem, but this is very annoying.
- Silent incoming talk path. If the call does not drop, then the other failure mode is people cannot hear me. I can hear them, but they cannot hear me. I have to hang up and reconnect. Very annoying.
- Voice path interrupted by downloads. Like a previous posting, I can hear whenever my Outlook email client wakes up and checks email. Static is added to the voice path, briefly. Minor annoyance.
So is this Vonage's fault? No, I don't think so. I think it is my cable service. I have similar problems when I setup (non-voice) VPN connects to my work. Sometimes my VPN connection just drops. From my readings on dslreports, my cable service continues to suffer from overloaded CMTSs. Not sure.
From my kids' point of view, sometimes web surfing gets "laggy" but it usually gets better a few minutes later... Not really that bad for doing surfing, email, or IM chat. The cable CTS people have been to my house and report no real cable problems.
So for work, Vonage only gets used for short calls. MeetMe calls are still done with my SBC landline. I had an idea that maybe switching to another VoIP provider would be better, but I am not sure I have the desire. I just want something that works (better).
-JK
Posted by: at April 27, 2004 05:01 PMWell.... Let me tell everyone about my experiance with Vonage specifically.
I recently moved across country and had to make major shifts in my data connection, voice connection, etc.
I discovered that SCB (Bell) didn't have DSL available in the area where my new house is. This was a huge shock since I moved from a depressed area of the country to a high tech center. Since they couldn't provide DSL (which is my main communication need) I told them I didn't need their service at all and began shopping.
I chose Time/Warner RoadRunner for my data connection since I was already using them for Digital Cable in preference to satellite. Their service has been stellar and no sat company on earth sends out a tech on a Sunday... Time/Warner does. I also have DVR boxes, etc. all provided by Time/Warner.
I contacted several cell phone companies and since I've never had a cell phone before they all wanted deposits that bordered on highway robbery.
I contacted Vonage and for less than $75 was set-up and in communication. I also have an 800 toll free number from them and will be adding softphone to my laptop soon since I travel a lot.
I've saved hundreds of dollars a year by dropping my old Bell company and will never go back to their 19th century copper umbilical again.
Posted by: at June 18, 2004 10:04 AMVonage has done more to spread the word to common folk about VoIP. Their marketing has been tremendous, including their affiliate marketing and banner ads that seem to out number X10 camera banner ads these days.
But will Vonage fall the way of Netscape? First to market and first to fail? Microsoft killed them. Will the carriers do the same? Forget Revenge of the Sith. The Empire Strikes Back and that empire is the carriers.
Vonage and all the other VoIP players may have finally woken the sleeping giant...
If Vonage is going to stay in the game, they better have excellent customer service (it's poor right now according to the VoIP forums) and they better have 100% uptimes and no more outages like this past week. Just look at all the users complaining about Vonage on the VoIP forums.
http://voip-forum.tmcnet.com/voip-forum/forum/
More specifically, check out this Vonage thread:
http://voip-forum.tmcnet.com/voip-forum/forum/forum_posts.asp?TID=250&PN=1&TPN=1
Fiber to the residence is comming, within two years. The major telcos are in the process of laying it now. Soon you will have giga-gob fiber optic cable right to your house. You will be able to get high-fi VOIP, digital HDTV, and killer Internet access, all from guess who? Yes, your local telco. They will be back in the drivers seat and once again have you by the balls. All with no federal regulation!
Posted by: at December 9, 2004 06:07 PMAs a network engineer - QOS Needs to enabled on every router or Vonage needs to able to provide a direct connection to it's private network where I'm QOS in enabled.
I can tell you that in the future VoIP will be mainstream but major engineering hurdles need to be overcome first. Vonage solves part of the problem by having there own private network and point of presence in key locations but since most people have to traverse other networks to reach a Vonage POP that is where the problems are introduced to all the people that have had problems - READ Quality of Service or QOS. QOS must be enabled and configured on every router in the path in order for it to work, this will give Voice and Video traffic, both of which can not tolerate delay or dropped packets top priority. Until that service is enabled on every router on the internet then VoIP will have problems. High bandwidth will do a good job of masking the problem but it will show up as soon as other applications start to use that bandwidth - DVR. Video On Demand, etc.
Overcoming the QoS problem could be done by taking the telcos completely out of the loop (until they bring the purported fiber to the home). As a small WISP we are looking at portable handheld radio VoIP phones for our subscribers. They would connect to our wireless network completely eliminating the local telco, at least on our end. As the coverage areas of wireless networks expand across the country so does the telco free coverage area of VoIP. Seems the only hurdle would be negotiating some sort of agreement between WISPs allowing VoIP clients from other providers to connect to their network.
As far as the telcos bringing fiber to the home..... fabulous! I would have to see it to believe it, but if they do we will just pimp their fiber in the areas where there is no wireless coverage, thus increasing quality VoIP service area.
Posted by: at January 8, 2005 02:22 AMI have had NOTHING BUT TROUBLE with VONAGE customercare, when i call, i have too hold for up to 45 min. then they could not help me. my modem has a usb the RT31P2 Device did not'. I emailed them, all i got was a cumputer generated number, and a messege that sais we will contact you soon. NEVER GOT A word back EMAILED THEM AGAIN TO CANCEL, NO WORD BACK That was on 1 16 Had to call and wait 20 min to get it Canceled. THEN THEY TRYED TO HACK MY CREDIT CARD FOR 41.19 FOR NOTHING. I have even been able to hook this up And now i still cant make them understand that I have to use a cell phone and it does not work to well here and to wait that long COST ME they wont pay for it.
Posted by: at January 20, 2005 02:24 PMMy experience with Vonage has been nothing but disastrous. After a few days of switching to Vonage, I didn't get any inbound calls. People told me that they get engaged tone. It continued for 2 full days. Tried to contact Vonage customer care. Could never get through. Sent email and got an auotmated message. The phrase 'Customer service' does not exist in their dictionary. I am switching back to my previous local service provider.
Also found out that 911 may not work through Vonage due to issues with VoIP. My prayers to all those who have only one phone line which is a VoIP service like Vonage.
WILL NEVER HAZARD TO GET MY PHONE SWITCHED TO VOIP, NEVER.
Posted by: at February 2, 2005 08:04 PMWow. I can't believe what I am reading here. Maybe it's just that most people won't take the time to express an opinion unless they want to complain.
I switched from BellSouth to Vonage about three months ago and it's been nothing but superb. NO outages, NO billing surprises, a great online interface.
NO FCC crap, NO recovery fees, NO fees to use TOUCH TONE(if you can believe BS still charges for that!) NO fees for "special" features like caller ID or call waiting... MUCH better sound quality. Free nationwide long distance. Many more features including the ability to have incoming calls ring on my home and cell phone simultaneously and the ability to receive voice messages via email. All this for about $27/month TOTAL.
I used a Vonage-issued number for the first month to test the water. After getting comfortable with the service, I ported my home number over and kicked BS to the curb with gusto. Vonage was nice enough to credit my account in advance for the normal $10 fee to port a number after signup. All told, I am spending a fraction of what I was spending for BS + long distance. The service hasn't gone down once. I also have friends that use Vonage that have had the same experience.
Seriously, I don't think I would go back to BS at any price. Vonage is too good.
Gene
Posted by: at May 24, 2005 11:56 PMThe service is fine, in my experience. It's the business model that's broken. Martin.
Posted by: at May 25, 2005 12:15 AMI just setup with Vonage and it didn't work initially. I contacted the Vonage Customer Service and was immediately connected and assisted. The problem was on my end, however. I locked my router mac addresses down and forgot to add my new Vonage device so that it could communicate. After that, it worked perfectly, no problems. I'm so happy that the major telcos are no longer draining my pockets.
Posted by: at April 13, 2007 01:59 PM