Pure VoIP vs. Telephone and Cable VoIP

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Randy Savicky
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Pure VoIP vs. Telephone and Cable VoIP

VoIP.com wrote an interesting article put out as a press release on PRWeb.com. Titled "Pure VoIP Vs. Telecom VoIP: Guidance from VoIP.com", the article takes a position that pure VoIP players such as Vonage, Packet8, SunRocket, etc. are a better value than telecom VoIP providers, such as cable companies and telephony carriers. First, a caveat, VoIP.com is a provider of pure VoIP, so their opinion is going to obviously have a bias.

The articles accurately states, "VoIP services vary widely from provider to provider, however there is an undeniable line in the sand that divides pure VoIP from the digital voice plans rolled out by the telecos. The average phone bill for a traditional line is $54 per month, while VoIP from the cable companies runs about $42, the telephone company's VoIP is roughly $33 and dedicated VoIP providers are $20."

It is true that pure VoIP players are more cost-effective than their telecom/cable counterparts. The article questions why this is the case when it states, "Since VoIP is more cost effective for [telephone/cable] providers, why aren't the savings being passed on to consumers who choose a bundled option from their cable or telephone provider?"

It attempts to answer this question when it says, "The simple answer might be that it's easier to give consumers a break if you're not shoring up a century's worth of copper wire losses with new technology revenue. One way to do that is by squeezing premium prices out of VoIP consumers."

I whole-heartedly disagree that this is the reason. Telephone companies and cable companies have had their copper infrastructure for years and most have been profitable. While the telephone companies have been hurt in the last 10 years, it hasn't been due to infrastructure costs, nor is defection to VoIP to blame. You can however blame the decreasing profit margins on long-distance calling. In the 1990s, it wouldn't be uncommon for the average home to rack up a $200/month phone bill due to long-distance charges. Today, if you pay that much you're a fool. Many telephone carriers expanded their offerings by expanding into wireless. However, this was a Catch-22 since wireless plans came with bucket of included anywhere (long-distance) minutes that cannibalized their landline long-distance calling plans.

There is now more competition in offering telephone service than ever before. So why are the cable companies and the telephone companies offering a "premium" on VoIP services that is higher than the pure VoIP players?

The answer to that is four-fold. First, non-tech savvy users not familiar with VoIP can be easily upsell-ed by their current cable or telecom provider to add VoIP service to replace their existing phone service. The new phone service will be much cheaper than their current plan, which is enough to get a customer to bite. The second reason is the fact that you aren't changing providers, and you don't have any complications with porting your phone number makes it a simple switch that will immediately save the customer money. The third reason is the customer can receive a single unified bill with their voice, video, and data services. You certainly can't discount the "convenience" factor.

I for one try to combine as many bills as I can since I notoriously forget to pay, or I'm travelling and end up paying multiple late fees. One bill lessens the odds of multiple late fees. The fourth reason why cable and telephone companies can explain their VoIP "premium" is because they can claim - whether rightly or wrongly - that their voice quality is better than say Vonage, because they are running the IP packets on a managed network with QoS (quality of service).

The article then states that pure VoIP players are better positioned to pass along cost savings "because they don’t have to support the multi-million dollar advertising campaigns that their larger, more entrenched competitors do." It further explains this by stating pure VoIP players are more tech savvy in getting the word out using less costly forms of advertising like viral marketing, blogging, and internet search engine ranking. While there is certainly a lot of truth to this, especially in the recent past, the telephone companies and cable companies have been getting better. The pure play VoIP providers certainly have leveraged the power of affiliate marketing to help promote themselves on the Internet. Heck, it seems as though you can't visit 10 websites without seeing a Vonage ad of some sort.

Cable companies and telephone companies haven't leveraged the power of affiliates nearly as much, however they don't really have to. Since both of these have specific geographic regions wher their copper is laid, they don't need to blast the entire Internet with banner ads or leverage affiliates. They can simply use local inexpensive mailers advertising their VoIP service (including triple play) or if the customer is a current customer, they can use an insert/flyer within their bill to promote their VoIP service. Further, since they are a current customer, there is a loophole in the national DNC (do not call) list that lets companies call you if they have done business with you in the past 6 months. As I mentioned in my 2005 VoIP predictions, this gives cable and telephone companies a huge advantage over pure VoIP players which surely will be exploited.

Pure play VoIP providers do have some advantages. First, they are less expensive, but you have to be willing to sacrifice some quality for value. I have been a pure play Vonage user (over cable data) for many years, and plan on switching in the next month (to Charter Voice) due to QoS issues - usually packet loss due to Charter's fault - not Vonage. Nevertheless whose fault it is, I can't have phone service issues on a near weekly basis. I will say that I have gone over 9 months with no problems with Vonage when I lived at my former address using Cablevision high-speed data. Thus, tech-savvy users who are willing to take the gamble on voice quality for value will find pure VoIP players attractive.

The second reason to choose a pure play VoIP player is for purely geographical reasons. Many areas of the country have high-speed data, but the cable or telephone companies don't yet offer VoIP services of their own. This is however changing very quickly as even the smaller cable and telephone companies are quickly ramping up their VoIP offerings, thus negative pure VoIP players' advantage. The third advantage of pure VoIP play providers is they do often offer more advanced features than the cable/telephone providers.

Recently I wrote about how Verizon is deploying fiber in NYC in a race to offer voice, video, data, before customer defections. How will the pure VoIP players compete with high-speed fiber and bundled packages. Will fiber, bundled packages, and single provider/bill spell the death knell for the pure play VoIP providers? Well, if Vonage's failed IPO is any indication, the money watchers are betting on the cable and telephone companies to eventually dominate the voice market. Of course, there will always be those looking to save a buck, so single play VoIP providers aren't going to go away anytime soon.

One thing that can drastically affect the single play VoIP providers is HR 5252 (Communications Opportunity, Promotion, and Enhancement Act of 2006) proposed by Congress. Currently, HR 5252 has passed the House, but has stalled in the Senate with a threatened filibuster since many Senators want net neutrality provisions added to the bill. If net neutrality provisions are not amended to this bill or another future bill, then it is not out of the realm of possibilities that the cable and phone companies can "throttle" VoIP traffic from competing pure VoIP providers. They could simply add 500ms of delay (unacceptable voice quality) without necessarily blocking the packets. Blocking packets would no doubt would spark lawsuits that could easily be won, however simply throttling packets is currently legal without any sort of net neutrality protections. Lawsuits would also ensue for throttling, but would have little chance of succeeding (unless an activist judge decides to make his own law instead of interpreting existing law).

Right now, the cable and telephone companies are in a great position. Even if HR5252 passes, the cable and telephone companies will no doubt still charge a slight premium for their VoIP service for the reasons I previously listed. With net neutrality guaranteed, the single play providers will continue to compete based on value and features. However, if net neutrality provisions are not guaranteed then pure VoIP players are in deep trouble. I for one support some form of net neutrality to at least guarantee that the pure play VoIP providers are not unfairly targetted. Further, I hope tech-savvy users continue to sign up for Vonage, Packet8, Lingo, and the like for the simple reason that it will keep cable and telephony companies honest with regards to pricing. If they charge a premium now, just imagine how much they'd charge should Vonage and the like go under or even simply become a less attractive option.


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