[IP] Why Vonage is Just a Fad
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From: Dewayne Hendricks <dewayne@xxxxxxxxxxxxx>
Date: June 22, 2004 12:17:08 PM EDT
To: Dewayne-Net Technology List <dewayne-net@xxxxxxxxxxxxx>
Subject: [Dewayne-Net] Why Vonage is Just a Fad
Reply-To: dewayne@xxxxxxxxxxxxx
Why Vonage is Just a Fad
By Daniel Klein, Tech Update
May 19, 2004
<http://techupdate.zdnet.com/techupdate/stories/main/
Why_Vonage_Just_Fad.html?tag=tu.arch.link>
In the bleak telecommunications sector, broadband telephony start-up
Vonage has emerged as one of the most well-known, yet, controversial
companies. Vonage, a provider of SIP-based broadband VoIP services,
launched its all-you-can-eat consumer voice service in 2002. Providing
a best-effort service with local, long distance, and enhanced calling
features for a single price, Vonage’s service has appealed to the price
sensitive user. In a year, Vonage signed up 100,000 users, creating a
level of angst among broadband providers, and renewing interest in
broadband VoIP among the investment community.
During the past 6 months, most major MSO, telcos, and IXCs have either
launched, or began testing, their consumer VoIP strategies. These
providers will target the mass-market with an RBOC-quality, low-priced,
flat-rate plan. Vonage’s service tends to appeal to the tech-savvy,
risk-averse consumer, which we see as a limited market segment.
Company Strategy and Mission
Because Vonage operates over the Internet and does not own network
assets, the company easily expanded its service to 125 U.S. markets.
The start-up also launched its service in Canada in 2004, further
expanding its service availability to a market in which broadband
penetration remains high. Using this strategy, the start-up has been
able to grab the low-hanging fruit customers in each market.
Company Strengths
• First-mover advantage: Vonage is one of the first telephony
providers to offer an all-you-can-eat” package with significant cost
discounts over standard RBOC services.
• Strong feature set and advanced functionality: As the market
leader, Vonage has introduced many innovative features such as a
softphone, virtual phone numbers, click-2-talk, call hunting, and fax
service.
• Exceptional marketing and advertising: Vonage has become prominent
thanks to a constant barrage of press releases and announcements. The
company also initiated relationships with RadioShack and Circuit City,
helping to create interest among technology-savvy broadband users.
Company Challenges
• Lack of network ownership: Vonage uses the Internet as its backbone
and hence does not maintain control over the network. This can pose a
challenge as competing service providers gain the ability to
de-prioritize types of traffic over the last mile of their network.
• No quality of service: The company says it cannot offer QoS, and
does not plan to re-architect its network to offer it. Voice calls do
not receive priority over data packets. As bandwidth intensive
applications such as video become commonplace, the quality of Vonage’s
calls will suffer.
• Not your father’s telephone company: Although consumers crave a
less-expensive telephony service, they still expect Bell-like service
and installation. Vonage requires users to configure and install the
equipment themselves, and there is currently no full-house solution.
This limits their target market to mainly technology savvy users, or
early adopters.
• Strong competition: In 2004 and 2005, all the major cable
operators, and most of the major telcos, will provide their own VoIP
services with local, long distance, and enhanced features at a flat
rate. With stronger brand names, and the ability to prioritize network
traffic, broadband network operators will quickly outpace Vonage’s
success in the market.
• Single-service offering: Vonage can provide a multitude of
advanced voice features, but cannot offer bundled service offerings
with video, high-speed data, or wireless. The Yankee Group’s research
demonstrates that bundled services not only provide savings and
convenience for consumers, but also help increase provider revenues and
reduce churn.
Company Predictions
Vonage has successfully marketed itself, and its concept. The company
has created a grand illusion in the marketplace. Most service providers
are not only familiar with this small, privately held company, but feel
threatened by the start-up and its approach to offering telephony
services.
However, we anticipate Vonage will become a victim of its own success.
Their eventual downfall will come because the company threatens the
RBOCs, IXCs, and MSOs. As the incumbent service providers and MSOs
offer wide- scale residential VoIP services with QoS at the same price
point as Vonage, the start-up will find it difficult to compete. Today,
some RBOCs require their customers to subscribe to their telephony
services to receive broadband. Tactics such as this, as well as the
increased focus on the triple play and bundling discounts, will
aggravate Vonage’s problems.
Company Recommendations
• Quality of service is necessary: As operators launch VoIP services
with QoS, it will quickly become the norm. Customers will demand their
broadband telephony service be reliable and comparable to their PSTN
phone service, especially as their all-you-can-eat bundles settle
around the same price points.
• Change its business model: To remain competitive, Vonage must
change its business model and rely heavily on partnerships for its
backbone and access networks. Offering a service without QoS is not
sustainable in the long term, and Vonage cannot provide a better than
best-effort service without these relationships.
Competitive Recommendations
• Only launch a QoS-based offering: RBOCs, IXCs, and cable companies
must not sacrifice their reputations by launching a secondary line VoIP
offering. Incumbent players that do not want to be perceived as
broadband providers must ensure consumers understand the benefits of
using VoIP, and recognize it does not have to be of lower quality than
current services.
• De-prioritize Vonage traffic: It may seem like a dodgy competitive
tactic, but broadband network operators could slow down Vonage’s
service. As subscribers increase their use of latency sensitive and
graphic-rich IP traffic, broadband providers could give network
precedence to their own revenue-generating services. Unless Vonage pays
fees to the network provider, there is no reason the operator should
not make the service a lower priority on the network.
The Yankee Group originally published this article on 6 May 2004.
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