Is There Profit In VoIP?

Peter : On Rad's Radar?
| Peter Radizeski of RAD-INFO, Inc. talking telecom, Cloud, VoIP, CLEC, and The Channel.

Is There Profit In VoIP?

A few of my clients are self-funded without any serious debt. When I send out news - like Vocalocity raised $3.45M for a total of $97M - the first question that gets emailed backed to me is: "Aren't they profitable?"  It certainly doesn't look that way!

On a call after the Broadsoft IPO, there was shock that Broadsoft has not had made money yet. How is that possible when you have a majority of the market share?

There are so many companies in the VoIP space. Thousands really. I don't any have a sizeable customer base. In fact, it kind of reminds me of the dial-up days when there were about 7000 ISP's, but many of those were VISP (virtual) with less than 1000 subscribers, using the modem pools of someone else. We see that today, because much of the ITSP's have wholesale and retail operations. Why? Because retail is the hard part.

Don't get me wrong, buying, setting up and maintaining a softswitch is a real technical challenge (moreso than many realize), but the real hurdle is the retail game: selling the service to customers, provisioning the service, and the cash flow issues with the hardware (IAD, POE switch and handsets).

Maybe that's where all the money goes: hardware. In a 20 handset deal, the upfront cash is about $4500. Turn up 300 lines and you have probably spent $270,000 (at 4 to 1 handsets to lines). That's not including other hard costs like licensing, LNP porting charges, E-911 billing, and labor for the tech to install the gear and turn up the service. Even more money if the LAN needs to be cabled. Even more for trouble-shooting any install or LAN issues.

Despite its legal history, it took Vonage a long time to reach profitability, because consumer VoIP is low ARPU but high PITA. Wholesale VoIP is low margin too. All these low margin models mean that there will be a need to seek funding, since the business model isn't providing enough cash to keep growing. 

I'm shocked that so many VoIP companies are still getting additional funding, especially on the mobile VoIP front, in this economic climate. Maybe the VC's don't want to flush their earlier investments down the drain. Or maybe there is a hope that there will be consolidation soon, like in the rural ILEC business. 

The FCC's report says that 13% of the lines in use in 2008 were VoIP, but that includes FiOS, U-Verse, and cable company services. That leaves a big chunk to be grabbed IF all lines are going IP.   Does that also mean that a lot more money will need to be funnelled into VoIP companies?

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