Large ISPs Missing From VoIP Race

The race is on. Major companies are preparing an ad blitz. But one group of communications companies is suspiciously missing from the ranks of VoIP contenders—the largest ISPs.

by Max Smetannikov [September 24, 2004]

At a time when every cable company, most of the RBOCs, and even some of the remaining CLECs are rolling out last mile VoIP services, three key names are absent from the list of companies flirting with this vital value-added service: United Online, AOL, and EarthLink.

No ISP made it into the latest report from Global Advertising Strategies report, "Last Mile VoIP Incites Marketing Rivalry", that we just released. This is remarkable because Global, a New York-based marketing and consulting firm that I work for, analyzed the last mile VoIP market and the position in that market of all major players. Not only did major ISPs fail to register on the VoIP marketing scale, many don't even have a last mile VoIP product.

"We have confirmed it is in testing," said Anne Bentley, AOL spokeswoman, in response to our question. "It's Vonage-style VoIP." Bentley won't give any other details on the offering. Netzero's spokesman confirmed the service provider currently doesn't offer VoIP, and EarthLink's spokeswoman didn't return calls soliciting comment, but our sources say there is no clear VoIP strategy in place.

What VoIP means to ISPs
Let's clarify exactly what we're talking about here. "VoIP" is what the company I work for has defined as "Last Mile VoIP," i.e. a service that delivers the benefits of VoIP technology to end users over the "last mile" that connects their homes and offices to various communications networks. There are many other kinds of VoIP floating around—VoIP sessions can be initiated by instant messaging clients, end users can make calls via their computers to other computers, business phone systems are embracing VoIP at a rapid pace, and VoIP has become a mainstay in wholesale telephony arrangements.

But none of these VoIP technology implementations compete with the telephone service an RBOC would sell as local dial tone. Last Mile VoIP does just that. The 150 million local telephony customers of Verizon, BellSouth, Qwest, and SBC offer a juicy target to anyone launching a Last Mile VoIP business, and when the RBOCs respond with their own product, they are cannibalizing their own revenue streams.

It's so easy
Last Mile VoIP is easy to deploy. It requires only a simple network architecture and there are an abundance of inexpensive platforms to make deployment easier. In fact, setting up a Last Mile VoIP network is not that different from setting up an ISP network.

Vonage, the company Global describes most thoroughly in the report, probably has developed the most straightforward architecture. The carrier has 20 POPs equipped with VoIP gateways around the country, which offload VoIP traffic coming from dedicated VoIP boxes on customer premise equipment (CPE) to PRI lines going into the class five tandems of local RBOCs or CLECs (depending on the market). Yes, this is Last Mile VoIP in its purest form—it literally exists in the last mile. Thanks to low intraLATA and long distance tariffs, carriers like Vonage are able to connect customers to traditional telephone networks via VoIP-enabled last mile.

We have this question: why don't more ISPs do it? At least one small ISP from New Mexico we know is in the final stages of launching such a service this fall. The architecture we described above is exactly what they've got. Their selling proposition? New Mexico local number availability, a nut none of the big name companies have cracked as of yet.

In fact, the ease of last Mile VoIP and the allure of finally being able to eat into the RBOCs' market share led Global to conclude that this fall VoIP competition is going to mature and true brand names will be established in this market. These brand names will be very lucrative.

The establishment of a brand name will not be like the dialup rollups ISPs are so familiar with. VoIP companies will not need M&A or IPO assistance. Even price competition will not be a factor. We believe that prices simply can't go any lower—$20 for local and unlimited long distance is pretty much as low as one could reasonably push the service in today's market conditions (think salaries, equipment costs, office space leases, tech support, advertising and marketing budget—the bare bone business expenses).

Sure, there is room for bundling—but that's a vertical game, not a mass market game. The big numbers are in rolling out universal offerings that would appeal to most telephone consumers on a commodity level—something like a $20 a month dialtone.

M&A? Carriers still don't have the valuations that Wall Street used to bestow on them a decade ago, and not having stock to use as acquisition currency puts serious brakes on the deal machine.

Which leaves us with a major brand war scheduled for this fall, perhaps right after the November elections, and maybe even before. After all, there are VoIP ads airing right now. AT&T and Covad have launched major campaigns, and Global believes there are going to be at least seven players vying for the mass consumer market this fall. Global's ranking suggests Vonage, Primus, and 8x8 have their act together the best. Their products, marketing message, and nimbleness are the unmatched—as yet. But we expect more players—companies like Covad—to start crowding the airways with brand new VoIP offerings. In the long run, consumers will be picking between Verizon, Comcast, AT&T, and—who knows—AOL?

Global believes that the company with the best marketing strategy is going to win the big war. We don't know who that is yet. Global ranked Vonage as the number one marketer in this market at the moment, but we have our doubts it is going to keep this spot come Christmas. That rumbling sound you hear is the revving of a dozen major marketing engines. Let the race begin!

— End