Worst of 2007: VoIP

Copyright 2008 by Virgo Publishing.
http://www.newtelephony.com/
By: Kelly M. Teal
Posted on: 12/28/2007

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VoIP clearly has moved into the mainstream, but 2007 marked a year of high-profile stumbles that appear to signal the end of standalone IP telephony.

Vonage Holdings Corp.’s tribulations seemed to make headlines more than any other tech company in 2007. The pro-vider in March lost a patent suit to Verizon Communications Inc. and, in September, another to Sprint Nextel Corp. In mid-October, Vonage announced it also was being sued by AT&T Inc. for patent infringement. Through it all, Vonage stock plummeted to its lowest point, the balance sheets still don’t show a profit and CEO Michael Snyder resigned. Given all of that, not to mention the millions Vonage must pay Verizon and Sprint, there’s much conjecture about the future of Vonage. Will a rival buy the company? Will Vonage close up shop? Or will it keep swimming against the tide?

Those questions have yet to be answered. But one thing is clear about 2007: with all incumbent mergers cleared and cable MSOs ramping their VoIP offerings, it was the perfect time for the big guys to fend off standalone VoIP companies such as Vonage, says Infonetics Research analyst Stéphane Téral.

Increasing pressure from larger carriers appears to be one reason why SunRocket Inc. unexpectedly ceased opera-tions in July. The second-largest consumer VoIP provider also had a flawed business plan that worked against it in an age of bundling. The firm bet on a combination of low usage and a rapidly decreasing cost of termination services while pro-moting discounted prepaid annual subscriptions, says Téral. “If you do this, you need to bring in short-term cash at the risk of recurring revenue. And, in addition, you need a very low operating cost structure, which they did not have because SunRocket required users to have SunRocket hardware to access their network,” he says. That added burdensome over-head to SunRocket’s operations. Despite the signs, nearly everyone seemed caught off guard by SunRocket’s sudden closure last summer, another apparent victim of a VoIP gold rush gone sour.

Then, just this fall, there came news that online auction giant eBay Inc. has been unable to make good on its $2.6 bil-lion purchase of Skype Ltd. As a result, the promise of monetizing a free VoIP service looks less likely. That’s not surpris-ing, given that eBay’s logic went against basic Economics and Business 101 principles, Téral says. Skype started as a freebie and “when you start that way, it is impossible or at best extremely difficult to turn free users into paying users.” The real goal was to buy Skype’s large user base “to tap into as a new engine to increase eBay’s user base,” he says. “As it turns out, it did not really work that way.”

If eBay is going to keep Skype, it needs to figure out how to make money off Skype’s 220 million users and get the technology better integrated into auction operations, says Sally Cohen, an IP analyst for Forrester Research Inc. eBay originally wanted to allow users to call one another on the P2P network — potential buyers could ask questions of auc-tioneers, rather than waiting for e-mail responses. That assimilation hasn’t fully materialized.

eBay is trying to remedy its missteps. In October, Skype co-founders Niklas Zennstrom and Janus Friis left their ex-ecutive posts at Skype; this was somewhat expected given that the two had made no secret of their desire to focus on their new Internet TV project, Joost. Now the industry rumor mill says Skype could go mobile, although that presents new challenges of its own (for example, why would users pay extra to connect to a free service when they already pay for cell minutes?).

Turning Skype around will be a struggle. eBay reported a third-quarter 2007 net loss of $936.6 million, or 69 cents per share, due mostly to a $900 million write-down in Skype’s value. That marked eBay’s first quarterly loss since 1999.

Overall, 2007 set the stage for big changes in the VoIP industry. VoIP is no longer an adventure, an opportunity for startups, says Téral. “It’s a serious telephony business taken over by giant telcos. … You can’t stay pure-play forever.”




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