UK VoIP Heats Up

The consumer VoIP market in the UK is heating up. Tesco—a major supermarket chain that also sells telephony services—recently launched a VoIP service. British Telecom (BT)—a VoIP pioneer and one of the largest providers—said recently it planned to start spending more money promoting its VoIP services. Subscriber growth has been steady rather than spectacular, but it seems clear the market is now kicking into a higher gear.

It still lags the U.S. and some European countries, such as France. And recent SNAFUs that left tens of thousands of BT and Wanadoo customers without service will be giving early adopters doubts about the wisdom of switching from traditional phone service. The outages may not do any long-term damage, though, because for the most part they were only reported in the specialist media, says Ian Fogg, JupiterResearch‘s UK-based senior analyst responsible for consumer VoIP and broadband.

“If the providers get over their problems and deliver reliable service in future, these incidents will be quickly forgotten,” Fogg says. “But if there are continuing problems, the mainstream press will start reporting it, and then it could have an impact.”

Late out of the gate
Commercial VoIP services on the Vonage model began to appear in Britain early in 2005. British Telecom (BT), the incumbent phone company, was a surprising first mover. The current market leader, according to its own estimates, is Wanadoo, a broadband ISP owned by France Telecom. It claims to have about 80,000 subscribers. The other big player is DSG international plc, with its somewhat misleadingly named FreeTalk service. DSG operates the Dixons chain of consumer electronics outlets, which sell FreeTalk. Other retailers also sell the service.

Vonage, the market leader in the U.S., began offering service in Britain last May, after BT and others. It will be hard pressed to repeat its U.S. success in the UK, Fogg says. In the U.S., Vonage has worked closely with cable companies anxious to mount counter attacks against telcos poaching on their pay TV turf. In the UK, the regulatory picture—and as a result the market dynamics—are different. British cable companies have been in the traditional telephony business for a decade, so are not a driving force in VoIP. Other broadband ISPs in Britain already offer their own VoIP services or are throwing their hats in the ring. So Vonage has fewer allies and more significant competitors.

The market dynamic around VoIP is different too because there has for many years been far more competition here in traditional telephony. Under the British regulatory framework, several companies—Tesco is one—sell traditional phone services and DSL broadband using unbundled local loops from BT. Many already offer heavily discounted rates. “It means that VoIP doesn’t necessarily offer as big a price margin difference because there are other cheap alternatives,” Fogg explains.

Supermarket fone
Tesco announced its entry into the VoIP market in January, claiming its service would be the first to appeal to a mass market. “With its complicated technology and confusing jargon, [VoIP] has mainly been the domain of techies,” the company said in announcing its pay-as-you-go service. Its simplified technology and tariffs will change that, Tesco said. It’s partnering with Australian VoIP equipment manufacturer Freshtel.

Fogg says the supermarket chain’s move into VoIP is an indication, more than anything, of broadband penetration reaching critical mass in the UK. According to Tesco’s estimate, 8.1 million homes now have access to broadband internet. Given that JupiterResearch pegs total UK VoIP subscribers in “the low hundreds of thousands,” it means there’s lots of room for providers to grow. Tesco’s entry is also an indication, Fogg says, that like other broadband ISP’s, its access revenues are under pressure because of stiff competition. “If they can sell their subscribers VoIP and get a few extra pounds a month, that helps.”

BT resurgent
British Telecom appears intent to reclaim its leadership role. “BT was an early inventor and creator of VoIP,” Fogg says. “But [it hasn’t] been aggressive in marketing those products.” That is now changing. The company originally had two services—BT Communicator (PC-based) and BT Broadband Talk (phone-based). As part of a new VoIP push announced in December, it has brought them together under a single brand, BT Broadband Talk. The company also said it would spend more—millions of pounds, according to one report—to promote its VoIP offerings. So the gloves are off at BT.

The company was constrained until recently, Fogg says, by fears that the government regulator might rap its knuckles if it appeared to be taking advantage of its former monopoly status and moving too fast on VoIP in the absence of real competition. But now that others have followed it into the market and been successful, it can step up its efforts. The success of Wanadoo in particular is a clear sign that the UK market is wide open and that BT, if anything, is on the defensive. “BT can be seen to be reacting now,” Fogg says.

Cross-Channel interference
Wanadoo is a major threat for a few reasons. It’s well funded by France Telecom (FT). It can also take advantage of FT’s longer experience with VoIP. The French market is 12 to 18 months ahead of Britain’s, Fogg says. The major VoIP providers in France, including FT, already have a million or more customers. Wanadoo in the UK has a significant chunk of the broadband market—over 900,000 subscribers. So even though it has fewer than 100,000 VoIP customers, it has lots of head room. FT also owns the biggest mobile operator in the UK market, Orange, which recently began co-marketing with Wanadoo.

“This is why BT is becoming more aggressive,” Fogg says. “It can afford to be because it’s now much less likely to incur the wrath of the regulator.”

It couldn’t, however, avoid the wrath of its customers recently. For several days near the end of January, users found their calls were dropped after about three minutes. Then over a weekend, the service went down entirely. The company blamed the outages on a “platform problem,” which it eventually fixed with a patch. It admitted the glitch effected “thousands” of customers.

Just a few days later, Wanadoo’s VoIP customers were left unable to take calls from conventional land line and mobile phones. The problem lasted more than a day before it was corrected. Are the technology gods frowning on VoIP? Is there a conspiracy afoot to discredit the technology? It’s more likely just coincidence, and as Fogg says, unless these kinds of problems recur, they’re unlikely to slow market growth. VoIP in Britain is off and running.

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