Abstract

The share going to retail brands, which stood at 2.9% in the second quarter of 2004, had rocketed up to 25% by the fourth quarter, while the share held by service providers fell from around 50% to 20%. The main reasons for this dramatic change were the emergence of new types of VoIP product - the VoIP router and the terminal adapter - and the aggressive expansion into the VoIP equipment market by leading retail brands Linksys, Netgear and Belkin, which have sparked off a new round of intense competition in North America. Over 70% of shipments of the two new product types go to retail brands, hence the gradual reorientation in the Taiwanese residential VoIP industry's customer portfolio towards ODM/OEM for retail brands.

The target customers for virtual VoIP service providers such as Vonage include the broadband subscribers of both DSL and cable modem operators. Virtual VoIP service providers are spared the cost of installing CO (Central Office) equipment, nor do they run into conflict with their core revenue businesses as the regional fixed line operators do. They have thus been able to move into the voice market with very low prices, to the great concern of other types of voice service provider. Virtual VoIP service provider services are currently very popular; the key issue for these providers in 2005 is whether they can maintain the quality of customer service despite the extremely rapid subscriber growth that they are experiencing.

Finally, one needs to consider the strategies being adopted for collaboration between North American retail brands and virtual VoIP service providers. Service providers such as Vonage and AOL are seeking to develop a business model whereby the brands are responsible for hardware sales and maintenance, while using co-branding to boost marketing performance and reduce costs. The retail brands are aiming to stimulate demand for VoIP equipment by keeping prices down to very low levels, in some cases almost to zero. In the case of a Linksys IP phone with a retail price of US$50, the combination of a US$10 rebate from Linksys and a US$40 rebate from the service provider means that from a consumer perspective the phones are free. Retail brands and service providers anticipate that keeping the price of the hardware very low will lead to an extremely high rate of increase in the number of new subscribers.

CLECs, "Baby Bells" and MSOs are all finding themselves under intense competitive pressure from the virtual VoIP service providers. Nevertheless, the intense competition between these four types of service provider has caused the North American residential VoIP market to grow rapidly, and will remain the key driver of growth for VoIP services.

Appendix

Research Scope

This report covers the four main categories of residential VoIP (Voice over Internet Protocol) equipment: E-MTA, IAD, VoIP routers and terminal adapters. The geographical scope of the report is confined to the production of residential VoIP equipment by Taiwanese VoIP equipment makers in Taiwan and China.

Definitions

Business Types

OEM

The OEM business model entails carrying out product manufacturing or assembly according to specifications supplied by the customer. The OEM business model emphasizes production efficiency; thus, in order to lower costs, customers outsource manufacturing to OEM providers. This cooperation forms a division of labor among design, manufacturing, and sales.

ODM

The ODM business model entails undertaking product design and manufacturing, but not direct retail sales or brand promotion. ODM providers either collaborate with customers on product specifications or independently design products according to customer specifications; the ODM provider then receives manufacturing orders upon customer approval. The ODM model links the sales capabilities of the ODM customer and the design and manufacturing capabilities of the ODM provider, developing a cooperative division of labor throughout the product's value chain.

Retail Channel

Business from retail channels includes orders from brand-name retail channel players, such as Linksys or Netgear, with whom Taiwanese makers cooperate on design. Business from retail channels also includes private label shipments to end-market retailers.

Product Types

IAD

An IAD is a DSL modem integrated with voice function. Two types of technology are applied.  One is called channellized VoDSL, which utilizes voice over ATM technology.  The other is VoIP based VoDSL, which utilizes voice over IP technology.

E-MTA

Embedded MTA (Multimedia Terminal Adapter) in a cable modem integrated with voice function.  This device also follows CableLabs' PacketCable standard and utilizes VoIP technology.

VoIP Router

A VoIP router is a SOHO (Small Office / Home Office) router that integrates VoIP function. VoIP routers convert analog signals into packets for transmission and forwarding. They also provide NAT (Network Address Translation) and DHCP (Dynamic Host Configuration Protocol) routing functions, along with IP sharing to enable several PCs in the same home to share an IP address.

TA

A TA (Terminal Adapter) connects to a regular analog telephone, converting the analog signals into packets for transmission; it can also convert digital packets back into analog signals so that they can be received by a conventional analog telephone, typically in bridge mode.

Shipment Destinations

''Asia Pacific'' does not include Japan or China, but includes Australia and New Zealand. Russia is included in ''Europe.''

Glossary of Terms