VoIP: Still Calling, but not an answer yet

I’m old enough to remember when a long-distance call was a special event. Our family would drop everything to crowd around the phone. We’d take their turns, trying to speak quickly so as to not run up an enormous bill. Even while we were paying an exorbitant amount by today’s standards, the quality was often crackly and faint.

I’ve also seen many voice and data integration startups come and go over the last 25 years. From a technologist’s perspective, voice bits aren’t all that different than data bits, so there’s an appeal for a single digital pipe. However, technology promises don’t always drive consumer behavior. Today in the U.S., the promise of VoIP (Voice over IP) has created more static than clear communications.

Why is this important?

As companies like eBay pour billions into this still-embryonic “killer app” through their acquisition of Skype, other companies are likely to also bring their attention and resources to bear. If accepted by consumers and businesses, VoIP promises to upset a lot of apple carts. At the end of the day, the most important thing to watch is customer behavior: if the American public won’t use the technology, then the fastest bandwidth fanciest headphones won’t amount to much.

U.S. Households haven’t been flocking to use VoIP. Today, nearly 1 in 20 home PCs (4.5%) make voice calls over the Internet. That’s even down from last year, where this number stood at 7.8% of home PCs. These figures are based upon surveys taken from 8,203 computer users as part of the Technology User Profile 2005 Annual Edition, and 7,527 respondents in the 2004 Annual Edition.

Use among the self-employed is higher, at 7.2% of self-employed PCs. At least there is growth for VoIP among the self-employed, as this rate stood at 5.5% of self-employed PCs last year. These are still relatively small numbers, and largely unchanged over the past three years.

There are numerous factors that explain why VoIP has yet to take off in the U.S.

Frankly, speaking over a crackly connection can be painful and annoying, even when free, and dial-up connections just don’t give enough speed for high quality. The highest-bandwidth connections were at first being adopted by people who aren’t as price-sensitive – the wealthiest. In 2004, 46.3% of households with home PCs and $50,000 or more household income had DSL or Cable Internet connections, compared with 28.7% of lower-income households. In 2005, this gap has narrowed but still persists, with 68.7% of high-income home PC households having either DSL or cable access, compared with 54.8% of lower-income households.

At the same time, competition among cellular carriers drove prices down. Furthermore, a growing number of consumers pulled the plug on their home phone lines. So, Americans learned to enjoy having easy, mobile, low-price access to long distance. Furthermore, cell phone penetration grew faster among lower-income households and worked its way into American’s daily lives.

Fundamentally, Americans like the convenience of having a clear phone line accessible wherever they may be. It trumps needing to make phone calls while tethered to a computer workstation and headset. 

Although it’s true that American consumers like free or low-cost services, they continue to pay premiums for convenience.

Yet another factor to dampen enthusiasm for VoIP is the prevalence of email and consumer’s preferences for email over the telephone. Among 7,599 home-PC households we surveyed as part of Technology User Profile, less than one in seven (14.1%) agreed or strongly agreed with the statement “I Would Rather Use a Telephone than Use Email,” ranking it a 6 or 7 on a 7-point agreement scale. Nearly double that rate, 27.8%, disagreed or strongly disagreed, ranking it a 1 or 2.

What does this portend for the future of VoIP in the U.S.? Most likely, VoIP as a separate service will continue to be a niche offering. It will be most popular among the price-sensitive, the tech-savvy, and the self-employed. It will also likely do well outside of the U.S., where long-distance charges can be so much relatively higher. As a bundled service along with cable, satellite, or ISP services, it is likely to increase in adoption, further challenging the landline phone companies.