Consumer VoIP Subscribers Skyrocket, New Voice
Contenders Entering Market


                                              ...
 Copyright In-Stat 2006. All rights reserved.



Reproduction in whole or in part is prohibited without written permissio...
Executive Summary

The state of consumer VoIP is rapidly changing as mainstream adoption grows and services
continue to tr...
Merging of VoIP Offerings
    Providers of PC-based VoIP and broadband IP telephony are moving into one another’s territor...
•   New entrants will partially drive growth in pure play Broadband IP Telephony
        subscribers. In-Stat anticipates ...
their PC. As these plans become more popular the FCC may again adjust rates to reflect the
    continuing evolution of voi...
In-Depth Analysis That Drives Your Business

Technology vendors, service providers, technology professionals and market sp...
In-Sights: PC-Based VoIP Challenges Broadband IP Telephony (IN0603277IA)

This report details results from In-Stat’s prima...
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Consumer VoIP Subscribers Skyrocket, New Voice Contenders ...

  1. 1. Consumer VoIP Subscribers Skyrocket, New Voice Contenders Entering Market July 2006 Amy Cravens Group: Residential Broadband Services Phone: 480.609.4545 Email: acravens@reedbusiness.com Report No. IN0603353WHT In-Stat 6909 E. Greenway Parkway, Ste. 250 • Scottsdale, AZ 85254 1101 S. Winchester Blvd., Bldg N • San Jose, CA 95128 225 Wyman St. • Waltham, MA 02451 Sales/Customer Service • 480.483.4441 www.instat.com • info@instat.com
  2. 2.  Copyright In-Stat 2006. All rights reserved. Reproduction in whole or in part is prohibited without written permission from In-Stat. This report is the property of In-Stat and is made available to a restricted number of clients only upon these terms and conditions. The contents of this report represent the interpretation and analysis of statistics and information that is either generally available to the public or released by responsible agencies or individuals. The information contained in this report is believed to be reliable but is not guaranteed as to its accuracy or completeness. In-Stat reserves all rights herein. Reproduction or disclosure in whole or in part to parties other than the In-Stat client who is the original subscriber to this report is permitted only with the written and express consent of In-Stat. This report shall be treated at all times as a confidential and proprietary document for internal use only. In-Stat reserves the right to cancel your subscription or contract in full if its information is copied or distributed to other divisions of the subscribing company without the written approval of In-Stat. Authentic Copies of this Report Feature a Red Color Bar
  3. 3. Executive Summary The state of consumer VoIP is rapidly changing as mainstream adoption grows and services continue to transform. According to In-Stat’s 2006 Consumer Broadband Survey of 1,217 US households, nearly one-quarter (23 percent) of respondents use some sort of VoIP. In-Stat segments the VoIP market in two categories: broadband IP telephony which enables calls to/from the PSTN and wireless numbers (such as Vonage) and client-based applications such as PC to PC applications like Skype or IM-based VoIP applications offered by Google, MSN or AOL. According to In-Stat survey results, more respondents use a client-based solution than a broadband IP telephony service, but it was also found that approximatley one-third of users use several VoIP applications from different providers. More Users Opt for Free VoIP In-Stat finds that among VoIP providers, those offering free PC-based applications are currently more popular than those offering broadband IP telephony service. Based on In-Stat survey results, Vonage, a for-fee broadband IP telephony provider, has the greatest number of users; however, the other top four providers offer free PC-based VoIP applications. • Vonage accounts for nearly one-third of respondents using a broadband IP telephony solution and is the definitive market leader. • Yahoo, Skype, and MSN are respectively the top three providers of PC-based VoIP applications. • AT&T and Verizon both account for roughly 15 percent of respondents and other broadband IP telephony providers account for less than 10 percent. • Most providers account for less than 10 percent of respondents, demonstrating the fragmentation of the market in which no one solution yet dominates. © 2006 In-Stat–IN0603353WHT–Confidential 1
  4. 4. Merging of VoIP Offerings Providers of PC-based VoIP and broadband IP telephony are moving into one another’s territory in order to capture a larger section of the market. • Broadband IP telephony providers are moving downstream to offer PC-based VoIP applications. — For example, Packet 8 launched a PC-based VoIP application in order to penetrate the market of PC-based VoIP users, in hopes to make these individuals Packet 8 users, and migrate them to a broadband IP telephony offering. — Vonage is releasing a V-Phone, a portable USB device that will allow subscribers to make calls directly from a PC. • PC-based VoIP providers (such as Skype, Google Talk, AOL) are becoming more sophisticated, introducing capabilities such as PC-to-Phone calling, which may slow the transition to broadband IP telephony, as users are able to do more with the closed VoIP applications. Forecast By the end of 2006, the broadband IP telephony market should have approximately 5 million residential subscribers. This will grow to over 19 million in 2010. Note, this represents US residential Broadband IP Telephony subscribers, and does not include client-based VoIP users. Table 1. Broadband IP Telephony Subscriber and Revenue Forecast (in K) 2005 2006 2007 2008 2009 2010 Users (K) 3,170 5,233 7,636 10,973 14,723 19,300 Growth Rate (%) 65% 46% 44% 34% 31% Revenues ($K) $776,289 $1,407,274 $1,831,092 $2,250,471 $2,796,010 $3,516,644 Growth Rate (%) 81% 30% 23% 24% 26% Source: In-Stat, 04/06 In-Stat estimates that residential Broadband IP Telephony services generated US$ 776 million in 2005. In-Stat forecasts that revenues will nearly double this year, to over US$ 1.4 billion. In-Stat places residential consumer service prices between US$ 20 and US$ 40 a month, with an ARPU of $245 in 2006. ARPU will begin to decline in the latter half of the forecast period, as increasing competition for subscribers drive prices downward. At the end of 2005 there were nearly 40 million total residential broadband subscribers in the US (representing just under 35 percent of total households), with 8 percent using Broadband IP Telephony service, according to In-Stat. By the end of 2006, this will grow to 11 percent of all broadband subscribers, and by 2010 it will account for 27 percent of subscribers. In regard to how these subscribers will be allocated among the universe of broadband IP telephony providers, In-Stat finds that: • Cable providers have the greatest number of subscribers throughout 2006. • Telcos will experience the highest subscriber growth rates over the forecast period, but will also account for the fewest number of subscribers. 2 © 2006 In-Stat–IN0603353WHT–Confidential
  5. 5. • New entrants will partially drive growth in pure play Broadband IP Telephony subscribers. In-Stat anticipates the breadth of players to increase, and for PC-based VoIP providers (such as Google, Yahoo, and Skype) to move upstream and eventually offer a Broadband IP Telephony solution. Cannibalization VoIP, with its rapidly growing base of users, poses an escalating threat to wireline and wireless use. The threat to wireline is a direct replacement of a traditional wired Plain Old Telephone Service (POTS) voice service with the emerging wired Internet-based voice service (VoIP). Specifically, In-Stat finds: • Of those respondents that use VoIP, over one-third have canceled their landline service. • This represents 8 percent of total respondents, or 1 percent of residential landline subscribers that have canceled their traditional wireline phone for VoIP. • In-Stat believes that the vast majority of VoIP conversion is to a broadband IP telephony solution rather than to a PC-based VoIP application. With wireless, VoIP does not present an immediate threat to the base of mobile usage (although Wi-Fi/cellular handsets do present a future challenge to such usage). However, VoIP does challenge the growth in wireless usage because the top driver for wireless conversion—cost of a wired voice service—is being attacked by VoIP marketing campaigns. Thus, while wireless has been the usurper of voice minutes, this position of net gain may be jeopardized. Therefore, wireless providers need to assume more defensive position against VoIP offerings. Regulatory Trends Recent announcements by the FCC regarding USF taxation of VoIP will likely raise prices 5 to 10 percent. While VoIP providers today compete primarily on cost savings, In-Stat does not feel that the USF tax will undermine the growing popularity of VoIP. In-Stat finds: • The $1 or $2 increase to the monthly VoIP bill still keeps VoIP prices significantly below traditional landline phone service. • VoIP providers may be able to lower their taxation rate by showing long distance to be less than 64.9 percent of total revenues (this is the safe harbor amount used by the FCC to calculate taxation assuming no usage studies are conducted by the provider). • The USF fee is used to subsidize telecommunication services for schools and low income individuals. If VoIP providers are contributing funds, it is expected that a portion of funds be used for VoIP service provisioning. • Based on In-Stat research, lower income segments are the heaviest client-based VoIP users. Such subsidization may help migrate these individuals to broadband IP telephony services. While In-Stat does not expect this tax to impact VoIP’s competitiveness with traditional phone services, it could make free client-based services more attractive. This is particularly a threat as more “out” calling plans are being introduced that allow users to call regular phone numbers from © 2006 In-Stat–IN0603353WHT–Confidential 3
  6. 6. their PC. As these plans become more popular the FCC may again adjust rates to reflect the continuing evolution of voice communications. Implications The VoIP market is rapidly evolving, which continually changes the competitive dynamics between VoIP providers, as well as with landline and wireless providers. Specifically, In-Stat finds: • The battle for VoIP users is heating up and PC-based VoIP is presenting a significant challenge to broadband IP telephony providers. With the significant base of users, PC- based VoIP is not only challenging traditional landline providers (particularly in the long distance market), but is going head-to-head with broadband IP telephony providers in the effort to capture users. In-Stat finds that: • Vonage has been very successful in building subscribers, but are challenged with significant churn, a monthly average of 2.11 percent according to the S-1 filing for their IPO. Furthermore, the market is very fragmented and competition for broadband IP Telephony subscribers will become more intense, increasing Vonage’s challenge to remain the market leader going forward. More aggressive play by the cable companies, and particularly the telcos, with their ability to invest in and market a VoIP offering, as well as their enormous base of existing subscribers to sell to, will significantly erode Vonage’s market share. • Price and promotion will be the primary drivers of subscriber growth, but features will also be an important element of future subscriber growth. In-Stat anticipates increasing competition for subscribers, and, as competition intensifies, providers will need to leverage features in order to remain competitive. • In-Stat believes that the base of Broadband IP Telephony subscribers presents an immediate threat to traditional voice providers. Broadband IP Telephony has proven itself to be a serious option for customers looking to save money while increasing the breadth of voice features. As a result, there is currently a significant base of users, and the audience is growing rapidly. • Despite remaining concerns, telcos are advised to incorporate Broadband IP Telephony into their overall voice strategy. VoIP subscribers will become a critical market over the next several years, and the negative impact of not participating fully in this market will be greater than the potential cannibalization of landline subscribers. 4 © 2006 In-Stat–IN0603353WHT–Confidential
  7. 7. In-Depth Analysis That Drives Your Business Technology vendors, service providers, technology professionals and market specialists, worldwide, rely on In-Stat’s experienced staff and in-depth research to support critical business, product and technology decisions. In-Stat’s insights are derived from both a deep technology understanding and comprehensive research, which examines each segment of the value chain for each market. Regular and ongoing end-user demand and primary research surveys underpin much of the analysis, enabling In-Stat to provide incisive market knowledge and guidance on future market opportunities. Research service subscribers enjoy a regular flow of easily consumable data and analysis designed to help support their business decision-making process. Deliverables range from comprehensive in-depth reports on new markets or technologies designed to help guide strategic decisions, through to rapid analytical response to major industry events designed to help clients to understand implications and to guide short- term business decisions. 10 hours of analyst inquiry is included with all In-Stat research services. The following In-Stat research services provide insight into topics covered in this white paper: VoIP Services & Infrastructure Provides an end-to-end perspective on global VoIP equipment markets. Includes primary research/case studies of leading VoIP service providers around the world, as well as detailed analysis and forecasts of global VoIP subscriber, equipment and technology markets. The service provides in-depth coverage of the softswitch, media gateway, session border controller, hosted services, IP PBX and IP phone equipment markets, as well as emerging cable telephony and voice over WiMAX markets. Residential Broadband Services Provides data, segmentation, & analysis of US consumer demand for voice/data network services & broadband VoIP adoption in particular. Service Provider Strategies Provides an end-to-end perspective on global VoIP equipment markets. Includes primary research/case studies of leading VoIP service providers around the world, as well as detailed analysis and forecasts of global VoIP subscriber, equipment and technology markets. The service provides in-depth coverage of the softswitch, media gateway, session border controller, hosted services, IP PBX and IP phone equipment markets, as well as emerging cable telephony and voice over WiMAX markets. In addition, the following related research can also be purchased individually: In-Dustry Update: Telcos Lagging Behind in VoIP Market (IN0602946IA) This report details results from In-Stat’s primary consumer research on VoIP adoption, including segmentation by age, ethnicity, and income. The report also provides detailed 5-year forecasts of VoIP adoption and revenues with segmentation by type of provider. © 2006 In-Stat–IN0603353WHT–Confidential 5
  8. 8. In-Sights: PC-Based VoIP Challenges Broadband IP Telephony (IN0603277IA) This report details results from In-Stat’s primary consumer research on VoIP adoption, including segmentation by age, ethnicity, and income. In-Sights: Business VoIP's Gathering Storm: Skype, Yahoo!, and Peers on the Horizon (IN0603302TX) This report explores the emerging voice-enabled IM market and the value business users are finding in "click to call" functionality as providers like Skype enter the corporate environment. It provides commentary on the impact of increased linkage of IM clients, as well as IM connectivity to the Public Switched Telephone Network. 6 © 2006 In-Stat–IN0603353WHT–Confidential

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