August 15, 2006
Who will really make money in VoIP?
Om raises this question in a recent post with the same title. At one point it was fashionable to point out that VoIP is a product and not a service, even when the poster boy at that time was Vonage only to be replaced later by Skype. Vonage never pretended to be anything other than a service provider; Skype was giving away its product. I strongly believe that VoIP is a product alone. One requires two “services” for VoIP – directory service and NAT traversal service. A properly configured network does not require the latter and there is not much money to be made from the former. So there is not much money to be made from these two. Since the intelligence has moved to the edge anyway, there is no need for a provider for other services. Given that I am not surprised with Om’s observation that money is with the device manufacturers. But the difficulty is in convincing the investment community because they are still looking for ARPU based business models.
Posted by aswath at August 15, 2006 11:37 AM
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I do not agree with OM at all. The macro trend in nearly all areas of society is that the developed economies are moving steadily from a product/production economy to a service economy. An increasing share of peoples purchasing power is spent on services, as opposed to products.
I completely agree that if one sticks with the old, very narrow, definition of the services traditionally charged for by a voice service provider (telco) - signaling and transport - then IP and VoIP is making the value of those two specific services will go to a very low level/zero.
But I do not understand why the observatioin that the value of signaling and transport as services is disappearing is an argument for the market potential for performing services - defined as an activity that in return for payment is performed for someone to make their life easier or more comfortable - will disappear from the communications industry when it is increasing in most other industries.
I am not sure that movement to the service economy is the right model to invoke. In these countries people continue to buy and own automobiles rather than hailing cabs. :-)
The point is that now it is possible to economically build intelligent end-points that simplifies the communication, the service providers are not required. At least that is the claim and the observed trend.
Ask any average user (the silent majority who still uses their cellphone almost exclusively for calling) and they will tell you they perceive communication to have become a lot more more complex, not simpler (but cheaper and potentially richer) with IP-networks and smart, multimodal and dynamic endpoints. Their need for service - but a different service - has increased, not decreased.
As for the cabs/cars analogy. Well, actually even there you see the same trend. 30 years ago most carowners - and in developed countries nearly all owned a car even 30 years ago - would not pay for a cab even when cab was more convenient than driving own car (considered wasting money for comfort). Today, most people do not have such inhibitions about buying a "driver service" they could perform themselves (it goes without saying that people use their own car when that choise is more convenient. a service is something you buy to make life more comfortable).
As for investors. Yes, they do love recurring revenue models. And they do so for a reason. Most great fortunes have been built on recurring revenue based businesses. An example from VoIP industry : Compare Vonage (the company everyone loves to hate :-) ) and Sonus (great products :-). ) Both are regarded as leading companies within their segment of the VoIP value chain. Both has raised a bit in excess of 1 billion USD in total capital. Sonus has with this capital in 10 years built a non-recurring annual gross annual profit of appr. 150 MUSD (growing fast), while Vonage in less than half that time has built a recurring annual gross profit of 350-400 MUSD (growing faster).
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