voip

Talk is cheap as rivals ring the changes
Author: Tony Boyd
Date: 24/06/2006
Words: 797
Source: AFR
Publication: The Financial Review
Section: Business
Page: 12


VoIP, broadband's cheap alternative to fixed-line calls, is vying for market support, writes Tony Boyd.
When broadband voice provider engin said during the week it would seek shareholder approval to issue 50 million shares, it was a reminder of how difficult and costly it could be to market a disruptive new technology.

Voice over internet protocol, or VoIP, has been hailed as the cheap alternative to paying for phone calls using a fixed-line phone connection. Analysts estimate that customers can cut their phone bills by up to 55 per cent using VoIP.

But the VoIP providers are not having it all their own way.

This week, Telstra released three subscription-based pricing plans offering, in some cases, unlimited local and STD calls for a fixed monthly price.

The plans are designed to encourage consumers not to switch off their fixed-line phones by offering savings of up to $25 a month for heavy phone users.

Optus already offers subscription-based pricing for its fixed-line connections. Optus and Telstra are developing mass-market VoIP products to counteract the smaller VoIP providers such as engin and Freshtel.

Engin's quest for more funds comes six months after it raised $4 million in a placement.

While its customer base is growing by about 4000 a month, engin's shares have been under heavy selling pressure.

The stock has slumped more than 50 per cent to 23? since hitting a high of 46.5? in mid-May, just before the sharemarket took a turn for the worse.

Lack of investor interest in the country's leading provider of VoIP services comes amid dire predictions in the United States about the future of one of the world's largest VoIP providers, Vonage.

Vonage has the dubious distinction of being one of the worst initial public offerings in the past 10 years. It raised $US531 million ($727 million) in June in a float led by Citigroup, Deutsche Bank and UBS.

The company's shares, issued at $US17 each, have fallen 50 per cent to about $US8.50.

Vonage, which has more than 1.6 million customers making phone calls anywhere in the US, Canada and parts of Europe for $US25 a month, "may have a slim chance of survival", according to analysts at technology research group Pyramid.

The Pyramid analysts say Vonage has been "hemorrhaging substantial cash" trying to market its services against big telecommunications companies offering cheap voice calls.

They say forthcoming triple-play strategies from telcos and cable operators may be catastrophic for Vonage. It faces the additional problem that it does not own the network across which its subscribers' voice packets travel.

In Australia, engin chief executive Ilkka Tales says his company has a very different business model to the one being pursued by Vonage.

He says engin is able to acquire customers at substantially less than $100 each, whereas he believes Vonage was paying about $US290 to acquire each customer.

"Our focus has always been on the cost-effective acquisition of customers," he says.

"All our trends are heading in the right direction on the cost side and the growth side."

He says engin has doubled its subscriber base to 40,000 in the past six months and it plans to increase its subscriber base by another 60,000 to total 100,000 by June next year.

Tales says its growth target is not ambitious because VoIP is about to take off dramatically.

"We have certainly seen in recent weeks greater awareness and certainly an understanding of our value proposition," he says.

He says engin's request for shareholder approval to issue another 50 million shares is to ensure the company has the ability to raise funds through a placement to fund its growth.

"We have enough cash to manage the business to profitability but that would mean funding growth out of our cash flows, or we have the option of accelerating growth quite dramatically," he says.

"So we want to make sure from a shareholder's perspective and a business perspective that we have the ability to fund that growth, or at least consider that option as market awareness of VoIP increases and we start to move towards a mainstream, mass-market environment."

Tales says the company is already expanding into New Zealand and will use any additional funds to increase the company's product range.

Telstra's group managing director, consumer, marketing and channels, David Moffatt, says VoIP obviously appeals to some customers but it cannot offer the quality of a normal fixed phone line.

He says Telstra's research shows its customers want to keep their fixed-line phone connections as long as they get more value.