Don’t jump into VoIP quite yet

Many executives and analysts within and close to the telecommunications industry see voice over Internet protocol communications (VoIP) as a major threat to traditional telecom firms' profitability. The idea is that people will use their Internet connections to carry on phone conversations and thereby cut the phone company out of the loop. But is this really the case?  

Mercer Management Consulting recently surveyed 1,000 consumers in the U.S. and U.K. and learned that the potential for Internet voice communications is indeed large, but only if these services are designed and marketed to consumers very differently than they are today.

Our research shows that the typical VoIP service of today, which is characterized by low cost as well as inferior sound quality and service reliability, appeals to a niche of highly price-sensitive consumers and technology geeks. However, the research showed that high-quality, fairly priced service offerings from established providers such as Internet service companies and mobile companies could capture as much as 30% of the residential voice market over the next three years--more than double the likely market share for the current low-quality offer.

For those communications service providers looking to position themselves to capture share in the home phone market through VoIP communications, our research raises several points to consider:

• Don't launch the service with inferior quality and reliability.

  Achieving standard public switched telephone network levels of sound quality and service reliability will increase the reach of the VoIP offer by more than 50%, or even greater in combination with an established brand. At the same time, established brands must be sensitive to the danger of damaging their overall image by offering a poor-quality VoIP service. Concerns about reliability are one of the key reasons why many consumers do not regard mobile phone operators as attractive home phone providers.

• Don't make low call charges the cornerstone of your offer.

  Below a certain point, most consumers are not all that sensitive to general call rates. Even the prospect of completely free calls to other subscribers of the VoIP service did not resonate with consumers in the study with regard to their choice of service. Most phone customers don't pay much for calls beyond their line rental charge these days. For instance U.K. users, who could possibly save money by using VoIP, are already well served by indirect access and carrier pre-select, which offer cheap calls with no compromise on quality.

• Be careful as to what costly features you incorporate in your offer.

  For example, the consumers we polled don't care about extra handset functionality and call management features. By contrast, CD-quality sound could expand the reach of the offer by as much as 30%. New services will take off only if the right players provide what consumers want, which is not the same as placing a big bet on shiny new technology. Remember interactive TV?

• Maximize the value of your existing customer relationships.

  Well-known brands that already provide a home phone or Internet service were seen by the consumers we polled as considerably more attractive as a provider of a VoIP service than new brands such as Skype or Vonage or, intriguingly, more than mobile service providers. Leveraging an existing business to cross-sell home phones looks attractive, especially for Internet service providers, whereas mobile companies may need to consider how they can build their brand acceptance as home service providers.

• Plan for local-loop unbundling and lobby for number portability.

  Consumers are much more sensitive to the fixed charge they pay (i.e., line rental) than they are to call rates. Companies that can provide multiple services through one phone line (for example, broadband Internet and a full first-line replacement VoIP phone service via "local loop unbundling") could look to reduce the combined monthly fee to the consumer, much as cable companies have been able to do. The sting in the U.K. is that consumers are less willing to switch their main "first line" if they cannot keep their existing phone number--hence, the importance of the regulator.

New VoIP providers may find the going easier in the U.S., where consumers are less sensitive to the hassle of changing numbers and equally keen on the idea of having a "universal" number. The challenge for traditional phone companies is to act now in order to develop a pre-emptive strategy that will protect their businesses. Acting now will allow these firms to avoid being left later with unpalatable options to stem a flood of customers to VoIP offers--options that would cannibalize their own revenues more than they would damage the competition. Traditional phone companies need to develop offers that will maximize defensive value while at the same time avoiding rocking the boat for today's loyal and valuable customers. As for new VoIP providers, the key for them will be structuring the right offer. 

Martin Kon is a director in Mercer Management Consulting's communications consulting practice and is based in New York. He can be reached at martin.kon@mercermc.com.