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VoIP Continues Growth Curve Despite Hurdles

1/07/2008 02:00:00 AM Eastern

LAS VEGAS — VoIP continues to grow even though for many providers 2007 was easily considered "the worst of times."

The leading pure-play provider Vonage was raked over the legal coals, finally submitting to three costly patent settlements. Skype suffered a major service outage that kept users in the dark for several days, and SunRocket unceremoniously disconnected over 200,000 subscribers without any advance notice.

Yet despite the negative news, subscriber and revenue totals climbed steadily, thanks in large measure to advances by cable companies in rolling out digital voice services.

In the third quarter of 2007, VoIP providers added 1.5 million new lines, a growth of 12 percent vs. the previous quarter, according to the research firm TeleGeography. (Skype, which was not canvassed in the survey, claimed to have reached 245 million registered users around the world, including 20 million in North America.)

As of the third quarter of 2007, there were 13.5 million VoIP subscribers in the United States — an increase of 71 percent from the third quarter in 2006. Revenues have grown even stronger, up 92 percent in the past year from $712 million to $1.3 billion, according to TeleGeography.

Roughly 8 percent of online adults use some form of VoIP technology, according to Sally Cohen, technology analyst, Forrester Research. Indeed, 30 percent of VoIP users employ more than one type of service, she said. But while adoption has grown modestly and awareness is widespread, consumer surveys show interest in the service itself is flat, Cohen added.

The growth in VoIP services has been driven almost solely by cable companies, said Paul Brodsky, research analyst, TeleGeography. "Two years ago, the split between pure-play providers and cable was about 50-50," Brodsky said. "Today cable dominates the market. They have a stronger marketing position and a huge customer base, and the bundle helps too."

Cable firms account for 76 percent of all third-quarter VoIP subs and roughly $1.1 billion of its total revenue. Vonage, long the market share leader, has slipped to third in TeleGeography’s figures, behind market-leader Comcast and Time Warner.

Vonage, which significantly trimmed its marketing expenses in response to its legal setbacks, added 77,000 new subscribers in the third quarter of 2007, bringing it over the 2.5 million mark. "That’s nothing to sneeze at," Brodsky said, but it pales next to the 677,000 subs Comcast added in the third quarter.

Looking ahead, cable’s lead will only widen. By 2010, TeleGeography predicted, 83 percent of the roughly 24.2 million VoIP subscribers will use a cable-delivered service. Pure-play providers that do survive will thrive as inexpensive, second-line options for consumers, Brodsky predicted.

Growth in the residential space has been difficult thanks to the intense competition coming from cable companies, admitted Huw Rees, sales and marketing VP, 8x8.

"They are our biggest competition. It’s a large reason why we’ve shifted our focus from the consumer to the small-business market," he said.

The recent swell of bad news has not hampered consumer adoption, Rees added, but it has made investors wary of the technology.