No Stopping VoIP
Phone Technology Keeps Going and Going

By Michael Hopkins, Senior Editor – The Bridge (http://www.mbc-thebridge.com/viewbridge.cfm?instance_id=446)

It's a business that delivered on its promises during the past two years.

And it's poised to keep delivering for cable, independent companies and others this year and the foreseeable future.

The business is VoIP, or Voice over Internet Protocol, the technology that lets cable ops provide a phone product, thus completing the triple play. VoIP also gives consumers the ability to buy phone services from independent start-ups such as Vonage or Packet 8. And it's giving traditional phone companies headaches.

According to Bernstein Research, VoIP adoption by consumers continues to accelerate, with cable VoIP subscribers and stand-alone VoIP service customers growing from 1.15 million at year-end 2004 to 4.17 million at the end of 2005. That amounts to a gain of more than 260 percent.

And Voice over IP is expected to continue its skyrocketing growth.

New Paradigm Resources Group says it expects the VoIP market to jump in size by 400 percent through the end of 2008. VoIP users could climb to 9 million by the end of 2006 and 24 million by the end of 2008, says the firm. Future growth rates will be fueled by the increasing availability of broadband internet to residential and business locations, says New Paradigm.

"VoIP is hot, and continues to evolve as a technology and offering, as the IP voice market attracts new participants, and services expand with new features, pricing and availability," says New Paradigm President Terry Barnich. "VoIP has come into its own as a disruptive technology, with new providers using a variety of business models to promote variations of the service. New entrants are developing an incredible array of networks and software applications that continue to generate a wealth of VoIP products and services."

And VoIP may just be hitting its stride, given that the potentially biggest provider of the service is just now rolling out the technology en masse.

Comcast has lagged behind cable VoIP pioneers such as Time Warner Cable and Cablevision. But Wall Street thinks the MSO giant is quickly getting on the VoIP eight ball.

Says Doug Shapiro of Bank of America Securities, "(Comcast) indicated that the pace of VoIP adds has picked up so far in second quarter, and is now on a 20,000 per week -- 260,000 quarterly -- run rate. In light of this run rate, with around 19 million homes marketed currently and a target of 32 million by year-end, we think the guidance and consensus of 1 million VoIP adds this year is easily attainable."

Chairman and CEO Brian Roberts says the Comcast Digital Voice product "is available to more people every day, and by the end of this year we will be marketing our triple play package of video, voice and data services to the majority of our customers. This will continue to reinforce our competitive advantage and position us to deliver more value to our customers and shareholders."

What is VoIP?

In technical terms, VoIP routes voice conversations via the internet or any IP-based network. The voice data generated flows through a packet-switched network, instead of traditional circuit-switched phone transmission lines.

On the business side, VoIP gives cable a technology for delivering voice, one of three items making up its triple play of products. Also, given that voice over IP is using the internet, companies like Vonage and Packet 8 have come to market with a stand-alone VoIP services that compete with cable and traditional phone companies.

In addition to consumer use, VoIP is making its presence felt among enterprises.

Revenues from voice IP services in the business sector will reach $18 billion by 2010, according to a study by Juniper Research. That VoIP growth among businesses will be driven by the replacement of existing circuit switched connectivity and the lower cost of calls offered by VoIP, among other factors, says the firm.

Cable and VoIP

Jeff Halpern of Bernstein Research says voice IP services could be a significant financial catalyst for cable during the next five years.

"In addition to strong VoIP subscriber gains, the ability to aggressively price VoIP services also appears to be triggering basic video subscriber retention and re-accelerated broadband growth .. a halo effect," Halpern says.

Says Jim Gayton, director of marketing for Cedar Point Communi-cations, a cable VoIP vendor, "People honestly believe cable is really just beginning the roll out of services. It's a real big market opportunity for our customers."

At the end of 2005, there were 2.5 million cable VoIP customers, according to Bernstein. At the end of 2004, the cable VoIP business had a thin 51 percent share of the overall VoIP business, with independent voice IP providers like Vonage and Packet 8 taking the rest of the market share.

At the end of 2005, cable's share had swelled to 60 percent of the VoIP business, "and appears on track to dominate the market over the next few years," says Halpern.

Two companies considered on top of their VoIP game are Time Warner Cable and Cablevision.

Cablevision ended 2005 with a VoIP penetration of 16.3 percent among homes passed. Time Warner Cable ended last year with 7 percent of its homes passed with VoIP. Cablevision netted more than 130,000 customers for its phone product during the fourth quarter, for a total of 731,000. Time Warner Cable added 246,000 customers for VoIP during that same three-month period, for a total of 1.1 million.

Comcast, the nation's biggest cable operator, has been somewhat slow in its VoIP rollout, but the company's product is gaining momentum. The nation's largest MSO more than doubled the number of customers with its Comcast Digital Voice product during the first quarter, taking its VoIP total to 416,000, from 204,000 reported at the end of 2005.

At the end of last year, Comcast had built out digital telephony capabilities to about 11.4 million homes, or a third of its homes in its footprint, states Bernstein's figures. At the end of the first quarter, that figure jumped to 19 million, and is expected to grow to more than 30 million by the end of the year.

While big cable operators are making progress in rolling out VoIP to consumers, small cable companies also have VoIP efforts in place.

A number of smaller operators have partnered with Net2Phone, which allows its cable company customers to offer a low-cost phone service that utilizes VoIP. Net2Phone's MSO clients include Bresnan Communications, Millennium Digital and Northland Cable, among others.

And cable is looking to improve its VoIP product.

Cedar Point is developing its VoIP technology in an effort to allow cable companies deliver advanced features such as video. The video component contains an option that opens up a video screen on a TV containing caller ID capabilities. The work could eventually lead to video telephony capabilities, says Cedar Point's Gayton.

Cedar Point's SAFARI C3 Media Switching System is a Packet Cable-qualified solution that supports legacy circuit and IP voice services.

A company called Viseon is taking further steps to make video VoIP a reality.

The company's first generation VisiFone is hailed as a TV-quality broadband videophone for consumers and businesses. The Viseon system does not require a PC or external equipment, and operates on any broadband connection and home or office network, whether it's DSL or a cable modem.

Another vendor in the cable VoIPspace is BigBand Networks. The California-based company has its FastFlow BPM(Broadband Provisioning Manager)that supports high-speed internet and VoIP capabilities through a single server. BigBand's CUDA cable termination system also supports VoIP services at the headend.

Whatever direction cable takes its VoIP service, it's giving the business a critical component to its triple-play bundle.

"The fact that cable is gaining an increasing share of voice subscribers should not be a surprise," says Halpern. "VoIP, as part of an attractively-priced triple-play bundle, gives the MSOs a compelling competitive advantage over stand-alone providers like Verizon."

Targeting the Bells

Voice over IP offerings are giving traditional phone companies head aches, and are being blamed for a large part of the access line (or customer) losses being experienced by the larger telcos.

In fact, some of VoIP's biggest backers go as far as suggesting the big phone companies are "dead men walking," given that their inexpensive phone service will eat away at RBOC's more expensive access lines.

BellSouth says that as of March 31, total access lines were 19.8 million, down 238,000 when compared to numbers reported on Dec. 31, 2005. According to AT&T, its consumer retail access lines declined by 267,000 during the first quarter.

According to Bernstein numbers, access line losses jumped in 2005, with more than 8.8 million, or 5.9 percent of total lines, switching off service. That represents an accelerated pace when compared to previous years. In 2003, access line losses totaled 6.5 million and in 2004 they numbered 6.7 million, state Bernstein figures.

Customers who turned off traditional phone service took three probable paths to replace their voice offering: They shifted to wireless only; they defected to a stand-alone, price-competitive VoIP service; or they went with cable's triple-play, which has a voice product.

"The probable answer is a little of all three occurred, with the emphasis on the latter two," says Halpern. "While some of these customers may have chosen to rely on wireless service exclusively, it is clear that many defected to VoIP service."

The access line losses have compelled telcos to take matters into their own hands and begin working on their own respective video offerings, which are becoming part of a competitive telco triple-play.

Verizon launched its FiOS TV video service last September in Keller, Texas. In addition to the Lone Star State, the telco sells the service in parts of California, Florida, Maryland, Massachusetts, New York and Virginia.

AT&T has a trial of its IPTV services underway in San Antonio, where it has its headquarters. There also are plans to roll out video service in other areas served by the company, including California, Nevada and possibly Arkansas.

Qwest has a video service in the southern suburbs of Denver and has an agreement with Salt Lake City to offer a pay-TV product in the future. BellSouth hasn't publicly stated its video plans, and probably will keep any service on the back burner pending its proposed acquisition by AT&T.

While the telcos roll out video, companies also are working on their own internet phone products.

Verizon has VoiceWing, its broadband phone service that offers local and long-distance calling throughout the United States, Canada, Puerto Rico and other U.S. territories. VoiceWing sells for $24.95 a month.

VoiceWing uses a small adapter provided by Verizon to connect a phone. The service can be used with DSL and cable modem connections.

Qwest also has a VoIP service, called OneFlex, that offers cheap national and international calling plans. The service sells for $29.99 a month and offers calling for as low as 5 cents a minute.

The Independents

VoIP services aren't the exclusive domain of cable operators and companies like Vonage and Packet 8. Independent businesses, such as Denver-based IP5280, also are making their presence known in the phone business.

IP5280, which is run by telecommunications veterans John Scarborough and Jeffrey Pearl, specializes in delivering VoIP as well as IP data solutions to business customers. The company supports clients with operations across the globe, yet its primary focus is on about 65,000 small and medium-sized businesses in Colorado.

IP5280's chief competition for its enterprise VoIP service has been the phone giants. "You can say that 9.9 times out of 10 we're coming up against Ma Bell. We're competing with the traditional phone companies," says Pearl.

The company pushes its low-cost proposition when dealing with prospective customers, but it also promotes the extras it can deliver for a small or medium business. "It's not just saving money. It's also offering the extra features and services," whether it's voice-mail delivery to e-mail, an auto-attendant for incoming calls or any of the other extras tied to a business phone service, says Pearl.

"We can walk into a small business and offer services that truly are like those used by Fortune 500 companies," says Scarborough.