Michael Porter’s Five Forces analysis of competitive position provides the basis of a well designed assessment of the competitive rivalry present in the market and the analysis is based on the barriers to new entrants, power of customers and suppliers and availability of substitutes. The VoIP industry is prone to high competition from the existing large players like AT&T and Verizon who are also for long time in the traditional telephone service providing. In addition to these major competitors there are cable television companies who have also entered into the VoIP industry attracting the customers with strategic bundle offers and the like.
For example Master Call offers package services that are not only attractive but also lucrative for the customers. “Each package provides the simplicity of receiving local calling and the finest long distance and international service available from any carrier today in one easy to use and understand bundle of services with rates that cannot be beat by any other carrier. ” (Master Call) The cable service providers are equipped to respond with problems with transmission over the network because the networks are owned by them.
(Kretkowski, 2007) They adopt the marketing strategy of combining broadband provision with VoIP and the cable television services which often appear attractive for the customers. There are other internet telephone service providers like Vonage who have established their presence in the market already. Another class of competitors is the software based VoIP service providers like Skype which is really attractive to the customers as they have to spend nothing for hours of long distance conversation except the broadband service charges.
These kinds of services use computer terminals for an effective communication. There are no secrets of the trade which deters new entrants to the market. There are established software and hardware specifications developed by professional companies which are available for further technical development. Any firm which is successful in adapting these technologies at lower costs is already in the business. Due to this openness in technology the entry barriers are very low.
“It could be even more lucrative with VoIP, because the technology doesn’t need the expensive wires and elaborate switching equipment required by traditional analog lines. ” (CBC News) The equipment cost for VoIP provision is also not very exorbitant to act as a barrier to any new entrant. Start-ups can even take advantage of Asterisk, Linux-based software solution, which enables anyone with a broadband Internet connection to set up a VoIP service (Asterisk, 2007). Ludwick (2006) confirms that the initial capital expenditure of VoIP is lower due to reduction in customer premise equipment.
The availability of easy substitute products with no or little switching costs to the consumers is the other major force acting on the competitive ability of any firm in the market. In the case of VoIP there are enough substitutes available in the market. For instance the wireless and cellular services can easily replace the landlines. This is evident from the fact that industry majors like Verizon and other landline telephone service providers have lost major business to other smaller cellular and VoIP service providers.
Similarly VoIP industry has also a threat from other landline service providers because of reliability tested over the period and the quality of voice and communication ability. One other substitute is presented by instant messaging services provided by websites and search engines like Google, MSN and Yahoo. The calling cards provide yet another substitute to the customers the convenience and the economy as there is no need for a computer terminal.
In all of these substitutes the customer incurs no switching cost and convenience and affordability determines the market share of the individual services and the service providers. With the availability of a number of alternative service providers the customers have a high bargaining power in terms of the kind of services as well as the pricing. There were times when the customers were expected to pay advance rentals and enter into contracts for availing the telephone and other services.
But with the advancement in the technology and increase in the number of service providers the position is altogether changed and both the startup and the established companies are offering VoIP and other telecommunication services virtually at no cost to the customer and there is no insistence of any contract or other commitment from the customer. With the present trend in the industry this position is likely to continue further and the customer will enjoy an absolute bargaining power with respect to the provision of the VoIP services.
The VoIP service providers in turn depend on the internet service providers for extending services to the customers and hence the broadband service providers become the suppliers for the VoIP service providers. Therefore they enjoy a considerable bargaining power over the VoIP service providers. It is highly likely that they may raise their service costs to the VoIP service providers or because of the ease in entering in the industry may themselves proceed to offer the services directly to the customers.