Whilst living out in New York earlier this year, we signed up to a Voice over IP (VoIP) service offered by Vonage and realised significant savings when compared with Verizon, our previous supplier. Once we had overcome the initial teething problems surrounding set-up, call quality was good and we were generally happy with the service and comfortable with its practical limitations.
Vonage, with 1 million customers is a market leader in the USA, second only to Skype which claims 54 million users worldwide. Its success can be partly explained by the market dynamics in the US where the telecoms industry is regionally organised. Low cost providers are far less common than in the UK so a customer’s choice for voice services is limited to a single telco plus potentially a single cable provider, and finally any of the VoIP services now operating in their region.
This contrasts with the deregulated market here in the UK where there is an abundance of low cost voice providers. However, there is currently another fundamental difference. In the UK, unless you have cable, you have to have a physical telephone line in order to subscribe to a broadband service whether this broadband service is supplied by BT or anyone else. And you must pay line rental regardless of whether you use traditional voice telephony. From a pricing perspective, this reduces the attraction of VoIP which, theoretically at least, eliminates the need for a landline.
Given my experience of using VoIP whilst in the US, I started to explore the practicality and pricing of VoIP services upon returning to the UK. Vonage launched here at the beginning of the year and has recently embarked on a high profile marketing campaign to acquire residential customers. Last week Dixons, one of the UK's largest consumer electronics retail chains, announced the launch of its own service, Freetalk. And of course there’s Skype which eBay is acquiring for $2.6bn.
Vonage charges a fixed monthly fee of £9.99 for “unlimited calls anywhere in the UK and Ireland”; calls to mobiles cost extra over and above the fixed monthly fee. A Freetalk package including the adaptor and a year’s subscription will cost £79.99. Subsequently Freetalk will cost £6.99 per month for “unlimited UK landline calls”. The Skype service on the other hand is completely free when calling other Skype users. Its rates to call non-Skype users are comparable to other existing non-VoIP low-cost services. These pricing models don’t appear hugely attractive when compared to the low cost providers such as Carphone Warehouse’s TalkTalk and OneTel.
So from a pricing perspective, I don’t think VoIP is yet compelling. How about from a functional perspective? VoIP offers exciting functionality not possible with traditional telephony – here are two examples:
· complete number portability allowing you to continue to make and receive calls on your number whether travelling on business, on holiday or moving home
· virtual phone numbers to allow friends and family living in other cities or countries to call you without incurring long distance charges
There’s no doubting the sophistication of these and other capabilities possible using VoIP but I believe most of them will appeal to a limited market. On the downside, in the event of power failure, the ability to make voice calls, including to the Emergency Services, is lost. This will make people think twice about giving up their existing landline service. Second, for VoIP services such as that offered by Vonage, all existing telephones must be plugged into the same special adaptor which is connected into the broadband router – given the mix of telephones consumers are likely to own currently, they are almost certainly going to have to purchase new multi-set cordless phones in order to use VoIP all round the house.
VoIP offers the future promise of all telephone calls made around the world being completely free, although this is likely to be many years away. In the meantime, it is likely to increase pricing pressure in the UK which can only be good for the consumer. However, although there’s little doubting that VoIP is the future of voice telephony, I believe the competitive and regulatory nature of the UK consumer market, along with the existing practical drawbacks of VoIP will delay its entry into the mainstream.