Is VoIP a Steady Investment?

By  Jessica Rivchin — June 01, 2006

The Vonage IPO last Wednesday wasn't the only dip that Internet-based phone services, known as VoIP (voice over Internet protocol) have seen in recent days. VoIP use fell 7 percent in Q106, according to the Infonetics Research report "Service Provider Next-Gen Voice and IMS Equipment," though the report did go on to predict that overall use will continue to strengthen. Worldwide, service provider revenue for next-generation voice and IMS (IP Media Subsystem) equipment stands at $722 million. And despite the first-quarter drop, numbers are up a whopping 48 percent from Q105, and analysts seem confident that VoIP will remain strong in the consumer, SOHO (small office, home office) and enterprise sectors.

So why the stumble? Stephane Taral, directing analyst at Infonetics Research, largely attributes it to the natural ups and downs of the market. "Typically, the first quarter is always weak. So, because the quarter was not as weak as one could have anticipated, there is an indication that the industry is growing nicely. Some segments went down, some segments went way up ... so it's not as dramatic as it could have been."

The fourth quarter is usually strong, explains Taral, because companies are trying to spend the remainder of their annual budgets. As a result, most markets end the year with a strong fourth quarter. "When things start again it takes a while to actually get back on track. Overall, if you compare the first quarter of 2006 with the first quarter of 2005, it's either flat or growing, so that's a very good sign."

Infonetics predicts that VoIP growth in both residential and SOHO markets will continue to grow over the next few years, driven by media gateways and softswitches, with the total next-gen voice market peaking at $6.2 billion in 2009. With skyrocketing numbers like these in the SOHO and consumer markets, could a similar boom in enterprise use be close behind? Taral does not see a direct correlation between SOHO and consumer use versus enterprise use, but he feels strongly that VoIP is definitely a good thing for big businesses.

"On the enterprise front, adoption [of VoIP] is gaining momentum because we are at the beginning of a new cycle of technology," says Taral. "We can have much better VoIP equipment than we used to, even two years ago. Today, because of the simple fact that you have the VoIP platform in place, it just makes sense to have the technology. It's very appealing because it has a lot of rich features and is cheaper than a traditional telephone. For enterprises, the major thing is cutting costs."

Traditional phone companies won't be completely replaced by VoIP service providers, Taral goes on to say, though they will have to really struggle to stay afloat. "Phone companies like AT&T and Verizon have VoIP offerings for both residential and enterprise subscribers. They're losing lots of traditional phone lines and are responding aggressively with VoIP offerings -- and the competition is very fierce. There are ways to bundle services together in order to offset the decline of traditional phone lines so that these companies can eventually recover. [The phone] companies are investing billions in reinventing their infrastructure so that they can be on top of possible competitors."

Though none has yet made a household name for itself--as consumer-courting Vonage did, spending an astounding $331.7 million on marketing in 2005 and Q106--the carriers' enterprise-focused competitors include companies such as CommuniGate, VegaStream and NetMagic, among others.

With traditional phone companies scrambling to offer competitive features, it seems safe to say that VoIP, despite its recent drop, remains secure its status as a significant and burgeoning method of communication for both consumers and enterprise customers.


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