Will A Price War Run VoIP Out of Business?

ElCheapo writes "News.com looks at the recent price war that has erupted amongst VoIP providers. How much lower can costs for unlimited long distance go before next-generation phone services run themselves out of business? How does this compare with free services that don't offer connectivity to the PSTN? Packet8 offers service for $19.99/month, a level analysts say is unsustainable. Vonage recently dropped their rates to $35/month to match VoicePulse. VoicePulse is known to use a softswitch based on the Asterisk open source PBX. Will open source allow startups to compete with the traditional LECs?"

Comments

C'mon.

[Arctic Fox]

An article like this betrays a fundamental lack of understanding of capitalism. They wont run out of business.
Prices will drop until companies start failing. (If in fact the low prices are unsustainable) So long as there are customers willing to pay for VoIP, there will always be business.
If the price is too high, then they'll be out of business. If the prices are low, they can make it up on volume.

Re:C'mon.

[chill]

If the price is too high, then they'll be out of business. If the prices are low, they can make it up on volume.

"Make it up on volume" is a phrase that usually only applies to the manufacturing sector, where fixed overhead costs like rent, electricity, etc. combined with the fact it is much, much cheaper to run 3 shifts of the same product than stop and change the line to a different product; test; calibrate; retest; ramp up production...

The only way they will "make it up on volume" is if there is almost 0 downtime and 0 human-interaction. It will not only have to be fully automated, but 5-nines of reliable without the 5-nines normal cost.

ummmmmmm

[Ty]

Yeah, blah blah blah. What's the big deal if they run themselves out of business? Just like in the post dot bomb era, a successful company, with a patient (aka actual, profitable) business plan will emerge to replace them.

NO.

[Anonymous Coward]

ntil they make something that pay's me to use it they will never EVER hurt my VOIP system.

Mine is 100% free, I have at least 6 nodes throughout the united states that all I do is pick up line 2 in my house and dial to connect ot the other nodes for free.

and yes it's as good or better than the telephone service using really low cost Creative VoiP blasters and fobbit.

voip will be around as long as there are people willing to use it and have access to the hardware. and no I dont care to dial out to a landline.

wtf

[Arjuna Theban]

Since when does competitive price slashing drive whole sectors out of business? The ones that have a better business model and do things more efficiently will survive, others won't.

Mind you, however, this is true where these businesses aren't competing against a monopoly which can undercut prices at their loss. In either way though, there is at least one company left providing the service of the sector.

-bm

VoIP

[grub]

IMHO what will drive most of the VoIP carriers out of business is not the low prices but the service moving into the business, bypassing the middleman. Cisco et al ad nauseum offer VoIP hardware. It's all a matter of time.

Re:One word: Bigzoo.

[gilmour14]

What also makes it irrelevant is how tons of people are dropping their land lines and using only cell phones, and not just young people either.

I'll settle for 0$

[jilles]

The problem with VOIP service providers is that from a technical point of view they are redundant. Skype is currently demonstrating this point in a very convincing way (good quality connection, convenient lookup service, 0$). So anyone depending on charging their customers for this is going to have some revenue problems in the near future.

The only reason you would need an actual service provider is to connect to 'legacy' telephone networks or to offer services like voicemail. Once the traditional telecom providers figure out that there is a market for this kind of thing, they'll be in an excellent position to offer that kind of services.

Re:I'll settle for 0$

[duffbeer703]

The only reason you would need an actual service provider is to connect to 'legacy' telephone networks or to offer services like voicemail.

That's a pretty big deal, considering there are like 500 million "legacy" phone lines in the US alone...

Traditional telecom will never allow VoIP to take off... telephone companies are huge employers in just about every state. They'll lobby congress and state legislatures and have VoIP taxed out of business.

Why? Verizon, SBC, etc are addicted to that $20-50/mo they make on residental service.

Re:I'll settle for 0$

[cmoney]

Maybe I'm missing something, but Skype seems to me to be just instant messaging 3.0 or something. It works just like it, you get a buddy list, and make your calls through a computer. I don't see how it's significantly different than something like iChat or talking over other current IM programs other than improved voice quality and the infrastructure is peer-to-peer.

Also, I wouldn't want to have to rely on my computer being turned on all the time in order to get phone calls. The RBOCs always bragged about 5 9s of reliability, the new VoIP companies probably give 1 9 of reliability (I have Vonage and that's been my experience so far) and I'd guess Skype would be lower still (the limiting factor not being the actual Skype program but all the things it relies on to work, my computer, my peer's computer, my mom's computer, and their cable modem, etc).

So just like IM, I'm sure Skype will take off but for day to day usage but my need to connect to people who don't use computers like that will means I stick with Vonage.

I dont get it

[luckytroll]

I always imagined that at some point someone would come up with a standard cheap widget that everyone could plug into their POTS jack which would enable a distributed P2P style of VoIP system - Sure, sometimes you might have to wait a few minutes to dial out on your voice line while its in use by the commons, but its a small price to pay if you get to dial anywhere in VoIP or POTS land. These centralized services remind me of Napster - centralized services, legislatable out of existence.

Competition saves, regulation kills

[dada21]

It won't be competition that drives a market away, it is excessive regulation, government mandated monopolies, or a lack of desire for that service or product by the purchasing public.

I doubt that people will lose the desire to use VoIP, so that third occurence is unlikely. But government overregulating, or enforcing a company's "right" to be the sole provider of the service, both could happen (and probably will). I see ads on TV all the time for "$40 a month unlimited phone service!" but I know the last time I had such a deal, I paid $50 for the service, and $35 or more for all the government taxes and fees on top of it.

It is ridiculous.

I dumped my wired phone service because of these fees, and I am about to dump my cell phone service for the same reason. I have enough IP connectivity wherever I am that that I will happily switch to a VoIP company that allows me to transport my Wi-Fi based phone to any network and immediately get connectivity. But when they start getting taxed heavily, I'll move on to the next format.

Honestly, 80% of my communications have moved to instant messaging of some kind. Its loggable, it takes thought to write messages, and I can communicate with 5 seperate conversations at once. I used to use almost 3000 minutes a month on my cell phone, now I am down to 1000 minutes, but I send probably 10,000 text messages to various people.

I'm betting many of you will eventually drop the over-taxed, over-regulated services for ones that get the work done faster, cheaper, and with fewer government intrusions.

Re:Competition saves, regulation kills

[skarmor]

Your assertion that the market will be driven away by "Government mandated monopolies" and "excessive regulation" shows that you have no understanding of the modern regulatory environment. I think you will find that competition is one of the highest priorities of the federal (and state) telecom regulators in both the US and Canada.

Rather than trying to enforce a company's "right to be the sole provider", regulatory bodies are implementing complicated pricing regimes, unbundling local copper loops and facilitating the interconnection of competitors specifically to maintain competition which could not survive on its own in the current environment.

I dumped my wired phone service because of these fees, and I am about to dump my cell phone service for the same reason. I have enough IP connectivity wherever I am that that I will happily switch to a VoIP company that allows me to transport my Wi-Fi based phone to any network and immediately get connectivity. But when they start getting taxed heavily, I'll move on to the next format.

You do realize that VoIP companies like Vonage still interconnect with the ("over regulated") PSTN in order to terminate calls right?

I find that most people don't have a clear understanding of how VoIP is being implemented. While it is possible to interconnect IP phones without accessing the PSTN this is not currently practical for most people. In fact, bypassing the PSTN completely would not be feasible until broadband is installed in most people's homes. Given the current levels of broadband deployment and the growth rate for that industry, it can be argued that it will be a good 10 years before there would be enough broadband connections out there to bypass the copper based PSTN. Of course we have to keep in mind that the PSTN is constantly being upgraded such that the option of bypassing the copper will probably not arise. In fact within the next 20 years we can expect to see the implementation of last mile fiber (Fiber in every home.)

The current benefit of VoIP is that it can replace circuit based switches (DMS-10, DMS-100) in favor of packet based switching over the fiber backbone. This solution is of course temporary. As more fiber is deployed, we will see the widespread use of telephony based on various protocols provided on different wavelengths within the fiber itself.

Honestly, 80% of my communications have moved to instant messaging of some kind. Its loggable, it takes thought to write messages, and I can communicate with 5 seperate conversations at once. I used to use almost 3000 minutes a month on my cell phone, now I am down to 1000 minutes, but I send probably 10,000 text messages to various people.

When you are sending text messages you are doing so over the regulated telephone network. You can't escape regulation, its going to be there.

As people's needs change the telecommunications indusrty will make efforts to meet those needs. As technology changes, so will regulation. Prices will drop and some services (like long distance) will become obsolete. You will find that telcos will be acting more and more as content providers rather than network providers as the cost of communications approaches zero. However, there will always be regulation (and taxation), you can count on it.

Voice

[locarecords.com]

Voice over IP is the next big thing and the bidding war is part of a general plan to drive the smaller less well capitalised firms out of business. This will leave the larger companies better positioned to roll-out all sorts of differentiated (and profitable) services.

Having relatives in Norway and an avid user of iChat with iSight I can tell you that this has reduced our telphone bill by a huge amount. Once others catch on VoIP and video services are going to go mental...

Re:One word: Bigzoo.

[wfberg]

2.9 cents per minute? Feh! I can call any regular phone number in the US for 1 cent per minute..

The kicker? That's one EUROcent.. And I'm calling from The Netherlands. Using our equivalent of a 1010 LD operator (a 4.5ct fee per call put through, no monthly fees except what I already pay my ILEC).

Yes, prices can go down. If international calls can be terminated for less than 0.01 USD per minute, so can domestic ones.

No, what is going to get interesting

[AbbyNormal]

is the emergence of high-speed internet providers jumping into the ring. My cable network recently got upgraded to a pretty decent speed and while chatting with a technician I found out that the company will soon be offering VOIP package that will be less than our current Phone company. Hmmmm.
Ten times as many features, less price, all in one package. Good bye Verizon! Your lack of DSL in my area, disturbs me.

There's a lot of room for a price war

[Halvard]

I'm the president of an business only ISP and we've been looking at adding voice services for 4 1/2 years. We sell select office buildings where each tenant gets separately firewalled service. I was offered wholesale long distance last year by Worldcom for an insanely low rate of about 1/10th of a US cent per minute. Yes this was to be tied to a voice circuit terminated in a colo we were already it. So for about US$250 per month and US$0.00014 per minute in excess of 500,000 minutes, it's easy to be able to afford long distance bunding even without VOIP for long distance. Even if that's about 1/5 the number of minutes in a 30 day month, it's kind of like bandwidth; a T-1 goes a long long way for a lot of people especially if you minimize bandwidth usage.

Couple that with a soft phone switch like Asterisk with it's pseudo-TDM devices and you've got an incredibly inexpensive solution. Your real costs are advertising and support, not long distance.

Re:There's a lot of room for a price war

[squiggleslash]

1/10c doesn't strike me as sustainable for Worldcom, and I suspect if they were offering it, it was either (a) as a customer getter with a hope that interconnect rates would fall in future enough to make a profit with an established customer base, (b) as an anti-competitive move against other companies, (c) as a variant of (a) where the prices are increased as early as possible hoping that customers do not switch or (d) that Worldcom expected to find sneaky ways to terminate calls.

Here's the problem: When you make a long distance call in the US, the two local telcos on either end of the call charge something called an "interconnect". Rates vary, but the model until recently was to use long distance to subsidize fixed line costs, and so the interconnection charges are high, usually well over a penny a minute and for some areas in excess of 10c.

Now, even if you had Worldcom putting a line directly into your business so they didn't have to pay the local telco an interconnect for their side of the call, Worldcom would still have had to consider that it couldn't control who you call, and the majority of the people you call would be using traditional local phone companies, with the relatively high interconnects.

Worldcom has, as you've probably read in the newspapers, recently gone bankrupt. If they were seriously charging 0.1c per minute (and not, say, putting a little asterisk next to it and "* Excludes interconnect and other fees charged by connecting phone carriers" in small writing at the bottom of the offer, which wouldn't surprise me, this is the same bunch that runs 10-10-220), then it isn't surprising they're up a dark brown unpleasantly-odorous stream without a means of manual propulsion. The big question would be on losses like that, why did they bother charging anything at all?

Not unless they ban encryption

[anti-NAT]

The moment end-to-end encryption and authentication is enabled, either via tunnels or by just encrypting the IP payload, no authority trying to assert control over VoIP will be able to identify one application verses another e.g., VoIP verses HTTP verses SMTP.

They will have to either ban encryption, or ban all applications, which is the equivalent of banning the Internet.

Deploying encryption in this manner will actually restore the Internet to its original design - an application agnostic network, whose sole job is to just make a best effort to deliver bits between the hosts at the edges. Only the hosts should know and will know what applications the Internet is being used for.

The technology already exists, albeit in early forms :

• DNSSEC
• Opportunistic tunnel setup within IPsec

This will also obselete firewalls, proxy servers, NAT, and any other devices that perform applications processing within the Internet. The only applications processing devices left will be those at the edges. Security, aka firewalling for example, will be deployed on each edge device.

Steve Bellovin (one of the Wily Hacker authors) wrote about distributed firewalls in 1999, here : Distributed Firewalls

Re:Not unless they ban encryption

[shakah]

The moment end-to-end encryption and authentication is enabled, either via tunnels or by just encrypting the IP payload, no authority trying to assert control over VoIP will be able to identify one application verses another e.g., VoIP verses HTTP verses SMTP.

Doesn't VoIP use RTP for the voice data? Your provider could easily identify & either block or otherwise impede the RTP packets, especially if they were offering a QOS VoIP solution and didn't want a level playing field (versus on open source, best effort solution).

VoIP is only a means to an end

[G4from128k]

I would not worry about VoIP operators surviving or not surviving (unless you are invested in them). People don't want VoIP, per se, they want to make cheap phone calls to their friends, family, business associates, etc. VoIP is only a means to that end.

If you look at telco equipment makers, like Lucent, one big new feature is ICD (Internet Call Diversion) that cross diverts standard voice calls on to the internet. CLECs, ILECs, PSTNs can buy this stuff to merge POTS and VoIP and offer free local voice service and low-priced long-distance that just happens to use VoIP.

I'm sure VoIP will become widely adopted and be almost invisible because it will be the most cost-effective way to carry voice communications. Whether any of the current VoIP service providers survive is irrelevant.

Re:VoIP is only a means to an end

[fruey]

You're totally right... in fact, most long distance calls anywhere in the world are already happening over IP, and have been doing for a long long time. The real losers are the big old digital ISDN type equipment vendors... I had a major telco with a lot of Ericsson equipment tell me you couldn't get 2mbps through regular copper wire over more than about 500m because they'd only tried the wrong kind of equipment to do it. We had MDSL modems running 1mbps (symmetric, no less) over a standard twisted pair analog circuit like 5km across Rabat, Morocco. Hardly where you have the greatest end to end quality in the infrastructure.

My VoIP thingy arrived yesterday!

[defile]

I opted for VoicePulse because they have a really extensive web interface that lets you do all kinds of neato stuff, like call filtering and emailed voicemail notifications.

The plan I'm on now is approx $15/mo, which is unlimited local with 200 minutes long distance. They offer a $45/mo plan with unlimited national long distance.

The call quality is *very* good, and there's no latency at all. Mind you I've had it for less than 24 hours at this point. I even started a huge full throttle file download and there was no perceivable degradation.

I guess the downside of this is that voicepulse only provides support via email. And I don't know if this is just a fluke or if this is going to be common, but I can't seem to make calls for up to 2 minutes after having just come off of a call (incoming calls get busy signal?).

I'm seriously considering dropping my landline.

Hard to beat unlimited service for $24.99

[ronmon]

My local telco (Bellsouth) offers unlimited long distance to all 50 states for $24.99 a month. I don't use long distance much, but my roommate does, and he was paying upwards of $85 / month with our previous ATT service.

Defending the status quo, a little.

[dbrower]

The phone companies monopoly, while historically profitable, is a dual edged sword. They get the monopoly advantages, but have limited return on investment, caused by regulated rates. The investment model is based on really long depreciation times for the physical plant. They are obliged to serve areas that are probably not economically viable to support -- like all the places that don't have cable TV, but do have phone service. They are obliged to provide 411 services, and to be usable in the face of power outages.

VOIP isn't carrying those burdens, and is often parasitic on the phone company physical plant for wires. So there is a lot of good reason for the phone companies to be unhappy with interlopers that might mess up their regulated economic model - which they can't change by law.

It is one thing to say the RIAA/MPAA should die, because their economic model isn't guaranteed; but the phone company model IS guaranteed by the law that gives the monopoly.

I don't think I have any problems with VOIP provision that does not interconnect to the regular network. At the point there are gateways, it seems like those become perfectly appropriate points of regulation.

-dB

Relevant Links

[artemis67]

VoIP Blaster review
fobbit
InnoSphere

Re:$8 per month

[pigscanfly.ca]

Do you have the url?
Also does that allow for dial in (can people call me?)

VoIP and 911

[oregonbound]

Until the emergency dispatch centers and the VoIP providers find a good, consistent, work around for 911 calls, this may prove a serious stumbling block for widespread adoption. While some (Vonage for example) allow you to register your location and transmit it to the dispatch center, others don't. I'm not a fan of regulation in general, but this is one issue that really needs to be addressed by the industry and if not by the industry, then by the government. Paul

Re:VoIP and 911

[otis wildflower]

Hear hear.

I had a fairly serious problem with this a week or so ago (rowdy teens fighting and throwing each other on my car, no damage, but I didn't want to get in a brawl in my bathrobe...), the 911 person was confused, even though I had registered my # with Vonage's 911 system.

In the meantime, I may just plug my spare phone into my landline and use it for 911 only.

(OH, and for NYC vonage folks, you can contact the city via 212-NEW-YORK, since 311 doesn't work.)

open apis?

[Doc Ruby]

When will I be able to connect from my Smartphone (mobile) over the air, via my VoIP service, to the Asterix PBX on my home LAN, to use my homebrew multimedia conferencing SW in a call to 3 other POTS callers?

Re:At the risk of being redundant

[metamatic]

Right. My land line phone gives me 5 a minute long distance and 10 a minute to family overseas. If I went through the hassle of getting VoIP and persuaded everyone else to, I could save myself maybe... oh, $3 a month? Pardon me if I don't run out and buy VoIP software immediately.

OK, they say, but what about the monthly fee you're paying for your landline or mobile phone? Well, yes, it would be nice to not have to pay that, but until everyone's using VoIP, I'm gonna have to have a phone. So until everyone has VoIP, it has no compelling financial benefit. And until it has a compelling benefit, it's not going to be used by everyone.

Voice vs. Telephony

[lynx_user_abroad]

One of the things to remember when we read stories about the latest in the VOIP technology is that there is a fundamental difference between the land-line service (telephony) Ma Bell offered and most of us grew up with and the newer (voice-over-I.P. or voice-over-anything for that matter) service places like Vonage offer. And the difference has nothing to do with how the information is carried.

Telephony tends to be a regulated environment, with the network provider controlling everything up to the service edge. This regulation both ensures call quality and provides a means whereby taxes can be imposed. It also forms a framework which keeps innovation out of the environment and puts start-ups (like the CLECS) at a disadvantage. In a telephony environment, all of the services are provided network-side of the line card. You can put any color Princess Phone(TM) on your line, or strap-on a feature-limited answering machine (or even a modem) but there's very little in the way of phone network features (call forwarding, 3-way, etc) you can "roll for yourself" in the telephony environment.

Telephony is taxed (Universal Service Fund) and consequently also rolled-out nationwide to everyone, which makes it a platform. It's uncommon to hear of anyone who can't get (land-line) phone service if they want it since the LEC's have to provide it.

And with Telephone, there's the assumption that each person on the network can be tied back to an individual subscriber line. This makes it possible for things like 911 service to work in a fairly supportable fashion.

Contrast this with voice services like the VOIP Vonage offers. Currently, it is regarded as an information service (making it unlike Telephony) and therefore not encumbered by the Universal Service Fund tax. But that also means it's not available everywhere (it can't be considered a universal platform for applications). Plus, it would be possible for a Vonage subscriber to build a custom client which provides services Vonage can't (or doesn't want to) offer, like conference calling and such. If they lose control of the service edge (very likely, IMHO, because the endpoint box is in the home) they may well find that Vonage becomes the preferred hangout for VOIP-based telemarketers (who better than they can make the best use of call-anywhere-for-nothing flat rate pricing) or perhaps the next generation SPAMBlaster with .MP3 extensions.

For people who only need voice services, Vonage is worth looking into. For people who need the other aspects which are more telephony-related, a land line is more appropriate.

Cell phones offer us a good example of a technology which started out as a "voice" service but is becoming more like a telephony servicce. It used to be that a cell phone connection offered only limited availability (with drop outs in no-service areas) and that the voice quality was less than acceptable at times. Now the coverage is increasing, voice quality better and even things like 911 are supported. But this came at the expense of USF tax, closed terminals (Are there any answering machines for cell-phone subscribers?) and increasing prices.

There's another kind of VOIP we hear about; Network owners like Sprint and MCI are replacing parts of their network core with VOIP infrastructure. For the portion of their network which exists solely within the service edge, you'll never see it, so don't worry about it. If they allow access to their VOIP infrastructure from beyond their service edge (unimaginable, but let's run with it for a moment anyway) they'll likely see the same problems with VOIP-spammers and VOIPhreakers which could bring Vonage down. It could get rather messy.