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.
Posted by Martin Geddes at 11:57 AMTrackBack URL for this entry:
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