Stanaphone, one of the better consumer-targeted VoIP companies, shut down its consumer operations at the beginning of this month. It had been a holdout for quite some time, and I’m honestly surprised they lasted as long as they did. They were one of those companies that offered free DIDs to attract customers, but they still offered excellent calling rates to global locations.

The problem, of course, with that business plan is that you have to ensure that the people who use your service are on the phone long enough to recoup your substantial losses for the free DIDs. That’s a huge gamble, and with their dial-out pricing, it was more of a pipe dream than anything else. On average, with Internet businesses, you can assume that, if you offer a free service, then 1-2% of your users will ever actually pay for any additional services you may offer. That’s a good average.

Let’s assume they were able to get DIDs for some outrageously inexpensive price of $3.00 per DID (with unlimited incoming minutes, which is pretty unusual for a DID of that price). That means if you offer a free DID, you have to make at least $3.00 in profit every month from other pay services to cover your basic costs. That’s per user. Now, Stanaphone was charging $0.016US per minute for US-Canada calls. We’ll assume they were making a pretty heft profit of about $0.007US per minute — $0.009/minute is a very good price, so that’s a high estimate. That would mean that, just to make up the costs for the free DID, each user would have to be spending more than 430 minutes per month dialing out.

That’s totally unrealistic.

As I say, I’m honestly surprised Stanaphone lasted as long as it did in that arena.

The VoIP market is, today, flooded with providers all offering their own take on what customers want. Open VoIP networks are becoming increasingly rare, as more companies try and close their services to keep users from being able to easily switch to other networks. The free DIDs are getting harder and harder to find from providers, as more and more providers either go out of business or simply realise that the usage they expected from customers is far more limited than they’d anticipated. More and more companies, like Stanaphone, are deciding that business VoIP is where all the money is, and are closing up shop in the consumer market. And many companies are simply discovering that the VoIP market is not the gold mine everyone thought it would be a couple of years ago, and have closed down after losing all their capital.

Some companies are doing well for publicity — Vonage and Skype being the top two known brand names in VoIP. Others, such as Gizmo Project are poised on the brink of being the next big name by offering flashy and full-featured software phones and becoming less a VoIP company and more an IM/VoIP offering. Some, such as IdeaSIP, are relying on a careful and close customer service focus that is unusual if not unheard of in the VoIP world. But the gold mine simply isn’t there. Vonage has been fraught with money problems even before the latest Verizon suit brought them to the edge of bankruptcy. Skype, backed by eBay, has been able to leverage its massive funding to attempt to gain customers by offering calls for free or close to it, but it’s simply losing money hand over fist to increase its customer base. Gizmo Project gained an influx of capital funding about a year ago that allowed them to create a new client and gain a large user surge, but their offerings of free calling to anyone else using Gizmo Project has the ring of a Skype-like attempt to burn capital in exchange for a larger user base.

Every day, there are more obstacles to avoid and more hurdles to jump. Legislation pushed by the telecom lobby creates an anti-competitive market. The sheer number of VoIP companies springing up out of the woodwork creates tough competition. The number of VoIP companies that go out of business every month frightens consumers away from adopting the technology, worried that their provider may suddenly vanish. The technology itself has yet to become transparent enough for many users to understand it enough to be able to use it. And marketing VoIP services is still an obstacle that no one has quite figured out how to overcome.

In the end, the products that survive will either have the capital required to survive the lean times, such as the ones already run by the large telecom companies or cable companies, or will somehow find a way to gain the appropriate grass roots momentum to carry them into the future.

It is with great trepidation and no small amount of morbid curiosity that I wander through sites like the VoIP Graveyard, wherein lie the brands that have already fallen. May they rest in peace.