Thursday, July 22, 2004

Daiwa EuroTelcoblog No. 59: Thursday, 22nd July, 2004 - Taking a stab at VoIP's addressable market in Europe

Since we started looking at the impending rise of VoIP in late 2002, market awareness of the issue in Europe has grown from a whisper to a very loud cacophony, yet much of the market (ourselves included) has had great difficulty in quantifying exactly what's at stake. We have made a few attempts in past editions of EuroTelcorama, mostly on an individual country basis where we had reliable usage data, but a more comprehensive view still eludes us. With all the technological changes taking place, coming up with a credible number is a bit like the "how many angels can dance on the head of a pin?" argument. Theoretically, and very optimistically, we think the "addressable market" for VoIP as a "primary line" service in Europe is equivalent to the size of the broadband footprint itself, though in practice, this is probably unlikely to be the case for some time, for a number of reasons. We also have some serious doubts as to whether this is really an either/or scenario. In other words, we do not view the consumer VoIP phenomenon as a straightforward case of swapping one "primary line" service for another (PSTN for VoIP). Inevitably there is a need for the media and analysts to predict "winners and losers," but we think this oversimplifies what is probably really going on, at least among the early adopters - i.e., many consumers are eclectic, using IM (both text and voice/video based), Vonage/Telio-type commercial services, Skype, Stanaphone, glophone, PhoneGAIM, humble calling cards and a host of other services opportunistically as befits their needs and the specific environment they are in at the time.

Nevertheless, if we were to attempt to address the "how long is a piece of string?" question, to get a clearer picture, we would probably need some in-depth consumer survey across Europe, which, to our knowledge, hasn't been done yet. However, research firm Ipsos-Insight on Tuesday released a survey of American internet users which may allow us to make some speculative projections. Before we begin, we must state clearly that this is a "square peg, round hole" exercise to some extent, given the vast differences between the US and Europe (and within Europe itself) along cultural, economic and market structure lines. However, in the absence of any more granular data out of Europe, it's probably worth having a go.

Ipsos-Insight, in interviews with a panel of over 1,200 internet users in the US, determined that 19% of them would be classified as "likely" to switch to VoIP service in future. Users of DSL and dial-up services were keenest to move (22% and 20%, respectively), while people with phone bills of more than $40 per month were more than twice as likely as those with bills below $40 (32% vs. 14%). These facts are generally unsurprising, but there were some results which were more unexpected:
  • When asked which type of service provider would be the best (the choices were telco, ISP, and cable company), fully 50% of respondents thought the telecoms players would do best. Cable companies scored worst (15% overall rating), though 33% of cable subscribers backed their MSO. This would seem to validate the view (apparently strongly espoused by BT Group, France Telecom, TeliaSonera, and apparently less so by many others in Europe) that there is a strategically compelling reason to move into consumer IP services sooner, rather than later.
  • The other area of surprise was in the list of "must have" features for VoIP, as cited by those who said they were likely to switch. The most popular of these (caller ID, voicemail, power back-up, call waiting, call blocking) were as expected, but some of the more unique features of VoIP services, such as call forwarding, multiple phone lines and virtual phone numbers (in other words, the features which the industry pushes as key differentiators) scored below 30% (a full breakdown can be viewed here: Perhaps this merely reflects relatively poor consumer awareness of these features, thereby providing operators an opportunity to upsell customers after capturing them by delivering the basics. The alternative view would be that, while some in the industry are urging VoIP service providers to differentiate themselves along feature lines rather than price, this survey actually seems to indicate that consumers may be much more concerned with reliability of service, replication of standard PSTN features, and, or course, price. Viewed from this perspective, perhaps the incumbents are in a relatively stronger position, and certainly the US incumbents appear to be embracing the technology shift more enthusiastically than their European counterparts - so far.

Whatever the takeaways we can draw on consumer attitudes from one survey in isolation, the indication of interest is undeniably strong. How does this apply to Europe? Let's look at a few recent internet usage stats, onto which we can attempt to graft the assumptions produced by the Ipsos-Insight study. According to Nielsen//NetRatings, which tracks internet usage in seven of the nine largest European markets (excluding Italy and Belgium), the "active digital media universe" for these markets in June was 86m users (home panels only). This breaks down by market as:

France         14,348,243

Germany     26,775,877

Netherlands  7,785,983

Spain             8,436,889

Sweden         4,391,951 

Switzerland  3,215,203

UK               21,082,432 

Total            86,036,578 

Doing the numbers

Applying the Ipsos-Insight result of 19% overall intention to switch, this points to a figure of 16.3m for the seven markets covered, and probably something like 25m for Western Europe as a whole. This is a figure very close to the estimate of total household broadband connections in Western Europe at the end of Q1 (just over 26m on our reckoning).

Another approach would be to apply the Ipsos-Insight figure for interest level among DSL users (22%), and apply it to our estimates for DSL users in all of Western Europe at the end of Q1 (19.3m). This gives us around 4.3m, to which we can add the 15% interest level found among cable modem users (6.8m) for a total of 5.3m potential residential VoIP users in Western Europe, or c.3.5% of total households. Factoring in further penetration growth in Q2 probably safely takes this number over the 6m mark at present.

What this doesn't capture at all is the likely interest among narrowband users. Anecdotally, VoIP service providers we have spoken to in the US and Europe (of both the access-independent and cable varieties) have indicated that in their experience, narrowband customer awareness of VoIP as an application enabled by broadband can act to accelerate the decision to migrate to broadband.

So, at the bullish end of the range, we have a potential migration of at least 25m in Western Europe over time, and at the more conservative, shorter-term end we may have something like 6m candidates at present who are actually able to do something about it. EU market stats released annually have shown residential PSTN ARPU (access and switched minutes) in the EU-15 stable at just under EUR30 per month (ex.VAT) over the past two years. Setting aside the fact that roughly 40% of this expenditure will probably be related to access (which is a problematic issue for VoIP players in most markets), we determine that if the 6m near-term potential converts cited above migrated all their voice ARPU to a VoIP platform, the revenue opportunity is probably on the order of EUR1bn annually. Adding back the access portion would take the opprtunity nearer to EUR2bn, or nearly 1% of the total estimated 2003 market value of telecom services in the EU-15 (comprising telephony, internet, mobile, CATV, and switched data/leased lines). Mapping these same assumptions across 25m migrating subs gives us a voice opportunity of c.EUR5bn and total revenue opportunity close to EUR9bn. That's more like 2% and 4% of the total market value, respectively.

One final caveat here is that, at least among the access-independent service providers we've spoken with, our experience is that the customer profile attracted to the VoIP proposition tends to generate higher-than-average ARPUs, and the Ipsos-Insight survey shows a significantly higher level of interest from those spending more than $40 per month on phone bills. In other words, our conservative EUR1bn revenue opportunity estimate may indeed be too low. We do not regard this exercise as anything approaching definitive, and the larger nagging question we continue to confront is how much of the revenue opportunity (whatever it is) is revenue transfer, how much is revenue defense, and how much simply vaporizes? As we have written and presented on numerous occasions, we think there is a better than even chance that a lot of this value is transferred to global internet brands as they battle it out for world domination. 

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