The beleaguered telecoms industry has another item to add to the list of forces undermining its voice revenues. Voice over internet protocol (VoIP) has been identified as the next revenue killer to attack this sector. In the US, people are talking about how IP is about to hit the fan.
Its significance cannot be ignored and it raises the question whether the telecom industry is heading for another structural dilemma.
VoIP now has a firm place next to regulatory issues, 3G and mobile phones even though this latest threat has been around for a decade. VoIP has mainly been used within the circles of computer fanatics and, in simple terms, is about making voice calls over an the internet. According to Roger Appleyard, senior credit analyst for telecoms at ABN Amro, fear of this intruder is being kept under control as mass revenue loss will not be an issue in 2004. But "beyond 2004 it will have an impact on credit profiles of telecommunication companies," he says.
Various markets are already responding. Andrew Entwistle, telecoms analyst at New Street Research, says it is having a varied effect on each market. "We expect VoIP to have a material impact in the US and in Japan," he says. "However we see a different environment in Europe, missing the ingredients for a rapid migration to mass market VoIP that exist in the US and Japan. In Europe at least, VoIP is merely one of several factors which are undermining the fixed-voice market."
Among other things, more competition and accelerating fixed to mobile substitution are major forces acting against fixed-voice revenues. VoIP is sometimes presented as a bigger intruder simply because of its higher profile in Japanese and US markets.
The European environment is less fertile for VoIP growth for a number of reasons. "VoIP will have more of an impact in Japan and the US than in Europe due to differences in interconnect regimes, dynamics of broadband and the state of traditional voice markets," says Entwistle. Yet the potential of its impact on traditional revenues should not be ignored. Appleyard says: "Technology is not geographically biased so the fact that VoIP is already having an impact on US and Japanese markets is a sign that it is working."
Tactical move by BT
Despite VoIP's sluggish impact in Europe, BT has already made a move into mass market VoIP. Anargyros Garyfalos, research engineer for Btexact Technologies, says that most data suggest that VoIP will be the heart of future enterprise communications. "The issue is not if an organization will benefit from the adoption of VoIP, but by how much," he says. Although BT has made its opportunistic move to counteract any structural risks posed by VoIP, other companies are content to wait and see. "We see BT's announcement of its Broadband Voice product as an interesting and aggressive tactical move," says Entwistle. "It will certainly annoy NTL and Telewest, although they can fairly easily match the BT offer if it appears to be winning their customers."
Danish telecommunications company TDC has also admitted that its revenue has been suffering from this technology. According to credit rating agency Moody's, this may be a sign of things to come. "The Nordic market in Europe is the one which is most likely to provide an indication of the importance of VoIP," says Aidan Fisher, senior analyst at Moody's. "These countries tend to have the highest PC penetration in Europe."
Retail market obstacles
US carriers such as the residential VoIP provider Vonage have already started targeting the retail sector. But retail markets differ from country to country. "Current web VoIP prices are only cheap if you are a fairly heavy user, prepared to buy a large bundle of call minutes," says Entwistle. "The minimum Vonage monthly charge is over twice the average call spending of a European household." Adoption of VoIP in Europe will remain largely confined to the business market until there is an increase in internet use.
At the moment, VoIP's significance is recognized but it is yet to have an impact on the prices of securities. "Theoretically, VoIP is a fantastic idea. Realistically, it only works economically if scale is achieved," says Appleyard. "Mistakes were made during the dotcom period and investors are reluctant to invest unless they have evidence of mass appeal and a realistic business model."