VoIP: Dialed In

Investing is a game of prediction. In every age, there exist mad scientists working away at a revolutionary products that the public may or may not run with.

Case in point: the Beta Max was a craze that many thought would change the way the world watched movies but alas to some mad scientist’s dismay, it petered out without a fight. On the other hand, the DVD did change the way we watched movies and so much more. What defines a flop and more importantly how do you spot it ahead of time? Smart long term investing boils down to three things: spotting a trend worth investing in, analyzing the companies worth investing in within that trend, and then ultimately the trend actually taking off.

With On World Inc. estimating that the number of VoIP users worldwide will balloon from 16 million to 207 million between 2006 and 20011 - when In-Stat forecasts the market to be worth $44 billion - players of all shapes, sizes and colors are foaming at the mouth to tap into telecom’s hottest segment.

And there’s more than enough to go around. With TeleGeography Research estimating that international VoIP traffic grew by nearly 40% in 2006 to account for more than 20% of the world’s total; and some analysts hypothesizing that VoIP will indeed replace traditional telephone service for the majority of users in the not-so-distant future; opportunities to cash in on the VoIP craze are popping up in every corner of the globe.

However, despite the grandiose sales wins to be made with VoIP, the market remains one of the most fragmented known to man. Although this portion of the telecom industry will likely consolidate over time much like they way the broader market has; for now, everybody and their brother is trying to make a buck off of VoIP. In addition to traditional VoIP plays such as Vonage (NYSE: VG) and Skype - an eBay company - (NASDAQ: EBAY), everybody from traditional telecoms and cable service providers such as AT&T (NYSE: T) and Time Warner (NYSE: TWX) to alternative service providers including Level 3 Communications (NASDAQ: LVLT), Ibasis Inc. (NASDAQ:IBAS), ATSI Communications Inc. (OTCBB: ATSX), and Rapid Link Inc. (OTCBB: RPID) are gunning for sales dollars.

Different Geographies = Different Market Dynamics

The domestic and international markets are characterized by a set of distinctly different dynamics. VoIP has become more of a “value play” in the U.S. and in other economically developed regions as consumers adopt the technology due to the availability of new value-added services and features (web-based software, instant messaging, mobile communications, etc.) that provide a higher level of functionality and efficiency over traditional telephony.

On the other hand, in less-advanced markets including the recently de-monopolized Latin America region where governments such as Mexico and Brazil have loosened their grip on telecom; VoIP is being implemented at a record clip, largely due to its ability to facilitate enormous cost savings on long-distance conversations. In my opinion, we’re moving slowly but surely towards flat rate calling, or heck, even free calling, once advertising gets thrown into the mix in an efficient manner as it has online. Due to this possibility, providers should likely start optimizing their offerings now before it’s too late, especially those relying heavily on the wholesale process to keep the lights on.

Collusion, Collaboration Paramount for Smaller Industry Players

So, with the domestic market completely saturated on a competitive level for all intents and purposes, focus is shifting elsewhere. And rightfully so - with In-stat forecasting the consumer market to reach $44 billion in 2011, when the U.S. accounts for a mere 18% of the total why not go where the growth is? But how does a small fish in the big global telecom pond survive, or better yet protect margins and maximize revenues with all of this competitive pressure? I believe that answer lies in consolidation, collaboration, and collusion amongst players of all sizes.
Now That’s What I’m Talking About!

A perfect example of what I’m talking about is the recent decision by Rapid Link Inc. (OTCBB: RPID) to acquire Web-Breeze Networks, LLC, and Communications Advantage, LLC. See Press Release

Although the International space remains a game of arbitrage, with wholesalers cashing in on their ability to provide the cheapest per-minute rates possible, eventually markets in developing nations will mature and demand a greater level of functionality and robustness out of their VoIP providers. As such, industry players such as RPID must fortify and diversify their offerings to make them more appealing to consumers on a global level. How else can they compete with the budgets and the brains of the Verizon’s and AT&T’s of the world?

By executing this most recent acquisition, Rapid Link gains a vast array of new capabilities and value-added services including, but not limited to: Worldwide Web-hosting Service, Full Service Web- based Email Services, nationwide Dial-up Internet access, national IP Voice Messaging and Fax Messaging service and over 800 long-distance customers using One Plus dialing, Nationwide 800, and Travel Card services with customers in every state. With names like Verizon, Qwest, Sprint and Time Warner playing in their own backyard, this purchase was a very slick move on behalf of management. It may not revolutionize the company, but it sure is a good start.

Moreover, this addition should strengthen the company’s global footprint as it significantly enhances Rapid Link’s offering and makes it more attractive to a wider consumer audience. Although the aforementioned ongoing VoIP industry arbitrage should continue for awhile, particularly in regions outside of the U.S., wholesalers are seeing margins erode quickly as the average price per minute of voice- traffic falls by the wayside.

Providers Can’t Win on Cost Alone!

Successful wholesalers such as ATSI Communications Inc. (OTCBB: ATSX) - a company that has grown revenues from $1.3 million to $30 million between FY2004 and FY2007 - are now faced with the option of either tacking on extra capabilities and value-added services to their current offerings through any means necessary, or going head to head with the world on cost alone, a seemingly impossible battle to win.

For the record, ATSI has logged 12 consecutive quarters of record revenues, 5 consecutive quarters of positive cash flow from operations and 3 consecutive quarters of net positive earnings per share. Management has a deep understanding of the market, especially the Latin American region, and holds a unique long-distance concession license with the Mexican government (Mexico is the number one producer of voice-traffic with the U.S.).

In my opinion, if you combine this thriving wholesale biz with an innovative service offering, Voila! We’re looking at an International VoIP powerhouse. From there, opportunities with upper tier players become more achievable as the company is able to offer something more than simply cheap minutes. From what I’m seeing, growth through acquisition and/or partnership is the most logical way from companies like ATSX and RPID to take their businesses to the next level and keep them there.

With the VoIP industry on the verge of tremendous growth in regards to subscribers, revenues, and potential technology applications, those willing to “play ball” with others in the industry possessing synergistic and/or complementary offerings will be the one’s that thrive, while others close their doors for good. This is just some food for thought on the appetizing trend of VoIP. There is so much out there and this is the time to do your homework on it!