Cheap talk

Phone calls over the web are the rage. Cheap, easy and over 10 million people in the U.S. already subscribe. Experts say that number will explode to 50 million by 2010. What’s all the buzz?


According to David Schwehm of Time Warner Connect, information technology continues to impact multifamily buildings. “Owners are embracing new information technologies like never before and they are future-proofing their buildings, examining all the products and services their communications companies provide, and then applying these services.” As a result, VoIP (Voice over Internet Protocol) phone service from the cable companies is becoming more common every day. As the competition heats up between cable and phone companies, it’s critical to know the options and to understand their full impact.

Listen to the media and you would think that VoIP is the greatest thing since sliced bread. VoIP technology makes possible low-cost and free phone calls over the Internet using specialized software and phones. With customers dissatisfied with rising wireless charges and costly landline service, the market seems ripe for low-cost alternatives.

When the concept first emerged as a companion to Instant Messaging (IM) in the late nineties, only a handful of users were adventurous enough to try it. In many cases, the software was too difficult to install and use, sound quality was poor, as was customer service, and users were often restricted to calling those on the same service.

VoIP service now claims 10.3 million users in the U.S. Skype Technologies Inc., one of the pioneering VoIP companies, now owned by eBay, counts some 75 million users in the global marketplace as its customers.

Skype, which uses specialized software and peer-to-peer networking to route calls over the Internet, has had its software downloaded about 250 million times.

The attraction, of course, is the low cost to consumers. For providers it’s the low cost of implementation that allows them to utilize existing Internet infrastructure as their communications network, avoiding extensive investment in network development and equipment.

Another reason VoIP services are found at heavily discounted rates is because the service uses different technology to transmit calls and lies outside of traditional regulatory boundaries. As a result, VoIP providers are free from charging many of the taxes and fees telecommunications companies must pass on to users of conventional phone services.

Expectations for the growth of VoIP services are high, with research firms such as IDC based in Framingham, Mass., projecting 62 percent growth in the market by 2010 and as many as 44 million users.

The downside

Low rates and the lure of using the Internet to call anywhere over the globe are not panaceas for the problems that plague VoIP. To most consumers, the concept is still foreign and they’re are not yet comfortable enough to push the market to critical mass. Sound quality issues remain and the Internet is still not as stable as landlines or even cellular service. Customer service issues and dissatisfaction over exorbitant cancellation fees have also been major obstacles to VoIP’s widespread growth.

Many residents in multifamily buildings do not realize that by signing on to VoIP phone service, they may be cutting themselves off from their buildings intercom system. Not all intercom systems are affected, but it does disable those that are connected directly to the buildings telephone wire infrastructure. While the telephone-based intercom systems have been tried and true for decades, the recent surge in VoIP phone service has created intercom problems that has many users baffled.

Also, VoIP phone service does not support fax machines and may not be compatible with some 911 emergency locator service from police and fire departments. VoIP phone service will also be interrupted if the power in a building goes down or if the cable goes out. Other drawbacks may include interruption or delays in voice transmission and burglar alarm system disconnection from the alarm system monitoring station.

Add to that glaring security issues that provide opportunity for hackers and fraud, and VoIP faces an uphill battle to win consumers.

Internet and telecommunications experts warn that VoIP networks present risk because customer conversations are not encrypted. In addition, these services are extremely vulnerable to the viruses and worms that attack the Internet, and the growing use of Spam over Internet Technology (SPIT) which would add potential for identity theft and networks being brought down by floods of VoIP-related spam.

Security issues are not the only items in the news about VoIP–Skype faces patent infringement suits from provider Net2-Phone, racketeering charges, and monetary issues. Worse yet, an increasing number of networks owned by CERN (a major organization fundamental in web development and advanced technology) corporations, universities and government-owned networks, are refusing to allow Skype traffic to pass through their networks. The reason?

Skype works by turning computers and networks into super-nodes for carrying its traffic. This traffic can overwhelm PCs and networks. To make matters worse, Skype does this without securing permission or paying anyone for use of their computers’ or networks’ bandwidth.

Fellow VoIP innovator, Vonage, has also met with bad press as a result of a failed IPO; its stock plunged more than 30 percent since May. The initial share price fell nearly 13 percent, making it the steepest one-day drop of any IPO in the last two years.

Vonage, which spends heavily on marketing to win new customers, is heavily dependent on funding to remain viable. Since the company was founded in 2001, it has posted losses every quarter.

Both Skype and Vonage rely totally on a business model predicated on free access to Internet networks to carry its voice traffic and relative freedom form regulatory oversight. As those factors change in the foreseeable future, it’s not likely either company has the resources to weather the storm.

Who’s who in VoIP

The VoIP leaders in terms of size have been Skype and Vonage, the largest Internet-based phone company in the U.S. with 1.6 million users. But while they have grabbed a large share of the market in its early stages, cable companies and traditional phone companies, such as AT&T and Verizon, are launching their own VoIP services, and competition is likely to alter the market dramatically. While cable and phone companies are entrenched in a bitter battle for telephone, Internet connection and TV services, some cable companies are already packaging the services into a, as one calls it, “Triple Play Package” which includes high-speed Internet, cable TV and VoIP digital phone service for one low monthly fee.

“There’s been a significant increase in the number of companies offering VoIP services to the multifamily market, including private telcos,” says Bill Burhop, executive director of IMCC (Independent Multi-Family Communications Council) a Washington-based industry association of broadband service providers, technology suppliers and multifamily owners. “Three years ago, no private cable operators were offering VoIP and now it’s quite common.”

While Burhop says demand for VoIP is growing, it’s not a money maker for private cable operators. The future demand, according to Burhop, is going to be in high-speed broadband services such as Verizon’s fiber-based FIOS and AT&T’s “Lightspeed” which will bring bundled services, video-on-demand and other entertainment services to the market. However, Burhop says regulatory issues surrounding fiber optic cabling and MDU (multiple dwelling units) premises may be problematic for apartment owners and providers.

Burhop also points out that growth in wireless services far overshadow VoIP and advances in wireless services may eclipse VoIP and leave it as a transitional technology that is simply bypassed by other technologies.

According to telecommunications industry research, there were 650 million cell phones in use in 2005. Revenues for wireless services surpassed that of landline services for the first time at the end of 2005.

Everyone, from small operators like Net2Phone with 100,000 customers, to Verizon, AT&T, other traditional phone companies, cable operators such as Time Warner and Comcast, and private telcos are rolling out VoIP services or bundling them into service packages.

One phone company is fighting back with FioS (fiber optic service). By running fiber optic cables to each individual apartment, phone companies can then provide the necessary bandwidth to counter the cable company’s offer by providing unlimited phone service, faster Internet speed and cable TV. That’s right. Phone companies are now tapping into the TV business.

What it all means to the MDU market

VoIP, like any of the customized service bundles and high-speed Internet from both telcos and cable operators, is another service MDU owners can offer residents both as an amenity and as a potential source of ancillary revenue.

There are strong doubts that stand alone VoIP service is high on the list of demands from apartment residents who seem to overwhelmingly prefer high-speed broadband services and customized bundling of services from providers. Roll-outs of fiber networks by Verizon and AT&T have been met with success and they are encroaching on territories previously dominated by cable operators. Cable operators have responded by offering more phone services and competitive broadband Internet to their customer base. Competition is likely to heat up with key talking points being price and customer service.

As for now, price is the sticking point with customers. Industry consolidation on both the telecommunications and cable sides have stifled competition and limited choices. Part of the demand for VoIP is a reflection of consumer unrest with the same old choices.

As for VoIP, it will either hang on as a small part of larger service offering, or simply fade away in the shadow of more powerful and advanced technology that plays well with the established infrastructure.

Authors: Barry Kipnis and Ronald Tumsuden