Colin's Journal

Vonage has received a considerable amount of press recently for its VOIP telephone service. The offering is certainly very compelling: for $35 per month you get unlimited national and Canadian calls and your phone can have one of a selection of area codes (or even multiple numbers from different area codes). The only thing you need is a high speed Internet connection, which incidentally means you can run this US phone number from anywhere in the world.

The shake-up that this will bring to the already very competitive US phone market is significant. With 39% of all residential Internet connections in the US being broadband there is a large and growing number of people who can take advantage of this type of service. Residential pricing is going to continue to fall, so businesses offering this type of VOIP service are going to have to keep a very tight lid on costs to maintain profitability. Expect to see all billing being done on-line with simple price plans used to keep software complexity low. There will also be a significant drive by VOIP providers to target small to medium businesses where extra services can be used to differentiate against competing products.

It is hard to predict how well this model will work in Europe, an equally sized, but very fragmented market. The biggest challenge is going to be termination costs. In Europe calls to mobiles are not paid for by the owner of the mobile, but rather the caller (“calling party pays”). This means offering a flat rate for all calls will be difficult, because the costs incurred when calls are made to mobile phones are significantly higher than those made to a land line.

The difference in termination charges are daunting, according to Oftel the termination cost to a land line is approximately 0.5ppm (pence per min), compared to 5ppm for a mobile termination. US calls to European mobiles are usually charged at the same rate as landlines, which means that either carriers are subsidising international mobile calls with revenue from land line calls, or mobile carriers are charging less for international termination. I doubt that this pricing can be extended to cover calls from within a country, even if the calls are routed over the Internet to the US, so mobile termination is likely to be just as expensive for VOIP carriers as everyone else. With mobile penetration rates of 80% in parts of Europe (e.g. UK, Italy) will an offering of unlimited land line calls be attractive? If priced correctly it could be , especially if the offer extends to unlimited calls to most of Europe and North America.

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