In the early days of WiFi, it was common wisdom to bet on service providers and aggregators to make money as the technology became popular. Somehow that did not work out as planned. Who even remembers names like Cometa that burnt through millions before becoming part of the great technology garbage dump.
In the end, the profits from WiFi, however miniscule ended up in the pockets of device makers such as Linksys, D-Link, Netgear. A step lower down the food chain, chip makers such as Broadcom, Atheros, Texas Instruments, and Marvell have profited from WiFi in varying degrees.
We are seeing similar patterns emerge in the VoIP, or at least consumer facing VoIP business. Service providers (the equivalents of Cometa) such as Vonage, Sun Rocket and even Skype are struggling to make money with their offerings. At the same time, you have folks such as Linksys, Netgear and Logitech who are offering devices that range anywhere from $100-to-$300 for making VoIP calls.
They look to be packed with profits for these companies. Logitech, for instance introduced three new VoIP related products – a desktop set that includes keyboard, mouse and headset, a Bluetooth headset and a speakerphone. These are not very expensive products to make and are going to find buyers amongst many PC-VoIP users.
Logitech, most certainly will make money on these devices. Just like Netgear which will profit handsomely from its $250 wireless Skype phone. Just like WiFi, the profits are going to fly to the chip makers including the usual suspects, Broadcom and Texas Instruments, something we had noted earlier.
I just wonder if this is the new model – a model of limited profitability – in the post-PSTN standards based world. If that is indeed true, does that mean we are seeing an end of an era of specialized chip maker, and larger “index-fund” like approach is going to be the way for chip companies to survive and earn a living? And what do venture capitalists do in these times of reduced profitability cycle? Unfortunately, I don’t have answers, just questions. Hopefully you will fill in the blanks.
21 thoughts on “Who Will Really Make Money in VoIP?”
Advertising dollars is where Google, Yahoo,.. will win. Skype has no ad business. Does EBay? Does EBay have locale-based advertising technology like Google?
Since “VoIP is a product and not a service”, it stands to reason that product vendors and not service providers will make money. 🙂
Ebay just announced its answer to adsense – adcontext (http://affiliates.ebay.com/ads/adcontext/)
I’m sure location based advertising (ala adsense) will be a component but perhaps not at launch.
hmmm…i’ve always been a seller of VG. what a loser.
what about NTGR or LOGI?
they’ve faired better than VG, but they are all still wading through the mud.
Over the last 90 days, these stocks losing strength: (percentage down from close 05/11/2006)
VG lost 56.84%
NTGR lost 17.32%
LOGI lost 8.88%
In a previous life, I started Canada’s largest WiFi hotspot provider, FatPort. In the first 18 months, we realized that the hotspot business was not ever going to be worth $100M. The reason service providers make so little money in these new non-regulated services is — as I think you have pointed out — because the barrier to entry is so low.
Unlike in the past, when communication services were highly regulated, today there is no regulatory barrier to starting up a telephone or wireless Internet service. On the other hand, there are still considerable technological and market barriers to building the technology that powers these networks. For instance, there are only a few companies with the cash and guts to churn out WiFi chipsets, but there are tens of thousands of two person VoIP service providers operating out of a basement and a colo facility. I would also point out that there is probably a reasonably good profit to be earned developing the back-end systems that power these networks — although not as good as the hardware vendors, who are really at the top of the food chain.
Service providers will never make huge money in these new deregulated markets, unless they succeed in generating an enormous user base and then find a way of selling value-added services to that user base. My guess is that the content-driven companies like Google will eventually lock up the VoIP space. They have lots of ads to sell and have to give away valuable services in order to maintain the user base that draws in the advertisers.
The last thing I want to hear/see during my short conversations is ADS. I don’t mind paying premium fees but like uninterrupted and clear conversations. Isn’t AT&T still offering International Long Distance ? I last used in April and it was around 20cents/Minute to India with 3.95 fee every month.
Don’t forget us product guys out here on the long tail. Let me say with absolute conviction that the product biz won’t be much easier than the services biz…going forward. The margins built into the LOGI, Netcom and esp. PLT products are just too inviting for the Shenzen knock-off artists (and their Gau lao friends like us).
Go pull up a chart for PLT to see what I mean.
There is plenty of money to be made selling business communication services. Businesses need, and will pay for, communication services that solve their problems, whether the solution runs on VoIP or carrier pigeons is immaterial.
Consumers, and especially Silicon Valley weblog readers, have gotten the idea that everything high-tech should be free. Ergo, selling communication services to consumers is a crappy business to be in. Anyone who has worked in telecom for any length of time knows this. This was true long before VoIP came along. Businesses will pay rational prices for essential services. Voice is just another service along with insurance, carpet cleaning, etc. They don’t expect it to be free, or even cheap if the service offers value to justify the expense.
There are basically two ways to make money in VoIP:
1) build a service that addresses business needs like PBX features or integration, workgroup communication, and sys admin (aka provisioning new users on a company intercom/voip/whatever system), and make sure it works.
2) build technology, tools and infrastructure that enable the above.
There really isn’t much profit in selling long distance service to consumers any more (and consumer VoIP is just discount long distance under a different name).
During the gold rush of early America, multitudes of miners migrated out west to find fortune in the hills, only to find life difficult. The Gold Rush made Sam Brannan the richest man in California, yet he never mined and ounce of gold, he sold shovels and equipment to miners. There were pockets of wealth generated for the lucky miner, but the people who sold equipment and supplies to the miners, the general store, recognized the real riches.
In today’s VoIP environment, a similar situation is emerging where the service providers are the miners, and the equipment vendors are the general store owners.
From a service providers point of view, Services over IP will make money, but Voice over IP is trending to zero and will eventually be a free service.
Architectures such as IMS will allow service providers to more rapidly implement value added services such as location based applications, presence services and multi-media (video, voice and gaming combined.)
Voice is a cost of entry, a cost of doing business, and any peer-to-peer application must have voice, but voice by itself may well not make money. Examples of this are many, AOL offering free content, as long as consumers purchase broadband. Fox News Corp offering video, avoiding retail channels and bringing revenue directly from the consumer to Fox. The Microsoft Nortel deal which takes voice off of the PSTN. In the same mindset, Microsoft’s announcement that X Box developers can create games for a $99 fee, Microsoft is taking advantage of the mass, the social community.
Voice is the cost of doing business, and equipment vendors are the only ones that will be able to make money, providers must include voice to offer the additional value added services that allows them to make money. These value added services will turn out to be the mother lode for providers. The value added service is the gold, voice is just the miners ore cart, the service that goes along for the ride.
We keep hearing about value-added and add-on services, but where are they? I say these voips are THE ADD-ONS.
Google, Yahoo already have the services and voip is the add-on. Skype and every other voip provider is looking for just the reverse – services to add-on to the voip. But I don’t see them generating $$$.
I suppose E-Bay bought Skype as an add-on, even though they justify other reasons for buying Skype.
Ok, add-on is substitionary. It doesn’t matter which is added first. I suppose my point is that the big guys (Google, Yahoo, EBay) that have content and mulit-service platforms are winners.
The small guys (Gizmo, Tel-Tel) get bought out by above.
Note: Gizmo and Tel-Tel are wholesalers. So there might be some $$$.
Should be too surprising really. Singlepoint, the MVNO in the UK, was basically doing the mobile equivalent of municipal networks. The access was close to free, so how did they make money? be selling additional products around the outside of the core offering; namely handset insurance, and then ultimately selling the customer base to Vodafone.
This is one thing that does become an asset in the free access world; the customer record. Google are nicely set to upsell and cross-sell to content providers based on the browsing habits of their users. This is one area where the $ will come from.
maybe the ILECs need to get back into the consumer hardware business if that’s where the profits are in VOIP.
The largest profit margins are going to the companies that lease the T-1’s and the chip mfg’s.
Product manufacturers and their channel partners (distributors, resellers, integrators, ect.) will be the ones who make the most money from VoIP.
Because hardware enables VoIP service. No matter what the service is, you will always need some sort of hardware to act as an enabler, transport mechanism, etc. For most product manufacturers, VoIP products are just another “line” and when the next technology comes out the will start another “line” to enable that technology as well.
I agree with Brian, though, that companies can make money in VoIP in the Business sector where true value-added services can be profitable. Services such as consultation, installation, maintenance, and support are highly profitable and if done correctly are services that justify the costs and can be “renewed” year after year.
Service business is much harder than it looks that is why people like Cometa got burned. Remember Metricom and Mobilestar. and yes, in such scenarios, tool providers in the ecosystem are more likely to succeed.
Om, great topic and the industry seems to continue to struggle with even defining VoIP, so it’s little surprise that the winners have not been identified. There seems to be a general presupposition that VoIP equates to a substitutive form of phone service or phone calls. Speaking only in context of the consumer/residential market, I see the VoIP opportunity as being far broader. The “new” minutes enabled by VoIP will create new value, these will come from new applications where voice is simply an embedded feature of an adjacent service or transaction. For example, if eBay uses Skype to help close auctions and drive commissions, which is their core business, then who cares how much they make on pure SkypeOut minutes? Check out the “voice long tail” (you can Google it) paper on this topic for more thoughts about this. It’s not the minutes that will create value, it’s the context they are offered within. All of this aside, if we think VoIP is a Vonage type service then the Best Buys of the world and the Google’s of the world will always have some overfunded and overzealous company winning to overpay for shelf space and AdWords. And, the cable companies are doing a wonderful job using VoIP to sell their digital phone service.
don’t all device makers pay small royalty fee to Skype?
Could you elaborate on the specialized vs. Index fund approach? I think perhaps with the exception of Marvell none of the other guys made money with WiFi. Couple of years in a row market doubled in terms of shipments but shrinked in terms of value due to ASP erosion.
I think specialized chip making start up days are coming to an end.
when I say the index fund approach, I look at companies like Broadcom and TI which make everything from DSL chips to WiFi chips to anything else. Basically take the hot sectors and use the margins there to balance out the margins in the low end, or sectors where margins are sliding. use the numbers to build a balanced portolio, so to speak.
Specialized chip makers are more like sector funds, too reliant on one sector. So it is good to see folks like Atheros make money, but how long. Can they reliable on being a market leader for a long time? Possible, but if they screw up one product release and ka-boom. Centillium is a good example of that.
IMO, VoIP as a communication infrastructure/ platform will become commoditized with money being generated by the applications/services/businesses that are built on/around it.