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A tale of two marketers

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VoIP is sweeping the planet. For those who do not know it yet, VoIP stands for Voice over Internet Protocol. It is a method whereby users anywhere in the world can call anyone else over the Internet for almost nothing. Despite its low cost, annual U.S. VoIP revenues exceeded $1 billion in 2005, according to a report from TeleGeography Research. The firm said it expects U.S. VoIP subscribers to jump to 9.6 million by the start of 2007. While this sounds big, US VoIP revenues in 2006 will represent only 7 percent of the combined revenues of traditional local and long distance service providers. Of the total VoIP revenue, more than half of it comes from cable operators.

Meanwhile, two independent providers of VoIP, Vonage and Skype, are marketing their services in fundamentally different ways. It is a very interesting story.

Skype was started in 2003 by two Scandinavians Niklas Zennström and Janus Friis. Skype lets users to talk to other Skype users anywhere in the world for free. Their service SkypeOut lets users call people in their home or office telephones for about two cents per minute paid in advance. Unlike other VoIP systems Skype software runs on member PCs rather than on a central computer. It uses the power of fast user computers (supernodes) to maintain the network. Today there are some 20,000 supernodes out of more than 100 million Skype members.

Skype went live in August 2003. A year later there were one million simultaneous Skype users. By May 2005 100 million people had downloaded the software and there were 3 million online at once. In October 2005 eBay purchased of Skype for about $2.4 billion dollars.

How did two guys make $2.4 billion dollars in two years? By word of mouth advertising. Skype has no mass marketing budget. They operate mainly by viral marketing. It is similar to the MCI friends and family program twenty years ago. Since any Skype user can call any other Skype user anywhere in the world for free, users are encouraged to get their friends and relatives to sign up. Helena and I first heard of the service when our cousins in Chile called us in Fort Lauderdale for a half hour call which cost them about a dollar. Helena and I had been paying about $0.40 per minute for such calls. Now we have Skype, and use it several times a day.

Vonage presents a completely different picture. When you sign up, Vonage provides a phone adapter (an ATA box) free of charge. This box plugs into your existing broadband connection. A standard telephone plugs into the ATA box, you get a dial tone, and you’re ready to go. Vonage offers unlimited calls to anywhere within the USA and Canada for $24.99/month for residential users. Vonage charges about 5 cents per minute to call Europe. To start off, Vonage needs to assign you a new phone number. When they do that, you get to pick the area code. This can allow distant friends and family to contact you by making a local call. For example, if a relative lives in area code 610 and you live in area code 650, Vonage can supply you with a number in the 610 area code. You can even purchase additional local numbers in other area codes that will also ring to your Vonage line, saving your callers a long distance charge.

Vonage has been considered by some to be the best known and fastest-growing independent VoIP provider on the market. In the first quarter of 2006 it had revenue of $118.9 million with about 1.6 million subscribers. To get there, Vonage has had a large TV, web page and print budget that have been eating their revenue faster than it comes in.

In 2005 Vonage lost $210.3 million, racking up a total deficit of about $467.4 million. In its IPO filing with the SEC Vonage announced that it plans to keep on spending for mass marketing advertising. Vonage is spending about $213 to acquire each new customer. The average revenue per line is about $26.63. Competing services are offering VoIP for as little as $19.95 a month.

The Vonage ads are really cute and funny. They involve some accident happening to someone, like a man cutting down a tree that crushes his car. Everyone laughs at them. But are they effective advertising? I watched them for several weeks before I understood what product they were selling. They are not direct response TV ads, which call for listeners to phone in to order the product. They are brand ads to encourage viewers to remember the name Vonage. This is good, but is it helping Vonage to become profitable?

Meanwhile, Skype has been spending virtually nothing on advertising. As of today, there are more than 100 million registered Skype users, of which more than five million are on line at any given time. Skype has marketed their product by supporting blogs, forums and viral content such as banners, Skype buttons for the users’ personal websites, email signatures, and flyers and flags for printing and distributing. They use the power of the Internet and fact that the value for each Skype user increases the more customers become Skype users.

Skype marketing has been based on identifying and supporting enthusiastic users, who they call evangelists. Customer evangelists are people that feel good about the products and services a company provides. They are willing to share their enthusiasm with others. Customer evangelists represent a virtual sales force for any company, which it can use to increase its customer base.

In summary, Skype appears to have a much more cost effective marketing program. Is Skype profitable? Only eBay can tell. Combining Skype with eBay undoubtedly provides benefits to both—benefits that are not available to an independent like Vonage. Is it too lake for Vonage to shift to viral marketing?

In the long run, however, one has to wonder how either Vonage or Skype can survive. MCI and Sprint once seemed to be almighty long distance companies. AOL dominated the Internet for a while and grew so large that it was able to purchase Time-Warner. While these companies are still very much around, they have had to shift their business model. Sprint has shifted to be more a wireless company than a long distance company. AOL as a business unit is losing subscribers. All three companies have had to shift their focus for the same reason: they did not own the pipe that goes in to a customer’s home or place of business. Telcos, cable companies, electric utilities and wireless companies own the pipes. Any one of these companies can provide their customers with bundled VoIP phone service, improving on what Vonage or Skype provide by combining it with broadband (which Vonage and Skype require to work but cannot provide themselves) and with TV (which Skype and Vonage also cannot provide.) In the meantime, however, Vonage and Skype can enjoy their growing customer base, and experiment with their different marketing methods.

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