One of the industry's best-known VoIP pioneers, US-based Vonage Holdings, is struggling to save its business after a federal court decision in March that the company infringed upon Verizon Communications' patents in the way it connects calls from the Internet to ordinary telephones. Vonage, which also faces patent lawsuits from Sprint Nextel Corp and two other phone companies, warned in a regulatory filing that it faces possible customer losses, employee layoffs, financial problems and even potential bankruptcy because of the suit. Meanwhile, Vonage's CEO recently resigned, it is planning $140 million is spending cuts and it is paring staff while it appeals the ruling.

The Vonage dispute underscores the weakest link in the VVO business chain: the networks. The VVOs don't own one and so must rely on others to transfer customer calls to the public-switched telephone networks. "They all have the same inherent problem. They don't control the network their service is running over," says Michael Arden, principal broadband analyst with ABI Research." That is really going to hurt them."
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The stupendous growth in VoIP worldwide might suggest there is plenty of business for everyone. ABI estimates that worldwide VoIP subscribers will grow from 38 million in 2006 to 267 million in 2012. In the Asia-Pacific region, subscribers are projected to grow from 14.88 million last year to 92.25 million in 2012. And hosted VoIP subscribers are forecast to rise in Asia from 1.74 million in 2006 to 11.8 million in 2012. However, VoIP over DSL/fiber will rise to 65 million from 10.8 million while cable subscribers will reach 11.45 million from 2.35 million in Asia during the same period. It's a similar situation in North America, where ABI estimates that hosted VoIP subscribers will rise from 2.3 million in 2006 to 15.9 million in 2012. But the independent VoIP market share will still lag behind both cable and DSL/fiber.

And there are other issues threatening to derail the struggling independents. In markets like the US, WCs could see market growth frozen if regulators decide against them on the "Network neutrality" issue now being fiercely debated by regulators and legislators.

"One of the uncertainties is, if the operators gain the legal right to block hosted providers from their networks, they are really left out in the cold," notes Arden. In Europe, incumbent telcos such as BT are building IP networks and migrating their own voice customers to VoIP, posting a serious challenge to independents.

China's success

Surprisingly, China, has emerged as a bright spot as VVOs capitalize on the country's relatively high long-distance calling rates to gain new customers.

Kevin Li, In-Stat's China analyst, says VVC subscribers will hit 1.23 million by year's end in China and grow to nearly 13 million by 2011. "The biggest driver is lower price, which is attractive for SMB customers and consumers with high demand for long-distance calling," says Li. "VVCs are having success."

Li adds that VoIP has existed in China for about nine years, and licenses were awarded to six traditional telcos to provide IP card service. These telcos--including China Telecom, China Unicorn, China Netcom, China Mobile and Tietong--have also started trials of broadband IP telephony, with the number of VoIP subscribers in the country growing from 50,000 in 2004 to 720,000 by the end of 2006.

Despite this, many VVCs in China have gained a strong foothold because they offer lower prices although services are limited. (One example: customers often can only make outgoing calls because incoming calls can't be connected to the legacy network.) The independents appear to operate outside established parameters.

"The Ministry of Information Industry has declared that broadband IP telephony service can legally be provided only by traditional service providers. Thus VVCs are operating illegally and have little phone-number resources," Li says.

However, he notes that the VVCs typically focus their VoIP business on just one or two provincial markets. "Little application innovation has been developed on VoIP, so price competition among VVCs is serious," he adds. "They are thriving because they offer lower prices than traditional calling services or IP card services."

A spokesman for one such Chinese hosted VoIP provider, Beijing Zhong Tong Interconnected Technology, said VoIP service has been offered for more than three years. The company offers VoIP as a value-added service delivered through its IP platform to Internet users who pay a one-time fee of $50 yuan ($6.48) for the IP number and a monthly fee of about 18 yuan for PC-to-PC and phone-to-PC calling. The MII does not have a clear regulatory policy over VoIP, the spokesman added, and hasn't required the VVCs to obtain a license