Vonage: recipe for success?

[David Farber <dave () farber net>]

Begin forwarded message:

From: Dewayne Hendricks <dewayne () warpspeed com>
Date: November 2, 2004 7:10:48 AM EST
To: Dewayne-Net Technology List <dewayne-net () warpspeed com>
Subject: [Dewayne-Net] Vonage: recipe for success?
Reply-To: dewayne () warpspeed com

Original URL: http://www.theregister.co.uk/2004/11/02/vonage_voip/

Vonage: recipe for success?
By Faultline (peter at rethinkresearch.biz)
Published Tuesday 2nd November 2004 11:05 GMT

Analysis Say Vonage to anyone in the communications industry and they 
say: "Oh the VoIP people." Ask if they'll make it, and you may get 
responses like, "well the RBOCs hate them and they have hundreds of 
lookalike competitors."

The salvation of Vonage is that when you ask anyone to name one of 
these 20 or 30 start ups that have copied the Vonage model, they 
usually hesitate, stammer and go to look them up. Perhaps being first 
into a revolutionary market, even if you don't have much in the way of 
breakthrough technology, may well be enough.

But the headline numbers say everything about the company that 
virtually invented paid consumer VoIP services across America. In 2002, 
the year it launched, it acquired just 7,500 customers. A year later it 
had 85,000. Now it boasts 300,000 accounts, each paying roughly $30 a 
month, which makes its run rate for revenue around $108m for a rolling 
12 month period. With 600 staff that only gives them a revenue per 
employee of 180,000, pretty low for a technology company, but it is 
partly explained because it is currently ramping revenues. It is also 
ramping staff and said this week it will add 600 more employees between 
now and Q1 2005.

For those that aren't familiar with the Vonage proposition, it is 
simple. Consumers sign up for unlimited calls across the US and Canada 
for just $29.99 (it's just gone down to $24.99) and select some kind of 
self installable SIP devices. It can sit in front of existing phones 
and attach to the broadband line or it can be a softphone (a phone in 
software) that links through a PC or even a Linksys router with special 
Vonage software.

SIP stands for Session Initiation Protocol and has been endorsed by the 
IETF, the 3GPP, the Softswitch Consortium and by Cable Labs' Packet 
Cable group, to name but a few and it originally hailed from work at 
Columbia University and came to fruition almost a full five years ago.

SIP is nothing more than a way of packaging voice into internet packets 
so that all the data is there to carry out basic telephony functions 
through proxy servers and softswitches. It needs to identify the type 
of traffic, the caller, the person being called, carry the number of 
the caller, re-route to new addresses, negotiate what to do at 
termination, offer authentication where required and handle call 
transfers.

More advanced services such as conferencing, and fax delivery need to 
be supported and all of this function needs to be described in a way 
that internet services will understand. It's a protocol that the big US 
local phone companies, the RBOCs, wish would just go away. But they 
have increasingly taken the view that if you can't beat them, join 
them, and begun offering similar, competitive services.

But without Vonage and its ilk, it would just be a case of replacing 
one way of delivering phone calls for another, with no material change 
in the prices. If that is Vonage's role, just to keep the RBOCs honest, 
what happens to it after it's achieved that and scared voice carriers 
into offering voice pricing that's more in line with its current cost.

From the horse's mouth

We got a chance this week to ask Louis Holder, EVP of product 
development at Vonage. Holder was one of the first three employees back 
in 2001 when the company got its first round of funding and spent a 
year building out its offering.

"The key to the service is the web dashboard that we give to consumers 
and SoHo customers to configure their service," he says. "It gives a 
customer all the things that advanced telephone systems can do, which 
were usually denied consumers, like viewing your call record including 
incoming as well as outgoing calls, managing voice messages, routing 
calls to your cellphone." The service also allows a customer to control 
billing online for international calling and pay bills online.

Holder reckons that between 70 per cent and 75 per cent of Vonage 
customers drop their original phone line and don't bother to keep a 
line from the local telco. "We know that because they port their number 
to us. Most people buy a little $40 uninterruptible power supply to 
ensure the line is safe from power outages for things like emergency 
calls. Others use a mobile as a backup or both."

So the days when VoIP was an extra and never hurt the incumbent telcos 
are well and truly over. Holder talks us through the early days: "When 
we started we just had a single softswitch where all calls had to route 
through, and just one or two exit gateway back into the PSTN. We just 
had to negotiate gateway rates with local telecom suppliers based on 
volume. Now we have 25 US locations and have just bought a dedicated 
line to the UK and have a gateway into the UK PSTN through a local 
telecom company there." He won't say which telco this is through except 
that it's not British Telecom the local incumbent. Local incumbents 
tend not to want to talk to Vonage.

At the moment the UK service is only for US clients to use to call back 
to the US for its current cheap rate of 3 cents a minute. Later UK 
subscribers will be invited to join the shift to Vonage VoIP.

"Until now we have transported our overseas traffic as normal analog 
voice. The problem was the quality of the call when it was carried over 
the international internet. It just wasn't good enough. With a 
dedicated line we can ensure that there is enough bandwidth for our 
international traffic, then we can offer a flat rate which includes 
international dialling. But right now we just have to negotiate 
discount rates for termination in each country, and pay for the 
traffic.

"Once we have learned a little from having this line in the UK, we will 
branch out into Europe. That will be early next year at the latest, 
perhaps later this year." Vonage has to put up a UK operation, built a 
support desk, add a softswitch and gateway, and then put together a 
marketing campaign, but it looks like it will sign its first customers 
in the UK inside three months.

Wi-Fi future

In the meantime on its home soil it is about to try shifting its calls 
to hotspots and wireless LANs, says Holder.

"We have Beta tests going with a wi-fi phones and people already use 
our service from Hotspots with a laptop or a PDA if it has the right 
software on it. We've put out a few dozen wi-fi phones, from about 8 
suppliers so far. We want to see how each of them deals with voice 
compression and how they fool the wi-fi base stations into giving the 
phones sufficient bandwidth. We'll pick a few to partner with in the 
first quarter of next year and roll them out. And when WiMAX is ready 
we'll offer a service using that too."

[snip]

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