Executive Summary
This report was written to analyze the competition among the Voice-over Internet Protocol (VoIP) industry segment, especially as it relates to the relationship between Skype and AT&T and the competition between the VoIP market and the land line market. In analyzing this segment we found that VoIP is a growing industry in what has historically been predominately a land line telecommunication company such as AT&T.
The industry segment is faced with a rivalry type competitive market that is currently being influenced by federal government through the Federal Communications Commission (FCC). This agency is considering a new law (Network Neutrality) on the websites that would decrease the power of big telecommunications companies like AT&T. The segment may feel continued pressure from substitutes in the form of other retail segments, but this should not have a strong effect on the over-all competition within the industry.
The biggest difference between the competitors was that AT&T used traditional telephone, is run through a public switched telephone network (PSTN) and was much more expensive. Skype offered its customers VoIP, which, defined simply, was the transmission of voice traffic over IP-based networks. In other words, it was telephone via an Internet connection.
VoIP is expected to show constantly increasing growth rates in the near future. According to a report by Infonetics Research, the global VoIP services market had reached $15.8 billion in 2006, an increase of 66 percent over 2005, and was on track to triple to $48.9 billion by the end of 2010. Projected growth for the decade was in the area of 145-150 percent. However, VoIP’s market share in the overall global telecommunications market was still minimal. Led by a few major competing companies such as Comcast, Vonage, Time Warner, and Cox Communications, the telecom industry was worth more than $1 trillion in 2010. With a roughly 5 percent market share by the end of 2010, VoIP was still a small competitor in the industry.
A major opportunity for VoIP providers was to capitalize on the cellular market. Experts predicted that, by 2019, half of all mobile calls would be over IP networks. The IP connections would be available through VoIP applications that ran through a cellular device. Mobile VoIP applications are expected to reach 278 million users, generating a $32.2 billion profit. Along with the notion that consumers would increasingly look at expanded VoIP services as a motivator for adoption, many experts hinted at the idea that the growth of Internet telephony technologies would signal the demise of the PSTN.

Introduction1 It was March 10th 1876 when Alexander Graham Bell made the first telephone call to his assistant Thomas Watson1, his exact words being:
“Mr. Watson - come here - I want to see you.”
Today, we take basic telephony for granted, and it is priced like water or electricity. In the midst of the war for market share in a nearly mature telephony market, a tiny company located in Luxemburg began the process of revolutionizing the traditional view of what Alexander Graham Bell began two centuries ago. The name of the company was Skype, and by 2004 the industry was abuzz with what could potentially disrupt its collective long-held business model. Skype had successfully fused peer-to-peer computing (P2P) and voice-over-Internet-protocol (VoIP) to create a new standard for telecommunications. One year earlier, on August 29th 2003, Niklas Zennström and Janus Friis had released the Beta/test version of Skype, touted as “the free Internet telephone that just works.” What are the dominant economic characteristics of the VoIP Industry
The biggest difference is that traditional telephone companies such as AT&T uses, a public switched telephone network (PSTN) and is much more expensive. Skype offers its customers VoIP, which, defined simply, was the transmission of voice traffic over IP-based networks and primarily free on Skype-to-Skype communications. In other words, it was telephone via an Internet connection.
The reason VoIP has become so popular is that it offers cost advantages compared with traditional telephone networks. Most telephone user pays a flat monthly fee for local telephone calls and a per-minute charge for long-distance calls. In contrast, Skype users can communicate for free with other Skype users and pays only a small fee for long-distance calls to landlines.
Unlike telecommunications carriers such as AT&T, VoIP providers were not required to invest substantial sums of capital in equipment and infrastructure, given that they utilized what was already in place. VoIP providers were classified as information service providers and therefore fell outside the Telecommunications Act of 1996, which heavily regulated telecommunications carriers. The lack of regulation made it easier for companies to enter the VoIP market than to enter the telecommunications market.
VoIP is expected to show constantly increasing growth rates in the near future. According to a report by Infonetics Research, the global VoIP services market had reached $15.8 billion in 2006, an increase of 66 percent over 2005, and was on track to triple to $48.9 billion by the end of 2010. Projected growth for the decade was in the area of 145-150 percent. However, VoIP’s market share in the overall global telecommunications market was still minimal. Led by a few major competing companies such as Comcast, Vonage, Time Warner, and Cox Communications, the telecom industry was worth more than $1 trillion in 2010. With a roughly 5 percent market share by the end of 2010, VoIP was still a small competitor in the industry.
A major opportunity for VoIP providers was to capitalize on the cellular market. Experts predicted that, by 2019, half of all mobile calls would be over IP networks. The IP connections would be available through VoIP applications that ran through a cellular device. Mobile VoIP applications are expected to reach 278 million users, generating a $32.2 billion profit.

What does the five forces analysis reveal about the chances for profitability in the VoIP industry?3
1. Current sellers competing in the market * It's been good times to be a VoIP user, and bad ones to be Skype. * To a great extent, up until now Skype has had a lock on the consumer P2P VoIP market, and even though it’s recent move into business VoIP hasn't been universally well-received, things looked rosy for the company in that market as well. * But a trio of competitors makes the future less rosy for Skype. Yahoo, the well-financed startup Jajah, and the big Web site Lycos have all released no-cost or low-cost VoIP P2P solutions recently, attempting to muscle in on Skype.
2. Threat of new competitors’ market entry * Possibly the most intriguing of the group is the European-based Jajah. The service requires no client to download, and doesn't actually use a user's PC to make the call. Instead, someone logs onto the site, types in his number and the number he is calling, and the site calls him and connects him to who he wants to call. For the most part, the call goes over the Internet, although the last-mile connection uses the PSTN or mobile service. The calls are low-cost, but not free, and are comparable to Skype PC-to-landline rates. But Jajah does not offer free PC-to-PC calls, like Skype does.
So why should Jajah be a competitor in the VoIP market? In two words, money and pedigree. It has the backing of the big Silicon Valley venture capital firm Sequoia Capital (the companies won't reveal terms of the backing) and with that cash and pedigree behind it, it's bound to be a contender. And there's another pedigree that bodes well for the company as well; one of its board members is ICQ co-founder Yair Goldfinger.
Some say that it's not Skype, but Vonage that Jajah has in its cross-hairs, because Skype offers presence as well as free voice. But if people are looking for inexpensive phone calls, presence is a secondary consideration. In any event, both Vonage and Skype may need to worry.
3. Substitute products stealing market share * There was a time when Lycos was one of the biggest search engines and directories on the Internet. Today it's an also-ran. But that hasn't stopped it from entering the VoIP market with Lycos Phone, which like Skype and Yahoo's program, allows for free PC-to-PC calls. So how will Lycos differentiate itself? With a bundle of freebies. Users get free incoming calls from landline and mobile phones, 100 free minutes of PC-to-landline calls, and free fax and voicemail services. For those who care about such things, there will be movie trailers and music videos as well.
Will this everything-but-the-kitchen sink approach work? It's hard to know. For now, people appear to be looking for one primary thing from VoIP -- cheap phone calls. All the movie trailers in the world won't help. The free services will help, but in exchange for those, people will have to put up with banner ads, and that annoyance may be sufficient to chase people away.
4. Competitive pressures resulting from supplier---seller relationships4 * Microsoft’s recent purchase of Skype was generating talk even before the deal happened, with Google and Facebook mentioned as potential suitors. And while there’s still a good deal of hype around Skype, the move is still generating buzz in the telecom industry because of what Skype is and what it represents. Right now, Skype and VoIP serve different market needs. VoIP’s goal is universal voice access for everyone; Skype is about supplemental and/or free voice access to anyone who wants it. To date, the expectations between a subscription-based service (VoIP) and a free service (Skype) have also held the two technologies to different standards of reliability and quality. Having said all that, the distinction between VoIP and Skype could begin to blur soon, as new technologies shrink the gap between traditional telco VoIP and OTT VoIP.
5. Competitive pressures resulting from seller--- buyer relationships5
Providing efficient communication tools to buyers and sellers might inadvertently create a loophole in transaction: the buyer and the seller reach an agreement to do transaction outside eBay, so that the seller does not need to pay eBay the obligatory seller fee. To discourage this behavior, when the buyer downloads and installs Skype, a message displayed on one of the downloading pages warns the buyer potential risks involved in off-eBay transaction. In addition, because the installation of
Skype on the buyer’s computer is completed on the Skype site rather than the eBay site, buyers might accidentally forget to come back to eBay to finish the transaction.
This message reduces the chance that the buyer forgets to complete the transaction and prevents possible loss of business due to the installation process. This was the issue that arose when eBay owned Skype. This issue remains a problem whenever there is a partnership between a company like Skype and the principal owner such as eBay or the current owner Microsoft.

What are the Driving Forces of VoIP6
Cost saving advantages: * Cheap Long-Distance calls by rerouting through the internet * Companies save up to 90% on long-distance calls * Ease of network maintenance and expansion
Higher flexibility
Improvements by switching to VoIP
Features
The above driving forces are acting to increase the future market for VoIP. As stated above, VoIP is expected to show constantly increasing growth rates in the near future. According to a report by Infonetics Research, the global VoIP services market had reached $15.8 billion in 2006, an increase of 66 percent over 2005, and was on track to triple to $48.9 billion by the end of 2010. Projected growth for the decade was in the area of 145-150 percent.

Conclusions: * Is VoIP going to continue to grow? YES! * Will it replace standard telephony? Most likely! * Will the increase in subscriber base make the market more competitive? Yes!

The strategy that will be required for Skype to survive the impacts of the driving forces will be to join forces, to keep itself ahead of the competition, and to deter new entries into the market.

What are the Key Success Factors for this industry?7

The VoIP industry has low barriers to entry primarily due to the economics of providing the service and a largely unregulated environment. Further, the window of opportunity is shrinking for new technologies. It has taken about 120 years for the telephone to attain 94 percent penetration, while Internet reached 25 percent penetration in approximately 10 years. Skype, a peer-to-peer VoIP calling software has already acquired almost 10 million users among the 600 million users of Internet, within 12 months of its launch in August 2003.
The primary reasons for the growth of VoIP are the inherent advantages offered by this technology including:
• Short-to-medium term price arbitrage – by using IP telephony, an operator avoids paying interconnect charges, that are usually applicable on a call placed using circuit switched calling facility.
• Economics of the technology: a circuit switched call takes up approximately 64 Kbps of data, while a similar call made on IP telephony would take 6-8 Kbps of data.
• Value added services – IP telephony has the potential to enable many value added services such as IP multicast conferencing, telephony distance learning applications and voice web browsing.
• Cost Reduction. Flat rate long distance pricing is available with the Internet and can result in considerable savings for both voice and facsimile (at least currently). The sharing of equipment and operations costs across both data and voice users can also improve network efficiency, since excess bandwidth on one network can be used by the other, thereby creating economies of scale for voice services (especially given the rapid growth in data traffic).
• Simplification of existing networks: An integrated infrastructure that supports all forms of communication allows more standardization and reduces the total equipment complement. This combined infrastructure can support bandwidth optimization and a fault tolerant design. The differences between the traffic patterns of voice and data offer further opportunities for significant efficiency improvements.
• Consolidation of resources: Since end-nodes are one of the most significant cost elements in a network, any opportunity to combine operations, to eliminate points of failure, and to consolidate accounting systems is beneficial. In the enterprise, SNMP-based management can be provided for both voice and data services using VoIP. Universal use of the IP protocols for all applications holds out the promise of both reduced complexity and more flexibility. Related facilities such as directory services and security services may be more easily shared.
Further, an increase in broadband penetration and Wi-Fi usage is likely to provide a thrust to the growth of VoIP, as discussed below:
• WiFi Technology: The combination of VoIP and Wi-Fi is very beneficial for corporate, as this combination provides a common infrastructure for corporate communication. Wi-Fi networks make use of IP technology, which makes these networks an ideal fit for VoIP telephony applications. The synergy between VoIP and Wi-Fi technologies makes wireless voice applications less expensive, and easier to install and maintain. The increasing penetration of Wi-Fi, and the emergence of new SIP capable Wi-Fi devices, has brought the necessary mobility required for VoIP usage.
• Increase in broadband adoption: High speed Internet access is a prerequisite for effectively using the VoIP services. An increase in broadband penetration enables an increase in the penetration of VoIP services.
Over last few years, widespread broadband adoption and other reliable high-data-rate technologies have improved the sound quality of VoIP, which has contributed to the success of VoIP. As a result of the above-mentioned drivers, various telecommunication companies are increasingly offering VoIP. For example, in the US alone, there are many companies that are offering VoIP services and these include companies that are have been operators of the conventional circuit switching, such as AT&T, Bell South, MCI, Sprint, T-Mobile.

What is Skype’s current strategy and what type of corporate strategy are they employing?8
It took Skype several years, but the popular Internet communications service provider may have finally devised a growth strategy.
The company plans to roll out corporate subscription packages in the fall that will include new tools for IT managers, Skype-equipped televisions suited for conference rooms and other products and services. Currently 37% of Skype calls are business-related. That means most of Skype's traffic consists of personal communications between family members and friends, who pay little--often nothing--to use the service. The Luxembourg-based company, which says it has 560 million users worldwide, generated $716 million in revenues in 2009. Former owner eBay ( EBAY - news - people ) sold Skype to a private equity company last fall for $1.9 billion. del.icio.us Digg It! yahoo Facebook
Twitter
Reddit rss David Gurlé, vice president and general manager of Skype's business unit, says Skype is still finalizing corporate subscription rates and could not say how much these subscriptions would add to the company's revenues. However, he estimates that business customers bring in 20% to 30% more revenue than regular consumers. Gurle also notes that corporate subscriptions likely will consist of monthly recurring fees and priced according to tiers of services and bundles of features
To marshal all these plans, Gurlé is both staffing up and relocating. He has been poaching executives from his former employer, Microsoft ( MSFT - news - people ), and will move his team to Palo Alto, Calif., this summer or fall. Before the end of the year he wants to establish three new ways to sell Skype to businesses: direct sales for medium-to-large companies, indirect sales for small-to-medium companies and partnerships with manufacturers who want to offer Skype as a bundled package with their own gadgets (such as the TVs).
Will chief information officers and IT administrators respond? Gurlé is optimistic they will see Skype as a "communication tool that transcends corporate barriers." He adds, "There are not many companies that excel in both the consumer and business markets, but we are in this for the long-term."

What main issues do you think Skype must focus on short term and long term?9
To achieve that, Skype needs to fend off rivals like Google ( GOOG - news - people ) Voice, Google's new peer-to-peer calling service, and Vonage ( VG - news - people ), which has generated buzz recently with the news that it will release an iPhone application.
Though people close to Skype say the company regards Google Voice as a more limited product because it lacks a video-call function and is only available in the U.S., experts like Stephan Beckert, research director at TeleGeography Research Group, call Google Skype's strongest competitor.
Another potential obstacle is the legal battle between eBay and Joltid, which owns the peer-to-peer communication technology Skype runs on. In a recent regulatory filing, eBay noted that Skype could lose access to Joltid's software as a result of the litigation. Alvarez believes the Silver Lake/eBay deal includes several million dollars eBay can use to resolve the dispute with Joltid out of court. The agreement, which valued Skype at $2.75 billion, is "certainly a premium price, particularly in this [economic] environment," she notes.

Recommendations for Growth10
One priority could be strengthening Skype's enterprise business. Silver Lake also owns telecom-equipment company Avaya ( AV - news - people ). Alvarez notes that Skype's business-focused software, called Skype for SIP, could be paired with Avaya's business communications services. "There are some synergies there," she says.
Some industry trends, like the increase of Wi-Fi-enabled cell phones, should also benefit Skype by making mobile access of the service more convenient. Skype has a popular iPhone application and a deal with Nokia ( NOK - news - people ) that embeds its service in some handsets.
Skype is already on an upward swing, with the number of registered users up 19% over the past six months and traffic up 25% during the same period. It currently boasts more than 481 million users and reaches virtually every country around the world. In 2008, it pulled in revenues of $551 million, representing a 44% year-over-year increase. EBay has said it expects Skype's revenues to reach $1 billion by 2011.

Conclusion11
Before Mobile VoIP can be successful, mobile Internet needs to be successful. Traditional VoIP on SIP and landlines are successful because it was reliable, easy and much cheaper than PSTN. Current cell phone providers need to lower the cost of data plans drastically before one can invest in the monthly fees. Let’s do some analysis and see the price differences.

Mobile VoIP is a No No
Every provider has high mobile Internet charges. The $5.00 call rate has been added if an individual makes a 15-minute call to India everyday for 30 days at 1 cent/minute. As visible above, in every aspect you are saving immense amounts of money each month by not using mobile VoIP. If you are following hype then we recommend you think about it once more before signing up for data plans. The future of mobile VoIP seems very slim at the moment. The current companies are creating them because they believe the market will boom, which by all means it will but as soon as people understand that it is an unnecessary pleasure then they will quit. This will leave the VoIP companies in the dust.
What now?
Good question. Like the beginning of VoIP, it was always targeted for computer users and it will stay strong at that. Costs are not high when using a computer because the investment in Internet and a computer are necessary aspects of life. What we can look forward to is Skype and Microsoft plans for VoIP and what will Google and Motorola do with their new merge. Look towards the big giants in business to bring forth exciting software that will enable the best VoIP provider to come forth. As for mobile VoIP, let’s just assume it was just a dream.