Sure, I dig the technology, and love the cheap service it enables. But as an investment, I've got to admit: I hate VoIP.
I didn't just draw this conclusion from Vonage's
Destroying value
I remember chatting with Foolish colleague Tom Taulli more than a decade ago about making phone calls over the Internet -- now widely known as voice over Internet protocol (VoIP). The technology was still being developed at the time, and quality was poor, but we knew it would cause a sea change in global communication. Today, companies such as Vonage, eBay's
So why would I pooh-pooh this cool technology rocking the telecom world? As flashy and fancy as it sounds, VoIP offers no new killer applications or buzzworthy innovations. It's the same thing you've always used -- just cheaper.
You win some, you lose some
Consumers benefit most from this efficiency, because they get to yak longer for fewer pennies. The big losers are the incumbent telecoms -- including Verizon
Vonage estimates that its subscribers could save more than $300 per year by switching from an incumbent's voice service plan to its unlimited VoIP service. Assuming that's true, Vonage, with more than 2.2 million subscribers, is draining $660 million annually from rivals' revenue. And that's only a fraction of the estimated 10 million people who have switched to Internet telephone services. No wonder VoIP companies face a huge uphill battle against the established powers in telecom.
VoIP may cost the incumbents money, but I still can't see how any company could actually make money from it. Low barriers to entry and high levels of existing competition will stifle growth before the service goes mainstream. Even companies that provide the "picks and shovels," like Sonus Networks
Investors have already seen plenty of companies pushing disruptive products or services that conveniently excluded "value" from their business models. Some of these familiar flameouts went up against the status quo with shaky assumptions, burning through wads of shareholders' cash:
|
Company |
Investor Money Spent |
Current Status |
|---|---|---|
|
Iridium |
>$6 billion |
Sold off after bankruptcy |
|
Pets.com |
>$146 million |
Bankrupt |
|
Webvan |
$830 million |
Bankrupt |
Growing ecosystems
Conversely, when I look at some of the greatest investments, I see companies that develop products and services that create value where none existed before. These companies foster valuable ecosystems around their products; sometimes, they even go on to create entire industries.
Think of Intel and Microsoft
A more recent example could be Apple
Where's the value?
Internet telephony is a novel application that leverages existing infrastructure to deliver comparable services at lower prices. Technological developments like this can help companies improve margins and offer better value to consumers, but they don't necessarily create substantial new value worthy of investment. Investors looking for that next home run stock -- the next Microsoft, Intel, or Apple -- likely won't find it in Internet telephony. Companies whose creations nurture thriving ecosystems are far more likely to produce exceptional returns in the long run.
Call on related Foolishness:
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Fool contributor Dave Mock gets his giggles by doing disruptive things that are of little value all the time. He owns shares of Intel. eBay is a Stock Advisor recommendation. Microsoft and Intel are Inside Value recommendations. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.
