Voice over IP (VoIP) has gained significant momentum in recent years and now has a prominent place in the mobile ecosystem, forcing mobile network providers to take a different stance towards this technology.

The changing bargaining power

While mobile voice still remains the cash cow for network carriers, in the EU in particularly there are signs of stagnation and growth is now primarily driven by data revenues and the sales of Smartphones. The need to upgrade text and voice users to Smartphones and data plan deals has shifted the balance of power amongst the forces that define the competitive landscape in the mobile sector.

To demonstrate this point, consider the UK market. Not so long ago, major network operators were considering not stocking Nokia’s flagship smartphone, the N97, in a protest against the company pre-installing Skype on the device¹. However, attitudes have changed and so has the competitive rivalry. It is a reoccurring subject in this blog, that consumers today are not just buying the latest handset based solely on its features and functions, but instead are buying the experience provided by the mobile ecosystem². With this change in consumer preference and with Skype appealing strongly to profitable smartphone users, network operators have bowed to the inevitable and embraced mobile VoIP (mVoip) by allowing handsets to be pre-installed with this application and also allowing Skype calls over their 3G networks.

The allure of Skype

Moreover, Skype seem to represent the evolution of Internet calling (VoIP) as described by Morgan Stanley in their latest Internet Trends report³:

 “VoIP = Consumers Want to Chat (via Voice + Messaging + Video) via Wired + Wireless Internet”

Not surprisingly, this definition also reflects changing communication patterns that go beyond the standard voice+sms offering of mobile network providers. Skype, with its vast customer base (almost 700m registered users), seems to tap remarkably well into that market⁴. The key advantage here is how adaptable VoIP is to consumer trends and the agility of this technology – consider, for example, Facebook and Skype talks on potential synergies, such as Video Calling⁵or Skype TV widgets.

Data collected by GfK Tech Talk⁶also verifies an increased popularity for VoIP, with 43%of the UK internet population saying that they are making internet calls (VoIP) while at home or on the move, using a range of different devices.

Internet calls – device compatibility

The same research also verifies that VoIP is a converged service and, although the vast majority (89%) of users are using their home internet connection to make calls, a large proportion are also using mVoip through mobile networks over 3G (31%) and Wi-Fi Hotsposts (29%). In all cases, Skype dominates the category.

VoIP providers used by connectivity type

However, although the data identifies that mVoIP is growing and that some customers are switching from operator provider voice services to mobile Internet calling, it is too early to say that there is a serious incumbent displacement taking place – 1 out of 3 VoIP customers have not used the service in the past week. The threat is also minimised by the fact that VoIP quality over 3G is currently inferior to GSM calls.

VoIP usage by different call types

mVoIP market is maturing

Nevertheless, there is indisputably a certain maturity in the VoIP market and big Telcos and IT companies are starting to invest in the technology before they become victims of their own markets. Consider Telefonica, for example, which recently acquired Jajah and started offering a mVoIP service in Europe⁷or Microsoft, which recently bought Skype for an ‘eye watering’ £5.2bn deal⁸ .

In addition, with the upcoming advent of 4G (LTE/WiMax), network carriers are hoping to recoup voice revenues by offering “best in class” mVoIP (voice/chat/video) service, which also has the potential to pull increased fixed-to-mobile call substitution. However, Skype over 4G will undoubtedly also offer an improved mobile internet calling experience and it has to be seen how network providers will overcome the leading provider’s first mover advantage and by mostly free service , and gain a profitable prominence in that space.

Conclusion

 In all cases, VoIP is here to stay and there is much more revenue to be generated from voice, chat and video data.  The risk for network providers of cross-cannibalising their voice business is probably smaller than the risk of losing voice revenue to alternative data suppliers (Public Wi-Fi, Home Broadband, etc.). The key for the successful monetisation of mVoIP will be predominantly around the structure of the new 4G data price plans, as charges for carriers’ internet calling will need to compete with the “freemium” business models already available out there.

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References:

1. Omio (1997) Orange And O2 Boycott Nokia N97 Over Skype Integration
2. GfK TechTalk (2011) Mobile Ecosystems
3. Morgan Stanley Internet Trends (2010)
4. Voice and SMS over LTE (2010) Video calling over LTE brings promise of fresh revenues
5. Bloomberg Businessweek (2011) 
6. GfK NOP Omnibus data (April 2011)
7. TechCrunch (2011) Jajah Now Powers Low-Cost Long Distance For German O2 Subscribers
8. BBC (2011) Microsoft confirms takeover of Skype

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Tags: Facetime, , Internet calling, Jajah, mobile networks, mVoIP, Sipgate, Skype, VoIP, Vonage