A price war in consumer VoIP is forcing leading market competitors to cut prices and increase services as the major players jockey for customers and market strength.
In early October, both AT&T Corp. and consumer VoIP upstart Vonage Holdings Corp. cut the prices on their basic consumer packages, bringing the fees for their ‘unlimited’ packages under $30 per month. These packages typically offer unlimited calling in the United States and Canada plus a selection of popular calling features, such as call forwarding, call waiting and caller ID.
Other service providers, notably 8×8 Inc.’s Packet8 and VoicePulse Inc., have added features in the last month without raising prices. Broadvox LLC, a service provider based in the Midwest, dropped its unlimited plan to $20 per month and eliminated a regional plan, migrating those customers to the unlimited tier.
The bargain-level pricing casts a spotlight on an issue that has been lurking in the shadows ever since lower-cost, consumer VoIP services first launched: If VoIP is economical to launch and operate, how cheap can services get before some market contenders become casualties?
AT&T’s move-in detail was to drop the price of its CallVantage consumer service from $34.99 to $29.99 per month. CallVantage offers unlimited local and longdistance calling in the United States and Canada (recently added to the unlimited list). The price ‘drop’ was in fact the change of what had been a promotional fee to a permanent one. AT&T will also give the first month of service free to anyone signing up before Jan. 31, 2005.
Meanwhile the Vonage price cut came in the form of an ‘upgrade’ in which customers of its Local Unlimited Plan were changed to its Premium Unlimited, which gives them unlimited calling throughout the United States and Canada for $24.99 per month (compared to more than $30 per month before).
By mid-October, AT&T escalated, dropping the price of its Local Unlimited to $20 (plus 4 cents a minute for long-distance), challenging not only Vonage but also the lower-cost entrants, such as Packet8.
Nevertheless AT&T still does not match Packet8 and Broadvox’s $20 a month for unlimited local and long-distance in the United States and Canada or Vonage’s $25 a month for the same service. On top of that move, Primus Telecommunications Inc.’s Lingo broadband phone service added unlimited calling to western Europe to its $19.95 per month unlimited plan, making it the most generous of the ‘unlimited’ packages.
Some consumer VoIP providers, such as 8×8’s Packet8 service and Primus, always have hovered near $20 per month for their basic unlimited plans. “We’re still cheaper. We are the industry price and performance leader,” says 8×8 CEO Bryan Martin pugnaciously.
That $20 price could be the point where all the market contenders start to feel pain. Jon Arnold, program leader for voice over packet at Frost & Sullivan, reports, “The agreement is that $20 is the floor, and it’s hard to imagine that pricing can get lower at the offerings that we are seeing today, because they can’t make any money. They can’t survive if it goes lower. The margins are there, but they are not spectacular, especially if one is also a broadband provider and has to pay access fees.”
A recent market report by Probe Group LLC suggests that cable plans for VoIP may also be affected by the cutthroat pricing. Comcast recently made an agreement to resell AT&T’s CallVantage consumer VoIP service.
“With AT&T more than a willing partner in VoIP, it makes tremendous sense to let AT&T take the infrastructure risk in VoIP,” says Allan Tumolillo, COO of Probe Financial Associates. He adds, “Comcast Corp. and the other major cable operators allied with AT&T may come to the realization that spending princely sums on infrastructure simply to get into a price war with the telcos [as well as] Vonage and Skype Technologies S.A. may be counter-productive.”
With that in mind, the latest maneuver by AT&T could be seen as a clear threat to the smaller players in the market. What AT&T seems to be saying is, “We are going to put the price at the lowest level we can. We’ll see if you can survive.”
An August 2004 report by The Yankee Group notes, “MSOs, IXCs and ILECs are joining the VoIP game, and their available resources dwarf even the largest of the alternative VoIP providers. The local VoIP market is already crowded with more than a dozen players vying for local consumers.” Because of this competition, the report continues, “As major players accelerate their rollout strategies, alternative VoIP providers will feel increasingly squeezed, and pricing pressure will intensify. We expect the alternative VoIP providers to lose 47 percent market share to the MSOs and IXCs/ILECs by the end of 2005.
Andre Temnorod, president and CEO for Broadvox, says he no longer believes it’s viable for standalone companies to be in the residential VoIP business. “Maybe [it is for] AT&T with its marketing dollars, but I don’t believe [players like] Vonage can survive in the market.”
“It’s a no-brainer for the cable company to take away the customer for even a higher rate [than the customer is paying to Vonage or someone else.]”
In response, Broadvox, Temnorod says, is realigning its business away from retail toward switchless resellers, such as UNE-P resellers, and others that can take advantage of its platform to bundle VoIP with other services (see related story).
Another question is why AT&T is gearing for war at all. “It seems ridiculous to me that, for Vonage’s size, which is not very big, they are driving AT&T to drop prices and kill margins,” says Arnold. “AT&T has so much more to lose than Vonage. Why does AT&T cut its price now? Maybe they are not getting fast-enough uptake, and they are getting nervous. Maybe they are worrying too much about Vonage, or they feel they have to get their numbers up as fast as possible because the cable guys will all start coming to the party soon.”
Certainly AT&T can afford to play the price game for some time. With its marketing clout, possibly its strongest weapon, not to mention its monetary resources, it can live with low margins longer than a Packet8 or a VoicePulse. Certainly for the consumer the spectacular price savings of VoIP generally will be highly attractive in the short term.
However, the prices today also clearly demonstrate that unlimited calling in North America is quickly becoming a commodity, if it’s not there already. Once $20 or $25 a month gets well-established as a base price from several competitors, that will be hard to raise. So how do companies differentiate themselves to keep customers and get new ones?
Here there may actually be room for services that may be not only differentiated, but also patented, unlike standard voice services. They may be tailored for local needs or market verticals, and will provide unique opportunities for both voice service providers and third parties.
But the industry is still in the “I can’t believe it’s that cheap” phase of VoIP, and it may be several years, and several hundred million dollars of pain for the service providers, until consumers start asking for more.
Additional reporting by Khali Henderson.
8×8 Inc. www.8×8.com