VON Highlights Disruptive Tendencies of VOIP

Current business models for voice no longer work, says an analyst at the VON Europe show.

LONDON—Traditional telecommunications providers, tied to their lucrative fixed voice services, are in danger of being swamped by innovative technology emerging from the fast-paced voice-over-IP sector, an analyst said Tuesday at the VON Europe conference here.

Arguing that fragmentation is now the name of the game for telecom services, James Enck, global telecom strategist with Daiwa Securities SMBC Europe Ltd., said consumers are moving away from traditional voice services to Internet communications tools such as instant messaging and social networking. These trends shouldnt be dismissed as teenage fads, Enck said—they point the way to a world where the current business models for voice no longer work, which could mean trouble for telcos that dont adapt fast enough.

"The pace of development in voice is daunting, and the skills needed are coming from outside the traditional telecommunications world, often from companies with fewer than 20 employees," Enck said. For established telcos, "it could get ugly."

Encks comments were part of a wide-ranging program that covered everything from the nuts and bolts of linking 3G and IP networks, to warnings of VOIP spam and worm attacks.

At the heart of the current uptake of VOIP is the spread of broadband, Enck said. Wide broadband penetration in the United States led to the launch of the Vonage broadband phone network, a consumer- and small-business network that routes calls from standard telephones over the Internet. Daiwa estimates new European broadband connections grew by 74 percent last year, with some European countries now at about 30 percent broadband penetration. Daiwa expects growth to surpass 50 percent this year.

This poses a threat for traditional telcos, as businesses and individuals are no longer reliant on their networks to communicate. "As the Internet takes root, telephony declines," Enck said.

He said 71 percent of U.S. teenage Internet users spend 166 minutes a month on Weblogs, two-thirds the number of minutes teens spend on the phone. Users spend two hours per month on social-networking site Friendster, and the addition of voice services could easily extend that, he said. AOL recently added a social-networking component to its ICQ messaging program. Popular new consumer-oriented services such as dodgeball.com and Xfire could add voice. "Voice can be embedded anywhere," Enck said.

Consumers are already signing up for VOIP systems that challenge traditional ways of looking at voice, and businesses will follow, Enck said. Take Skype, for example. The company says its free peer-to-peer VOIP application has been downloaded more than 13 million times. Since Skype doesnt channel individual users through a central server, it has no customer acquisition costs—users connect directly to one another. Rather than the $200 to $300 annual average revenue per user the telecom industry is used to, Skype only needs to make a Yahoo-like $9 or so per user through selling value-added services, said Skype CEO and co-founder Niklas Zennström.

"Voice revenues as a proportion of total telecom revenues will go down," said Zennström in his keynote speech on Tuesday. "Telecom companies can see this as a problem, and try to protect their voice revenues, or they can see it as an opportunity to sell more broadband and come up with other services."

Being told their business models were obsolete clearly unsettled some in the audience of service providers. "You hear something like this and you wonder what in the world is going on," muttered one attendee.

Next page: Nortels demo.