Has the VoIP Service Provider Bubble Burst?

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Back when VoIP Supply was started in 2004, I remember every service provider I spoke with was going to be the next Vonage. Sure, not all of them were going to grow to be that big, but I thought maybe a handful would make it. Two years later, none of them have made it to the status of Vonage. In fact, according to a project by My VoIP Provider, 85 VoIP Service providers have gone belly-up since last October. Now none of them (with the exception of AOL) were “big names”, but with almost two VoIP Service providers going out of business per week, it is inevitable that at some point in the near future we will start to see larger names fall.

Earlier this year, I had an interesting conversation with a Vonage Executive who told me that when Vonage was offering their wholesale service option, he would take 10% of the customer’s first year subscription projections were and that is what they would hit (if they were lucky) over their first two years. He stated that this was true even for those with modest projections. Now I do not feel sorry for any of these VoIP Service providers. Why? Because as a group, they are doing it to themselves. VoIP start-ups, in a desperate attempt to gain market share from more established players, sold on price alone. They battled each-other to become the low cost leader and in doing so found that scaling their business on low margins, no brand name, and little capital to be nothing more then a lose-lose proposition.

If the average American is spending $75 a month on phone service, do you really have to discount down to, say $14.99 or $9.99 per month to get them to switch? If you applied this line of thought to say cars, people would say you are nuts. Vonage has slowly lowered their pricing because they could, not because they had to in order to compete. Regardless of their offering better pricing to keep a customer (and while I do not have their infrastructure costs) I believe Vonage only lowered their costs as their economies of scale grew. I pretty sure they would not have survived had they started out at $24.99 per month and not $49.99.

This un-neccessary price reduction is not unique VoIP Service Providers. It seems that VoIP Hardware vendors, especially IP PBX vendors, are battling themselves to see who can go out of business first. The IP PBX that cost you $45,000 a few years ago, can now be found for as little as $499.99. Now I know Asterisk is free, and that must of the low cost systems are built off of Asterisk, but if they match a Cisco, Nortel, or Avaya in features, should they not be in the same universe when it comes to price? Would a company not be happy paying $20,000 today for a PBX with more features and functionality then the one they paid $45,000 for just a few years ago? I think they would have, but it is too late. Too many have come in with a low cost strategy, and with Asterisk, just about anyone can become an IP PBX vendor.

I believe very soon, you will see a number of IP PBX vendors belly-up. But hey, they did it to themselves…