Recent news out of eBay is that skype hasn’t turned out to be the goldmine that they hoped. Skype co-founder and CEO Niklas Zennstrom stepped down as CEO and eBay wrote off $1.4 billion of the original $2.6 billion Skype investment. You really have to feel for Zennstrom and his co-founders. Instead of walking away with $1.7 billion (per the incentives in the original buy out deal), they now only receive $530 million. I guess they’ll be anxiously awaiting the next Wal-Mart circular. This recent news adds to the mounting bad news surrounding stand alone VoIP players like Vonage and SunRocket. Is this recent example proof positive that VoIP will only flourish within the walls of established status quo companies like Comcast and Verizon? Or is this more a case of eBay “fumbling” with the jewel that skype could have become?

The troubles that stand alone VoIP companies have faced over the past year or so are, well, “troubling.” Vonage, clearly seen as a threat by traditional telecom carriers, has seen their legal bills increase exponentially as they fight multiple patent infringement suits. SunRocket could not generate enough cash flow to sustain itself. And now skype’s parent is admitting that their original vision of integrating skype’s technology and subscriber base into their active “community” has not materialized. At least not in an adequate return on investment sense. Perhaps there is a hard lesson to be learned here by all involved, including VoIP start ups. The lesson may be that beyond those of us that work in the communications industry, meaning your average consumer, VoIP is simply viewed as cheap long distance. Not as some revolutionary new way to communicate with potentially life changing experiences. I think we in the communications industry are guilty at times of believing our own “powerpointware” (or maybe drinking our own “kool aid”). If VoIP is indeed viewed as merely cheap long distance, then it will be very difficult to build a sustainable business around it alone. It may only survive as a part of something larger. I am certainly not discounting the tremendous value that IP brings to a service provider. But I am questioning whether companies can put VoIP at the center of their value proposition and survive over the long term.

If there were odds in Vegas for Vonage’s long term survival, they wouldn’t be looking good right now. Just after losing a patent infringement case to Sprint to the tune of $67 million (plus a 5% royalty of future profits), Vonage also lost parts of their appeal on a similar Verizon patent dispute. The news pushed after hours trading on their stock to less than a dollar per share yesterday. It’s not looking good for Vonage shareholders. Like life in general, business is about perspective. The perspective of Vonage supporters is that of an upstart that was willing to take on an entrenched monopoly industry, only to be attacked (and maybe killed) by the status quo. Telecom status quo supporters say Vonage is a “parasite,” who rode their facilities unfairly, and apparently, illegally, and now deserve what’s coming to them. Time will tell whether Vonage will survive, but I’m sure there is feverish strategizing taking place on how to leverage a Vonage demise. Who stands to win?

Let’s assume for a second that Vonage does not make it. Unlike the SunRocket demise, there doesn’t appear to be another stand alone VoIP provider with enough credibility to absorb a flood of Vonage subscribers. The irony in this, is to some extent, Vonage played this role after the SunRocket episode. But now, Vonage subscribers really won’t have another VoIP only company to turn to. In a Vonage demise scenario, VoIP subsbcribers will probably be quite leery of signing up with yet another VoIP only provider anyway. That would suggest that either cablecos or telcos have the best chance at Vonage’s two million plus subscribers. An argument can be made that cable may have the lead, since many Vonage customers abandoned the local telephone company and may not feel comfortable returning. Cable would be wise to come up with a “welcome Vonage customer” campaign, seizing on the advantages of being an alternative to the local phone company. But before cable gets too excited, they should recognize that many Vonage customers never left the local phone company, and use Vonage as a second line (“teen” lines as an example). Telcos will therefore have a golden opportunity to “win” those customers back with their own second line VoIP option. AT&T’s VoIP product is branded CallVantage, while Verizon’s is branded VoiceWing. This Vonage scenario may be a boon for those less recognized VoIP brands. Of course, all of this may be moot, should a suitor just come in and buy Vonage’s subs outright. I haven’t, nor am I qualified to, done any valuation analysis, but Vonage as a company appears to be getting cheaper by the day. Pretty soon, those two million subs may be cheap enough to buy outright, robbing us of the spectator view for a feeding frenzy on “serviceless” Vonage subscribers.

Seems like VoIP can’t catch a break this summer. It started with Vonage’s patent troubles earlier this year and got worse with the bankruptcy of SunRocket. Most recently Skype suffered a widely publicized outage. Are these just growing pains for a burgeoning technology, or is stand alone VoIP service digging its own grave? Probably a little of both.

VoIP as a technology is certainly here to stay. Internet protocol’s capture of the PSTN is assured. The real question is what kind of service provider will harness VoIP to its fullest potential. Players like Vonage, SunRocket, and Skype push the envelope with VoIP, while more traditional carriers like Verizon take a more cautious and measured approach. Cable companies leverage VoIP very well, but also don’t stray too much from the perception of traditional telephone service. Consumers of course make the ultimate decision about winners and losers and to them, a service that works reliably is paramount. I question whether carriers (new or old) that try to position VoIP as a “revolutionary” new way to do phone service are tooting an irrelevant horn. The revolution for phone service has already arrived – it’s called wireless. In the end, VoIP will probably be nothing more than a more efficient way to transport voice traffic, with some cool new features of course (VoIP as an application in a web 2.0 world is a subject for another post). Carriers that are able to leverage these efficiencies, while also providing a bundle of reliable and value added services may ultimately win. It seems as if carriers that rely on VoIP alone, as some revolutionary way to make phone calls, continue to see their fair share of troubles.

Net2Phone has launched a new 3 month free VoIP campaign to try to woo customers from its competitors. Net2Phone is trying to capitalize on the recent publicity of SunRocket’s bankruptcy and the concern over the viability of other pure play VoIP providers. Service rates after the promotional period will be $19.95/month.

The latest VoIP start-up is ooma, and its launch comes at a very interesting time. With the high profile demise of SunRocket, you would think the last thing a VoIP start-up wants to do is make a splash now. That is, unless you are ooma. They do have a slightly different approach, including a one time fee of $399 for unlimited domestic long distance calling, with no additional monthly fees.

Perhaps ooma’s greatest departure from traditional VoIP competitors is that they don’t necessarily suggest they are a replacement for traditional landline service. Ooma’s peer-to-peer networking technology actually relies on traditional landlines to connect local calls. There service also integrates and augments a traditional landline. For example, 911 calls placed over the ooma device automatically route over the traditional landline. Customers also don’t need a new telephone number for ooma – they can use their existing number. Will these new twists on VoIP provide sustainability for ooma? Who knows. Companies like ooma say they want to revolutionize phone service. Ooma says they want to do to phone service what TiVo did to television viewing. Interesting analogy, especially since TiVo founder Mike Ramsay sits on their board. The real question is, do everyday consumers think traditional landline phone service needs to be revolutionized? Maybe. Or maybe they think wireless service already did that.

The news of SunRocket’s demise is official. They have ceased serving customers. We reported about their problems back on July 2nd. Like sharks circling a wounded fish, Vonage and other are courting SunRocket subscribers – see Vonage ad image to the left. The real question is – who is next? SunRocket subs who decide to migrate to Vonage may see the same fate in a few months. The standalone VoIP model does not look very attractive right now.

The issue companies like Vonage face is developing a renewed value proposition. Cheaper pricing for unlimited local and long distance with a few cool features will not cut it over the long term. Consumers can get that from any number of providers, some of whom throw in high speed broadband and video to seal the deal. Why buy an expensive standalone broadband pipe to get Vonage, when you can get video, data and voice at an attractive price. When we look back on history, the lack of practical and inexpensive a la carte broadband pipes may reveal the true culprit in SunRocket’s (and more to come) demise. Other standalone VoIP providers like Packet8 are trying to build a niche by going after the small business sector, but so too will cable. Some skeptics think Vonage’s ultimate play is a customer roll-up strategy for eventual acquisition. If they can hold on long enough, they may be able to pick up all of the other standalone ‘scraps’ that will litter the VoIP highway in the months to come.

A couple of influential bloggers, Om Malik and Andy Abramson, reported over the weekend about potential problems at SunRocket. While these are just rumors at this point, several commenters have added fuel to the fire. Apparently there have been numerous layoffs, including many C-level employees and most, if not all, of their product team. Speculation ranges from pending bankruptcy to a possible sale of the company.

This news, if true, is of little surprise. Stand alone VoIP providers have practically no chance of long term survival - at least not independently. They simply cannot compete effectively enough with cable MSO and telecom triple and quad play bundling strategies. There are certainly exceptions to every rule, and I suspect a niche player or two may survive as a pure VoIP play provider. But probably not at the level of a SunRocket or Vonage, where expected returns on multiple multimillion dollar investments probably can't be met. Pure play VoIP providers like Vonage and SunRocket bear a lot of responsibility for taking VoIP mainstream. Everyday consumers began to understand and value VoIP in large part due to Vonage’s multi-hundred million dollar marketing campaigns or SunRocket’s attractive pricing schemes. Unfortunately, these costly business tactics may ultimately prove to be their demise. Vonage and SunRocket may one day be seen as an important footnotes in the evolution of VoIP and its competitive implications.

Story Update (7/3): The Washington Post is confirming these SunRocket moves in today's edition. SunRocket confirms laying off 30 employees to 'reduce costs.'
SunRocket is based in metropolitan Washington D.C.

Pure play VoIP providers like Vonage are getting no love from many industry analysts. Many question whether pure play VoIP service providers can survive in a telco and cable dominated world of triple play bundles. Vonage is of course the poster child of pure play VoIP, but there are numerous others, including SunRocket and Packet8. Pure play VoIP providers say the rumors of their demise are premature. They say future product roll outs including mobility plays will increase their value proposition and ultimately give them a spot at the table. Putting their long term viability aside for a second, companies like Vonage have accomplished some significant feats. Namely, bringing the concept of VoIP to the masses through their costly marketing campaigns. The general public is surely more aware of VoIP and its competitive implications. Will this be the only legacy of Vonage and its brethren?

Read this xChange article for more commentary.

Also, check out this ZDNet blog on the subject.