VoIP Pure Plays No Threat to Carriers

Can two million customers of Magic Jack’s bargain basement VoIP calling be wrong about consumers focusing on price for their residential wire-line service?

Although it saves consumers what the company calls an average $1,000 a year, the growth of MagicJack, and of other pure plays like Skype, is not rapid enough to have a significant impact on operators pitching home services bundles that include a VoIP component.

The big carriers “don’t like to say it because it looks like bullying their little competitors!” claims Tom Nolle, president of CIMI Corp., but “cable is their only real threat in voice.”

His comments might explain why AT&T Inc. (T), for example, declined to respond when asked if the upstart VoIP providers are impacting the carrier’s sales of residential bundles that include a voice component.

Today, many operators offer bundles that feature a TDM-based VoIP service. Others, such as AT&T, have begun adding VoIP to their TV and Internet double plays in place of older standalone IP-based calling services.

“What [the pure plays] offer is not a replacement for full residential phone service,” claimed Jeff Heynen, directing analyst for broadband and video at Infonetics Research.

The Two-Million Mark

Residential users have proven resistant to changing their voice provider, even with the lure of savings, largely because they don’t see cost alone as the primary factor. They may add a standalone VoIP service for some calling, particularly international, but typically don’t replace their current provider with the standalone offering.

“Incidental calling can flow off into these new models but the average user just doesn’t find phone bills high enough to take any risks for savings,” says Nolle. According to CIMI Corp.’s analysis of FCC data, the average residential bill is less than $60 per month. Even Vonage at $24 doesn’t attract many switchovers.

Carriers lose more lines when customers give up their landline all together in favor of a mobile phone.

Nevertheless, Magic Jack has made a name and a customer base for itself by offering what it calls “free” local and long distance calling within the U.S. and Canada. It charges a $34.95 flat fee for the first year (not month) for the device, and $19.95 for each successive year. The company, which also offers international calling, said at the recent Consumer Electronics Show that it has passed the two million customer mark.

AT&T, meanwhile, began rolling out U-verse Voice one year ago to go with its IPTV and Internet access service and offers features such as a single voice mailbox accessible from any landline phone, mobile device, or PC, borne of the integration of the carrier’s various platforms. The service also offers U-verse Central, an online portal to manage calling settings and to view call logs.

One sector that might suffer as budget VoIP providers gain share is the pay-in-advance business, among immigrants with family overseas for instance. “I do believe these approaches eat into the calling card business as more and more people are using the pure play VoIP providers to make calls back to India and China, for example,” said Heynen. MagicJack and its peers could also slow the growth of Skype, “since they provide a flexibility (no PC required) that Skype doesn’t.”