Forrester Research: Incumbent Telcos Set To Win Europe’s Consumer VoIP War

What’s The Hype About? Only 1% Of Europeans Use VoIP Frequently To Make Calls From Home

According to industry hype, voice over IP (VoIP) pure plays like Skype and Vonage are on the verge of transforming and taking over the telecom industry. But Forrester Research (Nasdaq: FORR) believes that pure plays have no chance of dethroning proactive European incumbent telcos from their consumer fixed voice market leadership. Forrester thinks that VoIP pure plays will fail to survive as independent companies because they don’t offer a truly disruptive and transformational service — and they lack key advantages that the incumbents have. Telcos like British Telecom and France Télécom can continue to dominate future voice markets as long as they maintain their proactive and innovative VoIP response strategies.

“VoIP adoption will certainly help trigger sweeping changes in voice pricing models across the industry. However, that will most likely not lead to the major industry disruptions foreseen by VoIP pure play proponents — at least not on the retail side of the business,” stated Lars Godell, Principal Analyst, Telecom, at Forrester Research, and author of a recent VoIP study. “Forrester sees the consumer VoIP hype as wild exaggerations, reminiscent of the UMTS hype, dot-com, and telecom bubble days. The ‘no free lunch’ principle applies: Someone will always bear the costs of delivering the service. Voice calls will never be absolutely free, but the hype — and the pure plays — do teach some important lessons. To avoid the predicted upcoming telecom power shift, incumbent telcos must fully wake up and restructure their business, including their innovation activities.”

It doesn’t help much if a new technology is very disruptive in a market that will remain rather small for years to come. Godell: “VoIP isn’t really mature today. It faces a range of problems, including immature SIP technology, unresolved regulatory issues, and a lack of industrial-strength and scalable public network management systems. Consumer apathy and slow broadband uptake will also hold VoIP back.” As Forrester reported recently, only 1% of Europeans use VoIP frequently to make calls from home, whereas 70% of consumers doesn’t even know what VoIP is.* Coupled with relatively low broadband take-up, European consumer VoIP adoption will move slowly. Forrester predicts that VoIP will capture 30% of the residential fixed voice market in 2010 and won’t approach 100% until 2020.

In addition, the incumbent telcos are fighting back: Proactive incumbents like Telecom Italia, France Télécom, and Portugal Telecom launched flat-rate PSTN calling even before VoIP pure plays became a threat, reducing VoIP’s threat to their core PSTN business. Since then, a majority of incumbents have introduced various flat-rate pricing plans, further reducing their vulnerability to VoIP pure plays. Smart incumbents are also tearing down technology silos and focusing on user needs, not technology, further undermining VoIP pure plays’ key selling points. And by launching their own VoIP services, ADSL bundles, and enhanced functionality services, incumbents are fighting the pure plays on their own turf.

VoIP Challengers Will Lose Out; Incumbent Telcos Will Win

“Incumbents have many advantages — if they respond in time and with force,” Godell noted. “They are well used to fighting low-cost voice competition: BT has been doing that for 23 years. The incumbents have significant advantages in brand name, scope (bundling), scale, customer base, billing, and financial strength over essentially all other challengers, although they do need to improve their customer satisfaction ratings. And while big global portals like MSN, AOL, Yahoo!, and Google have recently made acquisitions and service launches around VoIP and IM voice chat, they will never be able to claim national consumer VoIP market leadership in any Western European country.”

Forrester believes that VoIP pure plays will fail in the new telecom world. Falling short of true disruptive potential, lacking all the important advantages of incumbent telcos, and facing more intense VoIP competition from all comers, VoIP pure plays like sipgate, Telio, Gossiptel, and Vonage will not be able to survive for long as profitable free-standing companies. Skype’s investors were lucky to be able to bail out to eBay before the consolidation game kicked in. In Norway, that game has already delivered more than 20 VoIP pure play casualties in less than nine months. The best the pure plays can hope for is to be acquired — or to license their often interesting technology and service concepts.