Sunrocket Drives a Stake Into The Heart of VoIP

If the instability with Vonage wasn't enough, now Sunrocket has gone ahead and done a world of hurt to VoIP as a consumer product. For those who have not heard (such as people living in a cave with a goat somewhere in central Asia), Sunrocket has abruptly shut down. The consumer VoIP service sent out a message a couple of weeks ago saying it would cease operations. Another one arrived a few days ago declaring that all service will be off-line by August 5^th at the latest. In the meantime, expect service disruptions. Nice.

Now keep in mind, they took my renewal in April. Late April at that. There is no way that they did not know that they were having severe financial troubles. I admit, businesses on the downward spiral will often delude themselves into thinking that they will somehow survive when it's not possible. However, to make a year long commitment at a time like that is unconscionable.

This will hurt the nascent VoIP industry because it will literally crush confidence in the very idea of VoIP. People will say “First Vonage runs into trouble. Now Sunrocket does a meltdown. No way am I putting my money into that.” It is for exactly this reason that early phone companies were allowed to be monopolies for awhile. It was necessary that they have the time to build their infrastructure and create critical mass in the marketplace before having to compete on price. Without that luxury, it will be very hard for any VoIP company to succeed.

Here's the big problem: though it costs less to deploy a VoIP system then a traditional land line or cellular system, the costs aren't zero. The capital costs can still be significant even if future operating costs are lower.

Even that assertion is unproved. In a consumer business, technology costs can often pale in comparison with marketing and customer service costs. So, even if the cost of deploying and maintaining the system is less, the cost of acquiring and maintaining the customers is not that different. In order to maintain their organizations and make money, VoIP companies will have to charge nearly as much money as a traditional provider such as Verizon. Yet, they can't begin to offer the service Verizon offers.

The Sunrocket implosion will drive a stake into the heart of VoIP. The cost differential for most VoIP services is not enough to put up with the uncertainty, difficult installations, poor service, and relatively lousy call quality. VoIP is a technology, not a business. As a technology, it will continue to exist within major providers' or corporate networks. It may eventually lead to the elimination of long distance in North America. As a business, it's doomed to die.

So, what's in store for consumer VoIP? First, the dozen or so standalone VoIP phone companies won't survive. All the clever advertising won't restore consumer confidence. Second, some of the better companies will sell their networks to traditional phone companies as a way of providing cheaper service than a land line. Finally, the only service to have that wonderful combination of critical mass, low cost, and marketing cachet, namely Skype, will evolve into a more important and ubiquitous utility. That is assuming they can get a cheap Skype phone out.

Other than that, I think that Sunrocket is striking the death knell for consumer VoIP services.