Commentary: Net calls? Not so fast

by Maribel D. Lopez, principal analyst

During the past year, multiple system operators like Cablevision Systems, specialty Net phone operators like Vonage and traditional telecom providers like AT&T and Verizon Communications have introduced a new, cheaper generation of consumer voice services based on Internet Protocol.

Have consumers noticed? To find out, Forrester surveyed 1,132 online U.S. households to gauge their awareness and interest in services based on voice over IP technology. From these surveys, Forrester discovered:

• Service adoption is nascent. Forty-three percent of our respondents had heard of VoIP before taking the survey, with word of mouth as the biggest driver of awareness at 23 percent. But awareness did not translate into sales because a mere 3 percent are using a paid VoIP service and 1 percent are using a free service.

		Related roundup VoIP: Can you hear me now? Voice Over the Net conference this week puts spotlight on the fast-growing trend.

• But overall consumer interest is weak. Only 13 percent of the online consumers we surveyed are interested or very interested. If you add in the somewhat interested users, the total barely breaks 36 percent of respondents.

• Consumers are most willing to consider the local phone company. Not surprisingly, 38 percent of consumers said they would be very or extremely willing to buy services from their local phone company. Who's next in line? Almost a third of respondents voted for a wireless carrier. Although Vonage leads VoIP sales today, specialty operators came in last, with 19 percent of respondents willing to consider them.

In no hurry
Low awareness is one contributing factor to consumers' lack of interest in Internet calling. But there are other obstacles to VoIP adoption, including:

• Traditional phone service satisfies most consumers' price and quality needs. Looks like the local phone company is doing a good job. When asked why they aren't interested in VoIP, more than 60 percent of consumers said that they are satisfied with their existing service. Fifty percent also feel their services are reasonably priced.

• Many consumers aren't using enough long-distance services to save big bucks. Savings is the initial hook for VoIP, but with 43 percent of the consumers using less than one hour of long distance a month--savings are minimal at best. International calling yields the greatest VoIP savings, but only 15 percent of the households make international calls.

• Desire and dollars for a second phone line are low. When asked why they are not interested in VoIP, 65 percent said they had no desire to add a second phone line, while 42 percent said they can't afford another phone line.

Biggest motivator
Although VoIP offers many features, providers have marketed its cost savings to stimulate initial consumer interest. The pricing message is on target because:

• Potential buyers are bargain hunters and tech optimists. Almost three-quarters of the consumers list saving money as the top reason for being interesting in VoIP, while 39 percent said they want access to free features. More than half the people interested in Net calling can be described as tech optimists who like to try new technologies.

• Consumers need huge savings before they are willing to buy VoIP. The needle on interest doesn't move until consumers can save at least $15 on their combined local and long-distance spending. At this point, the consumers surveyed who are "very willing" and "extremely willing" to purchase VoIP more than doubles to 38 percent. At a savings of $25, the percentage skyrockets to 52 percent.

Shape of things to come
The VoIP battle will be a price war for the next several years. Operators that are successful in the short run will use the technology to:

• Deliver mass customization of communications services. A VoIP network provides the ultimate in choice--if operators give consumer access to the functions. Rather than offer prepackaged bundles, operators should let customers pick and choose which features they want in their bundles. To provide even more flexibility, operators should let people add and delete voice features online without calling the provider.

• Accelerate new service development. Today, it takes months to change service offerings, but once operators have built VoIP networks they can add new services without changing back-end infrastructure. Operators should closely monitor service consumption with data analytics tools from companies like Teradata and modify offerings to meet shifts in demand.

• Leverage an open developer community to expand service offerings. VoIP breaks the lock vendors like Lucent Technologies and Nortel Networks had on software development for voice services. Instead of building everything themselves, operators should actively seek out new software from third-party Session Initiation Protocol (SIP) developer communities to improve time to market and establish service differentiation.

Providers: Brace for pricing pressure
Operators believe they can maintain a higher pricing tier by offering VoIP at the lower price. However, all voice services will come under pricing pressure as:

• Do-it-yourself VoIP eats into operator revenue. A threat is on the horizon that will increase pricing pressure for Net phone operators. By 2006, wireless router vendors and IP phone manufacturers will offer products that come complete with software that offers the same feature packs as Internet telephony operators. The result? Bargain hunters who understand technology will unplug from the $20 a month VoIP services and roll their own.

• Universal service fees show up on VoIP bills. As more consumer move to Net calling, regulators will reconsider their stance on those fees for online dialing--at lower rates. Vonage already has a surcharge to support federal mandates like wiretapping compliance, but all Net phone operators will add service charges to cover future regulatory compliance issues. This increase in fees will force providers to drop VoIP service prices in order to meet consumer price expectations.

© 2005, Forrester Research, Inc. All rights reserved. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.