Market Update—BT Emerges on Top in U.K. VoIP Race 

The United Kingdom's incumbent fixed-line telco, BT, has steadied its grip as the top VoIP provider in the country, despite the presence of new start-ups in the U.K. market. The company's "BT Broadband Talk" already towers above its rivals, effectively snuffing out any hopes of a major VoIP drive in the country. In its latest result, for the quarter ending 31 March 2007, BT said it had 1.4 million registered users for its Broadband Talk and BT Softphone VoIP services. In contrast, fellow broadband rival Orange reported 412,000 registered customers over the same period.

The new breed of telcos have even fared worse. The U.S.-based VoIP upstart, Vonage, launched services in the United Kingdom in January 2005 and has struggled to attract up to 50,000 customers in the period since then. Its fate has been worsened by patent issues and an overall poor performance that has raised the spectre of an imminent bankruptcy. Worse still, the VoIP service of the U.K. electronics retailer, DSG International, failed totally following its launch in early 2006, forcing DSG to shut down the service in September 2006 and transfer the few customers it had to Vonage. Similarly, although U.K. grocery retail giant Tesco would not disclose its figures and has yet to pull the plug on the service, Global Insight believes it has not won many clients either (see United Kingdom: 5 September 2006: DSG Quits VoIP Market, Transfers Clients to Vonage and 20 January 2006: Leading Supermarket Announces U.K. VoIP Service).

While eBay's Skype has been the most vocal about VoIP, its SkypeOut service is not a cash cow yet and the wisdom of eBay paying US$4.1 billion for the business in September 2005 is beginning to look flawed. A comparison of first-quarter 2007 revenue at both Vonage and Skype suggests the latter's customer base is quite small. For the quarter ending 31 March 2007, Skype had total global revenues of US$79 million compared to Vonage's US$196 million (see World: 25 October 2006: Analysing the Upstarts: Skype’s Threat and 13 September 2005: eBay Acquires Skype for Up to US$4.1 bil.).

Outlook and Implications

Bundled VoIP Triumphs: The emergence of BT and Orange as the leading VoIP providers confirms that a VoIP-only strategy is doomed to failure. BT and Orange have adopted the strategy of bundling VoIP free of charge into their existing broadband services, making it unnecessary for customers to pay for the standalone VoIP services subsequently from either Vonage or Tesco. Unlike Vonage and others, who would have to convince customers to sign up, BT advertises its VoIP service lightly and simply signs up anybody that joins its broadband service. In emphasising ‘registered’ users, BT acknowledges that many of its registered VoIP users hardly use its service. Bundled VoIP services will continue to frustrate the VoIP-only players and despite the clamour for naked DSL by the new players, Global Insight believes that this trend will continue.

A Victim of its Own Success: Although hardly noticed, the technology behind VoIP has contributed immensely to destroying the market for end-user VoIP services. VoIP triumphed by promising to deliver international calls at a far cheaper cost than the traditional circuit-switched network. However, traditional telecoms providers have utilised the same underlying IP technology in their back-end networks, effectively slashing the cost of making international calls. The result is that telcos, both fixed and mobile, are offering greatly reduced call tariffs, which makes circuit-switched calls even cheaper than the VoIP service. For example, making an international call from the United Kingdom to France using Carphone Warehouse's Talk Talk service costs less than using SkypeOut, Vonage or Tesco's VoIP service.

An Over-Hyped Technology: Perhaps the failure of VoIP to pull down the existing telecoms framework suggests the VoIP phenomenon may have been over-hyped. When eBay paid billions for Skype in 2005, there was a general apprehension that the VoIP market was about to explode. Unfortunately, that has not happened. The fundamental error with VoIP was that proponents assumed that the incumbents and established players would allow the new entrants to cannibalise their revenues. Like the MVNO concept, VoIP relies on another player’s telecoms infrastructure and any assumption that the owners of the network would be content with becoming just "bit pushers" was a bit misplaced.