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HD Voice Having Positive Impact on Digital Voice Revenue Streams


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May 26, 2011

HD Voice Having Positive Impact on Digital Voice Revenue Streams

By Gary Kim, Contributing Editor

Digital voice will be the fastest growing U.S. industry in the next five years, and that mostly means voice services provided by cable companies, not Skype (News - Alert) or Google Voice, according to a new report from IBISWorld. Cable companies are expected to gain 65 percent of all the revenue in the digital voice space until 2016.

About 80 percent of the revenue will come from consumers and very-small businesses, while enterprises account for about 20 percent of the revenue, the report suggests. But mobility services are a wild card. Although Cable-delivered VoIP dominates the landscape today, tomorrow's growth might come from non-cable providers and  mobile VoIP, IBIS predicts.

That in all likelihood will not prove to be a big trend by 2016, though. One might ask why the incumbent telcos have been slow to embrace VoIP services, compared to cable or competitive providers. Some will instinctively argue that the telcos are big, lumbering companies unable to grasp the importance, but those views arguably are misplaced. Consider VoIP from a telco perspective. There actually is no new revenue to be gained in the consumer segment from offering VoIP services compared to sticking with legacy voice, as odd as that might sound.

The value proposition for VoIP, in the consumer space, almost always involves some element of “lower cost” and therefore an expectation that VoIP will cost less than what consumers already are paying.Ironically, despite the new features, the biggest draw for consumers, as seen in cable TV digital voice services is a simple value proposition: “what you get now, but costs less.” In other words, new features have not driven VoIP adoption in the consumer space, cost savings have been the draw.

So from a telco’s perspective, VoIP means replacing existing voice switches that actually work well for their intended purpose, and in many cases already paid for, to invest in new infrastructure that generates less revenue than the legacy infrastructure being replaced.Investing more capital to make less money just isn’t good business thinking. In fact, telcos are better off allowing competitors to take some share, at lower retail prices, so long as a telco can retain most of its current customer base, paying current retail prices.

The strategic approach is similar to what AT&T (News - Alert) did with its dwindling voice business for a decade: harvest revenue while losing share to competitors, rather than shift platforms across the board and earn less revenue from all the remaining customers. In simple terms, early on, telcos made more money by deliberately losing share to lower-cost providers, but keeping most of their existing customer base, at current rates. There is a tipping point, of course.

At some point, it starts to make more sense to keep some customers, even at lower levels of revenue. But the trick is how to do so without disrupting the actual retail pricing environment.

The answer is bundling. Customers can be sold a triple play service that offers savings over separate purchases of all three services, with effective prices being an accounting exercise. By disguising the actual price of the “voice” component, a telco can maintain posted retail prices for the stand-alone product, while effectively discounting voice inside the bundle.

Cable companies can do the same, albeit with a different attribution of revenue. In fact, voice over Internet protocol  leads the list of the ten most dynamic industries, which also includes green energy sectors like wind and solar power, and Web ventures in e-commerce and publishing, IBISWorld said.

Of course, some will argue that digital voice actually isn’t a new business at all, only the latest generation of voice services. There is truth to that observation, but digital voice definitely represents a new business and revenue stream for cable and Vonage (News - Alert), among others. Either way, IBISWorld forecasts compound annual growth of about 17.4 percent a year through 2016.

Commenting on the recent findings, Jim Gustke vice president of Marketing at HD Voice provider Ooma said, “Nearly half of our customers come from traditional landline service. In addition, the Ooma mobile app is gaining popularity with mobile phone users. With that dramatic a market shift underway, it’s not surprising that digital voice will become the fastest growing industry in the U.S.”

And, according to Gustke, “Consumers are attracted to Ooma for its disruptive value proposition -  free home phone service.”

“Once they use the Ooma service, they are delighted by advanced features like HD Voice for crystal clear voice quality and voicemail forwarding to email for mobility and convenience. In total it’s a value proposition that can’t compare to traditional phone service.”

Gary Kim (News - Alert) is a contributing editor for TMCnet. To read more of Gary’s articles, please visit his columnist page.

Edited by Stefania Viscusi

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