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Vonage VoIP Growth Set To Rise Sharply In 2005

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Voip Subscriptions Set To Rise Sharply In 2005

January 24, 2005

By Greg Scoblete

Las Vegas — The residential Voip market will nearly triple in size in 2005 to reach a subscriber base of 2.8 million, according to the Yankee Group research firm.

The market, which has just reached under 1 million subscribers in 2004, is being propelled by a raft of new services and hardware penetrating retail and by the entrance of top-tier cable MSOs that are in the processes of integrating voice into their data and video networks, said Kate Griffin, senior analyst, Yankee Group.

Yankee expects 17.5-million homes to be Voip subscribers by 2008. By then the market will have shifted markedly away from start-ups and small independents now dominating the field in favor of established brands and network owners, Griffin noted. In 2004 the Voip market was owned by smaller start-ups, like Vonage, which alone accounted for 61 percent of the local Voip subscriber base, but will quickly cede ground to big players, Griffin said.

Earlier this month, the largest U.S. cable company, Comcast, announced it would roll out IP telephony services this year with a goal of 8 million subscribers by 2010.

“The cable companies and telecos have the subscriber base and the content, they are going to jumpstart this,” said Hon Sit, business development VP, Leadtek, an IP hardware vendor.

“Big-name competition only helps us. It drives market awareness, which drives more people to us,” said Matthew Deatrick retail channel sales VP, Vonage, which announced just prior to International CES that it has reached the 400,000 subscriber mark and a new distribution deal with CompUSA to sell a Vonage-compatible Linksys router.

“I'm not impressed by cable's subscriber numbers. They have such a large base of customers, they could get a million people to sign up for anything,” said Paul Erickson, CEO, SunRocket — a new Voip start-up founded by former MCI executives. “They just don't get it,” Erickson said, noting that cable Voip is priced higher than its start-up peers but offers fewer features and is often not even billed as an IP telephony service.

Does the rise of cable presage the end of the nascent Voip retail market, replaced by the direct sales model typically associated with residential telephony and cable sales? Hardly, vendors and service providers say.

“Retail is going to make Voip explode,” said Jeff Walker, marketing senior director, Motorola. “Direct sales are difficult if people can't get it in their hands, see how easy it is to use, and have someone there to explain it to them.”

Griffin agreed, noting that VoIP's reliance on new hardware, such as routers and phone systems typically bought in-store, would keep the new communications service tied to retail.

“Retailers see the benefits of Voip because it's a subscriber-based revenue stream, and it could also lead to additional home networking sales,” said Katherine Bagin, marketing VP, AT&T CallVantage. “VoIP is a compliment to the digital home.”

Indeed, at CES the Voip hardware market broadened from one dominated by data suppliers, like Netgear and Linksys, to include cordless phone and videophone manufacturers, multiplying the number of potential retail Voip SKUs (see TWICE, Jan. 6, p. 12, “VoIP Equipment”). According to a report from the communications research firm Atlantic-ACM, the retail Voip market will be a $20 billion business in 2009. Juniper Research estimated that by 2009 the total Voip market would be $32 billion and will comprise 12 percent of the telecommunications business.

“We're really only at the beginning of this,” Bagin said. “The terminal adapter is a phase one product, just the basics of making a call with your existing phone, but soon you'll start to see products that really leverage the capabilities of VoIP,” Bagin said.

One of those capabilities is video. While the videophone is universally acknowledged to deliver the among the highest hype-to-disappointment ratios, Voip technology has given suppliers another chance to take a crack at it, which several did at CES.

Vonage in conjunction with Viseon, and Motorola in conjunction with Worldgate, will be promoting videophone services to the retail market throughout the year. While another videophone supplier, Leadtek, is courting cable companies and telecoms fresh off signing a contract with Frances Telecom, the largest telco in France.

The grand prize, though, is cellular, said Deatrick. Vonage officially launched a previously-announced Wi-Fi phone at CES and will look to integrate it with cellular networks in the near term, Deatrik said.

“The most exciting thing about Voip is seamless mobility: a dual phone, one that can switch between a cellular and IP network to patch up deadspots,” said Motorola's Walker. His company currently offers a dual GSM/Wi-Fi handset for the enterprise market and plans to introduce a consumer dual-mode model by year's end.

Despite the excitement around VoIP, “there are lots of challenges and gaps in the service, particularly quality of service and E911,” Griffin said. Alarm companies, such as Brinks, are advising their residential customers to retain a landline to ensure a reliable connection to its monitoring services; unlike the PSTN line, a broadband connection fails in a power outage, leaving IP telephony users with no phone service.

Then there's the FCC. While the Commission recently ruled in VoIP's favor in a case involving Vonage, where it stated that Voip should be regulated at the federal level, “we still don't have a clear picture of the regulatory environment,” Griffin said. A heavy regulatory hand could drastically slow adoption, Griffin warned.

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