Scoping Australia’s VoIP Services Market
6 February 2007
Because it has had the good fortune of becoming the default brand of Internet-based VoIP, Skype is often able to rely on a light hand from the media.
So it was when the company restructured its tariff sheet in late January: with a little PR sleight-of-hand and a couple of “Skype comes to [fill in country name here]” announcements, stings in the Skype price tail were overlooked by most.
When a German competitor, VoIPbuster, told the media that the Skype PR was concealing a price increase, Market Clarity spent a few minutes on a spot check. There wasn’t time for a full analysis across many providers, but we thought it worth asking ourselves “How does Skype’s value stack up?”
For this exercise, we used the price list of just one competing high-profile Australian VoIP provider, and made just two assumptions: calls would last an average of three minutes, and each month a user would make 30 mobile calls, 20 local calls, 10 long distance calls, and 10 international calls. We also took into account subscription prices and Skype’s $50 annual fee for a direct in-dial number (the local provider includes one in-dial with the subscription).
The result can be summed up in three points:
- The hypothetical user would only save around $3 per month using Skype compared to the local provider if he or she took the cheapest plan.
- The more calls the user made, the more competitive the local provider.
- People who make longer calls should look for untimed rather than timed VoIP calls.
This isn’t a definitive statement on comparative value: telecommunications tariffs are far too complex for such a simplistic assessment. But in writing about the VoIP market, the Australian IT press would do well to remember that there are hundreds of local providers offering competitive products and services.
The advice to consumers is that the value of a VoIP plan, like any other telephone tariff, depends on the user’s own behaviour. Getting the best deal will require an understanding of how you will use the service, followed by research on VoIP plans.
Australia has over a million VoIP users, but anybody wishing to assess the importance of the VoIP Services market, quantify its current value, and predict its future value needs to start by answering one question: Just how do you count “users”?
Defining users is not a trivial task, but it remains a challenge that anybody wanting to scale and forecast a market has to deal with. If we come up with the wrong definition of “user”, our current measurements lose credibility, and likewise our forecasts.
The question is especially important, and especially vexing, in brand-new markets where slippery definitions are common and exaggeration can take on the force of fact. Those with long memories will recall how “Internet traffic is doubling every 100 days” started out as a one-liner in a sales presentation and became official US State Department policy.
A more current example comes from the Pew Research Centre, which popped some of the Web 2.0 bubbles with the observation that many people who register for a Website (for example, YouTube) only use it a couple of times; yet those people are enthusiastically counted as “registered users”, especially when it comes to putting a price on the site.
“What is a user?” also occupies our minds at Market Clarity.
In creating our Market Tracker: The Australian VoIP and Hosted IP Telephony Market 2004-2011, a solid definition of subscriber has been of prime importance.
That’s partly because the VoIP market suffers the same problem as identified by the Pew Research Centre: with plenty of free self-activated sign-ups, it’s certain that there are many more VoIP accounts (that is, usernames registered with a VoIP provider somewhere) than there are active users.
Some of this may be accidental: the provider simply lacks the tools to eliminate inactive accounts from its records. Sometimes it’s deliberate: a provider counting every account ever established as a “current user”.
Sometimes, forced bundles are counted as “live users”. These can be found both in hardware sales (when an accessory like a PC headset ships with a free VoIP account) or as inclusions with other telecommunications services (such as new broadband users)
Here are just a few of the questions that have been at the forefront of our minds in compiling Market Tracker for the VoIP market:
- Is the provider distinguishing between free and paid VoIP accounts?
- Is the provider distinguishing between free and paid calls?
- Can we see a difference between active and inactive accounts?
- Can we reconcile wholesale and retail accounts to ensure that each active subscriber is only counted once?
At the moment, the VoIP industry lacks reliable, public measures for the performance of service providers.
Even in more established telecommunications markets, great care is needed to assess a carrier’s or service provider’s performance. In the emerging VoIP market, familiar metrics such as ARPU are almost non-existent.
The existence of large numbers of free accounts introduces a new factor in ARPU measurement. In other markets, the number of promotional accounts is limited and their duration short. By contrast, a free promotional VoIP account can last for years â€“ even if the account remains unused.
To provide our customers with the most accurate results possible, Market Clarity devoted time and resources to primary research, supplementing published information with a large number of telephone interviews with Australian VoIP and Hosted IP Telephony service providers serving residential and business customers.
For our customers, the result is a dataset which we believe offers today’s most accurate measures of subscribers, revenue, and service types in the Australian VoIP services market.
Figure 1, below, shows the different parts of the Australian VoIP market covered by Market Tracker.
Figure 1: VoIP Services Market Segmentation
These are defined as follows:
- VoIP vs. Hosted IP Telephony Services — The key differentiator between these service types is that in Hosted IP Telephony, the service provider alleviates the need for business customer to operate and manage their own voice servers. Instead, this functionality is implemented within the service provider’s infrastructure (this model is also referred to as IP Centrex).
- Internet vs. Private Network Connections — VoIP and IP Centrex services can be delivered either over a broadband Internet connection, or using a Private data network connection. Private network connections are most suitable for businesses, which need high call quality, reliability, and security for their VoIP services.
- Retail and Wholesale Services — A company offering a retail VoIP service may operate its own VoIP infrastructure with no outside assistance, in which case it has no retail-wholesale relationship. However, it is more common for VoIP service retailers to purchase one or more components of their VoIP service from a wholesaler. Wholesale VoIP services available to the retail market include branded bundles (such as Engin), ‘back office’ functions such as billing management, or complete “white box” wholesale offerings which include all necessary technology and infrastructure, with the retailer adding its own brand to the product (such solutions include WCG’s VOBphone wholesale product).
- Wholesale VoIP Call Termination — If a VoIP provider is offering either inbound or outbound PSTN connection services to its users, it must acquire call termination from PTSN carriers. Such services may be acquired directly from the carrier, or through a wholesale “minutes trader”.
The Australian VoIP services market had an offbeat 2006: in some ways, it has changed greatly in the last year; while in other ways it is standing still.
There has been continuing and rapid growth in the number of users, and the “whitebox” wholesale VoIP revolution has continued to drive rapid growth in the number of VoIP service providers. Perhaps driven by the increasing competition, we can also see more differentiation, particularly in the business market.
But what’s not changing is the financial basis of the VoIP services market. In the consumer market — more precisely, among providers offering Internet-based VoIP services to residential customers — the rapid growth in user base has not been matched by an equally rapid growth in ARPU, nor has it been matched by a proportionate growth in the number of customers signing up for paid VoIP services.
Freebies still dominate the Internet-based VoIP market, and are distorting both market economics and consumer expectations. The more demanding the consumer becomes (wanting robustness and high quality from the VoIP service, for example) the more expensive the provider’s service infrastructure will become. Yet as Figure 2 shows, the “freebie” accounts will outnumber paid VoIP services for many years to come.
Figure 2: Internet-Based VoIP Market Services in Operation (SIOs): 2004 to 2011
Internet-based business VoIP service providers also find it hard to generate revenue today, because there is a large provider population but only a relatively small customer base. (Note: business and residential VoIP services are included in Figure 2).
However, Market Clarity believes that during 2007, business VoIP revenue will outstrip residential revenue, a trend that will continue through 2011 and beyond.
That’s because the drivers behind the business VoIP market are considerably different to those which apply in the consumer market. Price is important — but a great many other considerations are also in play for the business user, including:
- Capex cycles (how long until the TDM PABX needs replacement?);
- Integration and process re-engineering (will VoIP help support other business process initiatives?);
- Total cost of ownership (how does a VoIP system stack up against a TDM PABX in terms of price/performance and value?); and
- Skills availability (can you find the personnel needed to maintain a TDM system in the long term?).
Over time, business drivers like these will become increasingly aligned with each other to make the VoIP services case more compelling to the business customer. While businesses will never outnumber individuals as VoIP users, business is already the major revenue driver in the overall VoIP and Hosted IP Telephony services market — generating over $150 million in the 12-month period ending in December 2006.
This compares to just over $30 million in the residential VoIP services market.
Of course, as the VoIP user base grows and users start making more calls, the residential VoIP market will grow in value — but at the same time, business VoIP use will also continue to grow.
Both of these will feed wholesale suppliers, the “third arm” of the VoIP services market.
Although wholesale services represent a relatively small revenue component in the VoIP services market, Market Clarity believes the emergence of various forms of “white box” wholesale services was a major factor in expanding the number of VoIP providers in Australia in 2006.
By simplifying and reducing the risk involved in launching a VoIP service, wholesale VoIP services encouraged providers to add VoIP to their portfolios — a value proposition which has attracted the attention of dozens of ISPs, who see VoIP as a means by which they can reduce churn
Perhaps more than anything else, the proliferation of different VoIP value propositions demonstrates that this has become a very crowded market in a surprisingly short time.
The revenues may be small today, but they will grow as the user base expands. The challenge for providers is to survive until the VoIP services market is stable. VoIP providers can’t live on excitement alone: in 2007, they will need information, planning, and execution.
- Internet services: Broadband and Narrowband subscribers and revenue from 2000-2011, for business, residential and wholesale services segmented by technology and speed.
- VoIP and Hosted IP Telephony services: Internet-based, Private-network based and Hosted Voice service subscribers, revenue, and minutes for business, residential, and wholesale services segmented by technology and speed.
- Fixed Voice services: Coverage includes basic access lines (ISDN, ULL and LSS), voice minutes, and revenue for retail (residential and business) and wholesale services.
- Mobile Voice and Data services: SIOs, minutes of use, payment type, customer type and ARPU for Australia’s retail and wholesale cellular markets.
- Data services: Wholesale and retail subscribers, customers, revenue and average service yield for IP/MPLS, Ethernet, Dark Fibre, Frame Relay, ATM, Leased Lines and ISDN.
Shara Evans, CEO of Market Clarity, will be speaking at:
- CIO Magazine: Unified Communications: Accelerating Business Transformation through Connectivity, Collaboration and Control – 14 February (Sydney ) and 16 February ( Melbourne)
- Australian Telecommunications User Group: 2007 Annual Conference – 7-8 March (Sydney )
- Terrapinn VoIP World Australia 2007 – 24-25 July ( Sydney)