Editorial: Selling VoIP

When you look at adding VoIP to your bundle of services, don't forget that technology is not the only hurdle. Marketing is tough too, but there's plenty of advice available, and some of it is very good.

by Alex Goldman ISP-Planet Managing Editor [August 13, 2004]

We knew the ISP business was going through very very big changes when we spoke with Bill Ford at ISPCON in Washington, D.C. in April. Ford told us that his billing company, Platypus (since acquired) was adjusting its software to meet the demands that value-added services place on billing systems.

When technological change permeates an organization, reaching into the back office and other basic systems, you know the change is fundamental. That is the case with VoIP.

And while we deal with other aspects of VoIP in other sections of ISP-Planet (which, by the way, hosts over 10,000 articles written since its founding in 1999), in the marketing section, we deal with an aspect of VoIP that might be easy to overlook, given the daunting challenges elsewhere.

Selecting customers
Matt Godden, president of Seattle, Wash.-based Xoasis Networks, a VoIP server vendor, tells us that ISPs should look to the small business market for customers before they enter the residential market.

Small businesses see obvious advantages, he says. "There's been a lot of interest in VoIP for two reasons. First, everybody assumes that you get free long distance. Second, if you're a company with branch offices, if you have four branch offices, for example, you can transfer all calls without hangup and pickup and have one operator manage all four offices."

It's tougher in the residential market, because wireline operators are already competing on price. "The biggest challenge there for VoIP is competing with long distance services. You need to be at 2 or 3 cents per minute. You can charge a monthly fee, but you run the risk that somebody could run up a huge bill on you. CLECs have been dealing with these problems for years, and they're familiar with this risk. They're seeing a lot of interest in multitenant or small business PBX systems for office buildings and condos."

One CLEC familiar to every ISP is Covad, which has just published White Paper: The Arrival of VoIP [.pdf]. The white paper cites research forecasts which say that the residential VoIP market will triple between now and 2007 from 6 million lines to 19 million lines, but that the small business VoIP market will blossom from 100,000 lines today to over 1.7 million in 2007, a seventeenfold increase.

Although competition will be fierce in both markets, the Covad white paper says that the residential market will be more price sensitive. The small business market will also be sensitive to quality of service. Covad touts its provisioning ability and the skills added in its recent GoBeam acquisition.

A virtual advantage
But non-facilities based ISPs like Earthlink will tout their ability to provide a service that's independent of any infrastructure or operating system. One vendor agrees.

Clive Raines of Ft. Lauderdale, Fla.-based VoIP, Inc., says ISPs can use his company's own-branded VoIP service, selling CPE directly or through retail chains. He thinks ISPs will compete effectively in the residential market, with a few caveats.

"There's money to be made by offering VoIP as a supplementary service. Some companies tried to replace the Bell line and that got them into problems with 911 and 411 and even with defining the free calling area. Every provider has their own idea of what constitutes a free local call. Also, the phone number is often used for billing. What we've done is say, look, it's better to sell this as a supplementary service. Use the phone line for incoming calls, and use VoIP for international and long distance calls. Also, why not get a number in New York or Florida, where your kids are or where your parents are, or if you're a small business, use it as a business number and have a virtual office in that city."

Bill Hamlin, Director of VoIP Services at Long Beach, Calif.-based Rocket Internet, agrees with all of this. He said in a recent post to the ISP-Investor list:

I've been working on VoIP for a couple of years. Billing for VoIP is boiling down to a flat rate model. $19.95, $29.95, whatever. The cost for terminating a call can get as low as 0.7 cents/minute, but realistically you should figure on 1.4 cents/minute. This is through a 3rd party VoIP provider (meaning you don't need any gateways or T1 lines).

So if you're charging $29.95, you lose money once your customer talks for 2100 minutes. You can probably figure on usage being much less than that. "Breakage" can run around 50 percent, meaning your cost is about $15 and revenue is $30. That would be good, wouldn't it?

The bad news comes in when you consider supporting "incoming" calls. There are some "virtual" numbers available but the charge is 1 cent/minute plus $2 a month. That eats into your margins. The alternative is to install the dreaded gateway in your POP and lease the dreaded T1 from the phone company. I would advise against that and tell your customers to use the POTS service for incoming—that your VoIP service is for outgoing calls only.

You could always offer Vonage or the other 30 services popping up all over, but I'm concerned about the long term viability of that versus what I think *does* make sense, which is this termination-only, flat rate service.

By the way the really good thing to offer your customers is "on-net" calls, where both parties have an IP phone and talk all they want for free.

The software for this stuff runs on RH9 Linux and is free. The phones are under $100 now.

Hamlin adds, "the point I'm making is you can put together a simple flat rate based system so long as it's only for outgoing calls. There are several termination services I've worked with in the past, but the one I'd recommend this week is Vinculum. They're the ones charging 1.4 cents/minute (and good rates elsewhere). As for the open source billing system, that's the part I work on so have people contact me for more info."

One good source of free research is the Pew Internet & American Life Project (not pewinternet.com, which is a search site that spawns popup ads, including one for NetZero, who should know better). Generally, research websites like Pew (and Jupiter Research) release data after several months, and charge clients to view the most timely data.

One such report, VoIP Awareness in America, was released on June 27, 2004. The data was obtained in a survey of 2,204 Americans during February, 2004. The report also cites information gleaned from the DSL Reports website and the comments pages of websites of VoIP vendors such as Ft. Lauderdale, Fla.-based VoiceGlo.

The report says that for young people between the ages of 18 and 24, the cell phone competes effectively with VoIP. The most likely target market for VoIP services appears to be anyone who already has a broadband connection.

Tech savvy users, the report notes, understand the drawbacks of VoIP. Many seem to see it as a tradeoff of price for a slightly lower service quality.

In summary, you don't have to pretend this is perfect. You don't have to replace the phone company. Instead, sell residential users a second line that's cheaper, and sell businesses a more high touch managed service.

Beware, however, of the changes you'll have to make in your own company. Master the back office and the marketing as well as the technology, and you'll be well on your way to becoming a master of 21st century telecommunications.

—End