Who Killed the VoIP Revolution?

"VoIP is dead," Skype General Manager for Voice and Video Jonathan Christensen declared at an industry conference a few weeks ago. He spoke figuratively, of course, but he may well have been right. While proponents of Voice over Internet Protocol had long promised a decade of creative destruction, they themselves appear to have become the victims.

The full potential of a technology is not always realized once it converges with market forces. In this case, the gravitational pull of the incumbent local exchange carriers (ILECs) has always proved difficult to resist. Most of the VoIP industry, while loudly proclaiming the "session-initiation protocol" SIP era as the beginning of the end for monopoly communications, secretly courted the incumbents in hopes of profiting from replacing their long-amortized investments in the fixed-line business. By tying their fortunes to the whimsy of the ILECs, many of the upstarts suffered, destroying billions of dollars in shareholder value in the process.

Recently, PulverMedia, which spurred the VoIP crowd and rode its financial crest, shut its doors amid a swirl of controversy. As of this writing, Sonus Networks (SONS), once a highflier trading at 95 a share in 2000, goes for about 2.29. Even Cisco (CSCO) has thrown in the towel, discontinuing its BTS series of softswitches, which provide the routing logic for VoIP networks. These dismal stories perfectly mirror the ride of the VoIP industry in general.

Assault on Monopolies

The outlook was once a lot better. In 1999, with the ratification of the SIP specification by the IETF, advocates who wanted to tear apart the monopolies that dominated telecom started to beat the war drums. Following conventional wisdom that the Internet democratizes and deleverages any market into which it enters, they found it easy to persuade investors to pour billions into VoIP products and companies. Regulators seemed to support that theory, too, sealing the deal with the Federal Communication Commission's so-called "Pulver Order," which defended the VoIP industry from over-reaching regulation and tariffing.

The anticipated period of "creative destruction" came, all right. It began in 2001 with the smiting of the competitive local exchange carriers (CLECs) and long-distance competitors, who had not yet even had time to embrace VoIP, by predatory pricing from the incumbents. It continued with the shift from fixed voice lines to wireless phones, as evidenced by the drop in landlines. More recently, the guns have been turned toward the VoIP equipment vendors that begat the revolution in the first place.