EDITORIAL: Succeeding With VoIP

Every month it seems another major telecom or information services company enters the VoIP market—the latest being AOL. What strikes me is that it's easy to create an entry strategy, and many have done so; but it's difficult to create a winning strategy, and almost all haven't. Here are my top three considerations for succeeding with VoIP.

1. Sustainable Business Model

There is a rule of thumb in the telecom industry: you can't succeed for long if you are only a one-trick pony. No retail wireline carrier has ever succeeded with a data-only service, and my assertion here is that no one can succeed with a VoIP-only retail offering.

OK, Vonage, the VoIP industry leader, has reportedly created 500,000 customers after two years of operation. The No. 2 industry leader, AT&T's CallAdvantage, has fewer than 60,000 customers; and by my estimate, in third place, Verizon's Voice Wing is in the 20,000 customer range. The other 500 or so U.S. VoIP-only operators have customers only in the thousands. Either No. 1 Vonage knows something about VoIP marketing that others don't, or maybe the others fail to see the ROI on massive advertising, given today's churn rates.

Bottom line: As highlighted in previous editorials, if you are a VoIP-only provider depending on someone else's broadband service and avoiding legislative and regulatory mandates (E-911, USF, CALEA, taxes, and more), your business model is not sustainable. And if that's not enough, the owners of the broadband pipes are out to get you. Note: Most ILEC customers can't subscribe to broadband DSL without also subscribing to switched voice, and in March the FCC upheld this ILEC practice. Cable is likely to follow this bundling strategy. Keep in mind, it worked for them with the bundling of ISP service with Internet access. Most cable ISP service is free with broadband access. If you want AOL, go ahead and pay the extra $20 a month; few have.

So what's the take-away? There are only three sustainable VoIP business models: if you own the access arrangement (cable operators and ILECs); if you are a VoIP wholesaler supporting access holders; or if you are a CLEC, using digital access or leasing T-1s or T-3s from the ILEC and serving business-only customers.

2. Look Beyond the FCC

When it comes to tracking developments affecting VoIP, most VoIP providers have their heads in the sand, not their ears to the ground. They listen and watch the FCC and state PUCs and believe they are on top of developments. I have heard countless comments saying, "FCC Chairman Powell doesn't believe that VoIP should carry all of the mandates of the circuit-switched voice world." Well, Powell is gone and Kevin Martin is in. Regardless, the FCC gets its marching orders from Congress and the President. In other important areas, local and state governments are ultimately in charge. Take the three big VOIP issues:

• CALEA: Congress passed CALEA way back in 1994, and many issues are not well defined regarding VoIP and lawful interception. The Patriot Act is scheduled to sunset this fall. It is highly likely that Congress will pass legislation that clarifies CALEA and picks up the telecom mandates, should the Patriot Act fall into limbo.

• E-911: The FCC can call VoIP an interstate service that falls outside the jurisdiction of state regulation. But that doesn't mean VoIP providers aren't going to end up in court over E-911 failures. It's already happening in Texas.

• Taxes: If you are looking at the FCC for VoIP tax guidance, you are looking in the wrong place. Most of the 20 percent or so added on by taxes, surcharges, and fees comes from local government mandates.

3. Industrial-Strength OSS/BSS

The single largest flaw in a VoIP service provider's operation is the lack of industrial-strength OSS/BSS. As a service provider, you can't take convergence or the VoIP bundle to the next level or satisfactorily meet CALEA or taxation requirements without an upgrade to OSS/BSS.

For example, most cable companies offer VoIP over cable modem. But to take that VoIP offering to the next level, it has to be integrated with data and entertainment services. The problem is that most cable operators deliver their customer's voice call to a wholesaler who provisions the service (telephone number assignment), gathers the call CDRs for billing, supports CALEA, enables E-911, and all the rest. Yes, it's a fast way for a cable company to offer voice—but without full control of OSS/BSS, it's not enough to move VoIP to the next level.

If you want to know more about next-generation OSS/BSS for VoIP, plan to attend TeleStrategies' Billing and OSS World show in Philadelphia, May 3-6. If you need to understand CALEA compliance for VoIP, plan to attend ISS World, May 23-25, in Washington D.C. If you need to understand VoIP taxation, Telecom Taxation 2005 is scheduled for June 15-17, also in Washington D.C. For more information or to register, go to www.telestrategies.com.