Making residential VoIP a viable proposition

Like the enterprise IP telephony market, the consumer, or residential VoIP market has definitely changed over the last few years, bringing with it a raft of new challenges and opportunities for vendors, integrators, service providers and their partners.

One major issue facing the residential VoIP market is just how to turn users into paying customers.

Compared to other telecommunications services, consumer VoIP services have a desperately low ARPU, and many VoIP services are now offered by ISPs, whose major focus is not necessarily on revenue but on customer loyalty.

As a consequence, this focus on free services is making revenue a major challenge for “pure-play” VoIP providers.

According to Shara Evans, CEO of Australian research company Market Clarity, this explosion in the number of VoIP service providers has been the biggest single change to have hit the local market over the last couple of years.

“There are close to 200 VoIP providers of different kinds in Australia now, and the majority are targeting residential customers, either exclusively or in addition to SME services,” Evans said.

Sydney-based residential VoIP service provider Engin CEO Ilkka Tales said another recent market development had been the rise of new, easy-to-use and install products.

Engin’s market research had also shown that more residential consumers were likely to consider adopting VoIP at home than they were Pay TV or a conventional data-based broadband Internet service over the next 12 months, a major development in the evolution of residential VoIP adoption, he said.

The same research, from Connection Research Services, actually showed that, whilst only 8.7 percent of Australian residential homes currently used a VoIP service, a massive 31.2 percent said they might contemplate the uptake of one over the next 12 months.

Sydney-based VoIP and wireless equipment provider NetComm managing director David Stewart claims it is only in the last 18 months that the residential VoIP market has become viable in Australia, due to the massive uptake in consumer broadband services. “This, above all else, has opened up the possibility of moving beyond basic Internet surfing into other applications such as wireless and VoIP,” Stewart said.

Lagging behind enterprise market

Despite this surge in the number of providers offering services and the apparent spike in interest from the public as a whole, it is apparent that the residential VoIP market still lags a long way behind the enterprise market in many key ways, not the least of which is uptake.

Stewart said the main difference between the two markets was the emphasis placed on the benefits of the technology. “Residential VoIP primarily focuses on the benefits of reducing call costs – something it does very well for a home user.

“Enterprise VoIP focuses more on collaborative elements and treats call-cost reduction as secondary. “Instead it focuses on things such as unified messaging, staff portability, desktop workstation conferencing, instant messaging and overall integration of computing and voice technologies.”

Evans agreed, stating that the biggest differentiator by far between the two markets at present was service. “Residential VoIP services are primarily based on broadband bundling, equipment purchase price, monthly subscription price, and the cost of calls. In the enterprise market, there’s much more scope to differentiate services through the bundling of other related services, such as system configuration and support, network / system design, broader product supply choices, switch hosting (ie, IP Centrex), telephony switching hardware (IP-PABXs or call managers), and so on,” Evans said.

More importantly, residential users are still primarily limited to using the public Internet to access their VoIP services.

Enterprise customers, on the other hand, can choose non-Internet network connectivity, which can then eliminate many of the quality, availability and reliability and security problems that VoIP services often encountered, Evans added.

Stephen Harley, products innovation manager of Perth-based ISP and VoIP service provider iiNet, believes the quality and availability of both enterprise and residential VoIP services have improved greatly over the last few years in Australia. “Historically, VoIP has been tarnished with a low-grade voice quality and technical setup being required via a connection direct to a PC which also required software, soundcard, speakers and microphone. As a result, early adopters of residential VoIP services were largely tech-heads,” Harley said.

Over the last few years, however, VoIP customer hardware and network hardware had improved significantly, meaning residential VoIP services are no longer restricted to a single PC. “Hardware such as Analog Telephone Adapters (ATAs) now allow traditional phone handsets to plug into these devices, making it even easier to use along with your normal phone service, or to even replace your normal phone service,” Harley added.

Whilst enterprise VoIP services still had an edge over residential in regards to extended functionality and use of multiple handsets, residential users still had the same ability to make huge call savings by taking advantage of access to free calls between VoIP to VoIP customers when using specific VoIP services, Harley added.

Consumer technophobia

Another major difference between the two markets at present is the level of product maturity and the corresponding levels of end-user awareness.

According to Tales, one of the major reasons for such small uptake of VoIP in the home until now has been a shocking lack of customer education. “People need to be made far more aware of the fact that they don't need to completely renew their infrastructure if they don't want to, that the savings are real and the quality is there and, of course, it is real broadband,” he said.

Stewart agreed, arguing that there was still a tendency to dismiss VoIP as a geek’s technology. “VoIP is competing against a conventional phone technology that is over 100 years old and people have an expectation that you pick up the phone and it works,” Stewart said.

“The current generation of residential VoIP equipment emerging was challenging conventional phone technology in its “plug in-and-use” simplicity, he said, though the challenge was still very much there to educate consumers to the fact that VoIP can be that easy.

Harley was also critical of the levels of consumer technophobia that still existed in the marketplace.

“Originating from the IT field, and captured within an awkward IT acronym, VoIP is an application that traditionally belongs in the study or the computer room. It’s been that way for so long for devices like modems and PCs that it takes a considerable shift in perception to get people to imagine a modem or a PC sitting in the living room, or a VoIP handset next to the kitchen bench,” he said.

It is therefore vital, he added, to educate people about the way in which the technology can fit into the way people live now, and not at some time in the future, otherwise “it’s going to stay in the study.

Getting people used to VoIP,” Harley added, was about moving them in small steps away from what they were doing before; talking on the phone in the kitchen, bedroom or living area. “With wireless phones and low-cost options for multiple handsets, VoIP is starting to grow in popularity as the only real difference is where you plug it in,” he added.

Quality of service issues

Another thing Evans claimed was slowing down residential VoIP uptake was the way in which some vendors were undermining the “open systems” nature of VoIP by making too many of their features dependent on vendor lock-ins.

This effectively meant that if a customer wanted something not being offered by the vendor, that end-user’s choices were extremely limited.

Similarly, Evans said there was a dangerous trend in the networking industry of tying underlying network systems (such as the LAN capabilities) to the telephone on the desk.

“While forcing a customer to have a particular phone if they want good VLAN support for their IP telephony system looks like a good sales strategy, it places too many constraints on customers.

For example, a LAN switching vendor may use proprietary VLAN extensions that are designed to work only with its own IP phones,” she added.

The fragmented nature of Australia's broadband and telecommunications industry was also a potential problem, Evans said, because it leads to excessive finger-pointing when things go wrong.

For instance, it is quite common for business customers to buy broadband access services from one company, and a VoIP service from another. Neither of these providers would have visibility into the other’s network, and may not have any type of commercial relationship whatsoever.

Furthermore, the broadband provider may be using infrastructure from a wholesale supplier - meaning that fault detection may involve three external companies: the broadband infrastructure owner, the broadband service provider and the VoIP service provider.

“People can’t cope without their phones for a week while different carriers and service providers try to work out who ‘owns’ a problem,” Evans said.

Harley agreed that it was essential to have the same provider for normal Internet and voice services, and that iiNet was able to use this as one of its main sales differentiators, given that it was a large ISP with its own network.

“This allows us to offer a controlled VoIP service with support that’s rolled into a whole broadband/phone experience,” Harley said, adding that if someone had a problem with iiNet VoIP, they could speak directly to the people that control the Internet network it’s running off.

“Other VoIP providers allow users to operate off any ISP network, but who do you ring when the VoIP service has a hiccup? The VoIP provider has no network to fault and the consumer is left in an awkward position halfway between their Internet provider and their VoIP provider,” he added.

“As with all technology; service, support and dependability might not sell it up front, but working together, those three factors control the end user experience and feed back into the further adoption through friends and family,” Harley said.
According to Tales, the biggest differentiator for residential VoIP services is still savings. “Our customer survey revealed, on average, Engin residential customers saved up to 55 percent on their phone bill by using Engin.

“If you are on cable you can get rid of the landline, if you are on ADSL, you can get the benefit from the best of both worlds by keeping your number and by using a VoIP service for all your outbound calls,” he said.

iiNet’s Harley agreed that price was still paramount and that, whilst the overwhelming perception produced by the media was that VoIP was simply about low-cost calling, it was really about the ability to give the consumer far more choice for a service that they’d been paying a premium for far too long for.

“To this end, VoIP offers dramatically reduced rates as it jacks into the one constantly innovating and evolving technology source: the Internet.

Big companies, those that have been around for a long time, with established pricing policies and strategic plans that stretch out over years, often find it incredibly difficult to compete with the overwhelming pressure from the Internet to innovate and rethink the way we do things.

Pricing strategies that cover long and often manual connection procedures have no place in a virtual environment where the same service is replicated instantly – with minimal resourcing,” he said.

However, as Evans pointed out, it is important to remember that there are still great call plans available with traditional voice services too.

“If a customer expects to cut their phone bill, but most of their calls are to mobiles, they might be disappointed. If, on the other hand, they are looking for a second or third phone line for their kids to use, a VoIP service may present a low-cost way of providing for these extra services,” Evans said. Savvy customers may also have the option of using VoIP for cheap international calls and traditional telephony for other call types, she added.

As more and more residential customers subscriber to VoIP services there will be an increasing pool of people that can be reached at ‘no charge’. It is also likely that the emergence of VoIP services will lead to new types of call plans, perhaps completely funded by advertising, Evans said.

However, whilst price may still be a major driver at the lower end of the VoIP market, more and more features are being introduced into the market to make the proposition seem more compelling. Calling features that would normally each incur an additional cost like call waiting, voice mail, three way calling, caller line ID and call forwarding to e-mail are now standard features of many residential VoIP services.

“Call forwarding to e-mail is one of the simplest yet most useful services out at the moment. Instead of trawling through your voicemail when you get home from work everyday, you can simply have an audio message emailed to any email address you like so you can hear it all as it happened.

“You’ll never miss an important message again,” Harley said. “Just like e-mail has largely replaced the need for a dedicated fax line, the virtualness of a VoIP line will ultimately replace the need for a fixed residential line. The future is a household with a separate VoIP number for each family member, just like an e-mail address, but without the exorbitant cost of bringing multiple fixed lines into the house,” he added.

Evans added that presence-based services, such as the ability to see which of your friends are online at any given time as well as having the ability to simply click on an icon to initiate a voice or video call, send an instant message, or an email - all without having to look up a phone number – were other key features of the VoIP world.

“The protocols behind VoIP also allow for sophisticated functions such as call forking (allowing multiple phone numbers/devices to ring at the same time), unified messaging, and so on,” she added.

Other channel opportunities

So, given that sales margins are likely to continue to come under pressure, despite increased uptake numbers, what types of other opportunities exist in this market segment for channel companies?

Tales said he believed the current market state represented a fantastic opportunity for partners to offer a way to free customer budgets so they could direct their cash flow to network upgrades, new computers, new infrastructure or straight to the bottom line. “This is all about adding huge value to the end customer and offering our resellers the opportunity to help their customers save money while making money - a win, win proposition.”

Harley said he expected to see channel partner opportunities become more available through middle-ware applications that are sold in addition to bare VoIP services. “These applications can be used to route certain calls to other branches, connect callers to a Voice to email gateway and provide call statistics etc,” he said.

Other partnering opportunities ranged from the resale of VoIP services to other markets not mass targeted directly through some ISPs such as SME and Corporate bodies that have existing relationships with these channel partners, Harley said.

Resale of VoIP through the retail consumer market was also becoming more popular as the VoIP service is bundled with VoIP hardware as a trial try-before-buy service or sometimes including free calls, Harley added.

Stewart said that, given residential VoIP’s relative infancy, channel partners could benefit not only from increased volume of hardware sales but from programs such as trailing commissions from VoIP service providers delivering greater margin and residual income streams.

One flow-on effect we are already witnessing, he said, was its increased uptake from the SMB market, where cost-consciousness was also paramount. “Excellent opportunities will be generated for channel partners to be VoIP solution deliverers for this market,” Stewart said.

One thing Evans said was paramount for any channel company wanting to benefit from the growth in this market segment would be the ability to communicate with customers buying voice systems on their level.

“Remember that the customer buying the phone system is not going to be familiar with the ‘geek-speak’ of a VoIP specialist”, she said, adding that, whilst there may be a raft of features that can enhance the VoIP experience, often the end user just wants “a cheap phone that works,”.

Gazing at the future

A number of recent independent research papers and worldwide trend data indicate strongly that the Australian market is close to what Tales described as a “tipping point” for VoIP to take off in Australia.

However, issues such as education, understanding, dispelling the myths, true broadband speeds, providing true customer service and support - not just a Web site – still need to be properly addressed before anything like critical mass can be achieved, he said.

The increasingly rapid uptake of residential broadband services would continue to be a major catalyst for VoIP adoption, he added.

Stewart agreed that the major challenge for the residential VoIP space would continue to be educating the market to overcome some of the major misconceptions of the technology and overcome consumer apathy and fear.

“As an industry we are chipping away at it and increasing people’s awareness… but we’ve only touched the tip of the iceberg so the market potential over the coming years in Australia is huge!,” he said.

Another major driver will be the emergence of new products in this space which are completely portable and can be used anywhere there is an Internet connection, making it a virtual substitute for the mobile phone.

“You’ll also start to see an emergence of VoIP products for the home that are completely integrated with built-in features like wireless which simply look like a phone – it’s the form factor that consumers most associate with,” Stewart added.

Evans said Market Clarity expects increased wholesale competition in the VoIP market, adding that retail competition was so intense right now that revenue opportunities, already tight, may continue to shrink.

“Both in the ISP market, and in other spheres such as retailing, we already see a focus on retail residential VoIP being used to make customers more loyal, rather than as a profit centre in its own right. Indeed, we believe that it is only a matter of time before VoIP services are available from most ISPs,” she added.

Harley said that, in some foreign markets, where the product was far more mature, residential VoIP take-up was already growing at a faster pace than primary line traditional services, and revenue from such traditional primary line calls was already on the decrease as consumers moved to VoIP for all their call needs. For this to happen here, he said, VoIP needed to become far more widely accepted as a replacement to traditional line services, not complementary.

“As the service continues on its evolutionary path, more businesses, telcos, hardware vendors will develop more applications and services for use with VoIP. Gaining access to cheap calls, along with mobility and portability of one’s number anywhere, anytime is where VoIP is heading,” Harley said.