January 25, 2007......... Can VoIP Be Monetized?

The short answer is NO. VoIP is not destined to inherit the pricing structure of traditional telephony. In the face of free VoIP-to-VoIP services and interconnect (with PSTN) priced at cost, the profitability of VoIP is spiraling to zero, and there seems no way to stop it. That is very bad news for every provider except possibly the one with the most efficient and most well developed infrastructure. The fact is that even operators with extensive interconnect services (e.g.. SkypeIN and SkypeOUT) are in a business with zero profit margin. They aren't making money now and they have no prospect of changing the situation.

We talk a lot about Skype on this blog, and with good reason - it is by far the most significant VoIP carrier. Skype is criticized for not having a good plan to monetize its operations (to make a profit), but my question is this: if Skype is having a difficult time, with its low cost server-less infrastructure and its prospects for interoperation with Paypal and eBay, how much more are Skype's competitors going to suffer. After all, they (even Skype) have thus far deployed VoIP as merely a telephone replacement service... and that service is very soon going to be essentially free.

So I'll assert for the sake of argument that VoIP carriers who don't have a way of subsidizing their operations are doomed to failure. When the dust settles, who will be left? Only two types of carriers have any chance; a carrier that also owns the VoIP "pipes" so as to charge for bandwidth, and a carrier that has other services or products to sell to its VoIP customers, possibly through the VoIP medium. Therefore, the first category is an ISP, and the second category is a services or software company like Skype or Microsoft or Google or Yahoo or Apple (???).

There are no ISP's with a large world-wide footprint so as to offer free VoIP-to-VoIP calling, so they would need joint operations to compete. The cost/complexity of such prospective joint operations is an instant show-stopper. So what we're left with is a software company with a VoIP offering that can sell products or services to the same customer base. Right now that means Skype, MSN, Google/AIM, and Yahoo. Look for some reshuffling and merger activity this year as the latter three try to catch up with Skype. Also look for a cross-platform VoIP offering from Apple. More about that later.

Finally, look for lots of new services being deployed through a VoIP medium, especially through Skype..... but don't expect eBay and Paypal buttons to appear in Skype until the security problems get fixed. Would you like to know why?