Changewave Research: Home Voip Use Going Mainstream

ChangeWave Research: Home VoIP Use Going Mainstream

ChangeWave ResearchReport:

Home VoIP Use Going Mainstream

Sweeping Transformation of Consumer Telecom Continues

Overview

The results of our previous Alliance Consumer Telecom survey (Dec 2003) found that“The killer combination of cable companies, cell phone service providers, local telco’s, and now Voice over Internet Protocol (VoIP) is turning the traditional telecom industry upside down.”

In a new Alliance survey, completed September 28, 2004, we revisited consumer telecom trends – including homeVoIP use, cell phonesand home telephone service. A total of 1,166 Alliance members participated. Here’s what we found:

I. VoIP in the Home – A Closer Look

• Consumer VoIP Market to Accelerate in Next 12 Months. In the nine months since our last Consumer Telecom survey, the percentage of respondents who report that they “Currently Use VoIP at Home” has risen two percentage points – from 5% to 7%. In addition, the percentage who report they “Plan on Deploying VoIP Over the Next 12 Months” has increased from 20% to 23%.

• Rise in Home VoIP Customer Satisfaction. A total of 78% of the respondents who have used VoIP in their home during the past year say they are “Very” or “Somewhat” satisfied with the service –a big 10-point jump from the previous survey (Dec 2003). And the percentage who say they are “Unsatisfied” (or have canceled) their VoIP service has dropped from 29% to 22%.

It’s About Flat Rate Pricing and Quality.Among respondents who plan on deploying VoIP during the next 12 months, Flat Rate Pricing (54%) and Quality of Calls (54%) are the most important factors influencing the decision. Other important factors include Lower Rates – both International (32%) and Domestic (27%) – and Feedback from Friends/Associates that Use VoIP (25%).

• Vonage is the Market Leader Among Current VoIP Users. Vonage (23%) has the largest share of the market among respondents who currently have home VoIP. Tied for second are 8X8 (13%) and “My Cable Company” (13%).

• But Cable Companies and 8X8 are the Top Choices of Those Planning to Get VoIP. Respondents who plan on deploying VoIP during the next 12 months report they are most likely to choose “My Cable Company” (15%) or 8X8 (14%) as their service provider. Vonage (6%) and Verizon (VoiceWing) (5%) came in 3rd and 4th, respectively.

We note that Alliance members have received significant exposure to 8X8 over the past two years, which couldpartially account for the company being a relatively strong choice among respondents.

II. Consumer Long Distance and VoIP

• Consumer VoIP Providers Gaining Market Share. Among respondents who report they are likely to change home long-distance service in the next 6 months, 21% say they will switch to stand alone VoIP – more than double that of the closest competitors (Local Phone companies and “Using Cell Phone for Long Distance”) (10%).

• VoIP Users Sticking With Their Home Providers. Only 7% of respondents who currently use VoIP for home long-distance report they are likely to change providers in the next six months – a key sign of strength and the best rate in the telecom industry.

III. Cell Phones and Service Providers

• More Phones with Cameras. Ninety percent (90%) of respondents own a cell phone. Currently only 17% own one with a camera, butthis is4-percentage points more than in our August 2004 Alliance survey. Moreover, 41% of respondents who say they plan on purchasing/upgrading to a new cell phone within the next 6 months report they’ll get one with a camera.

• Current Cell Phone Ownership - Nokia Leads But Continues to Lose Market Share. Among current cell phone owners, 28% use Nokia handsets, down 7-percentage points since our December 2003 survey and a full 12-percentage points since May 2003.

• Planned Purchases - Nokia Also Losing Ground; Blackberry Gains. For the third consecutive survey, Nokia’s share among those planning to purchase a new cell phone has dropped. Although still leading with 19% of “planned purchases” over the next 6 months, that’s a 7-point decline for Nokia since our December 2003 survey and a whopping 18-point decline since January 2003. On the upside, Blackberry showed momentum with a 100% gain among “planned purchases” since last December (from 2% to 4%). Palm/Handspring (7%) and LG (5%) also showed gains.

• Next 6 Months –An Explosion in Wireless Headsets. More than half of all respondents (53%) report they currently own a cell phone headset with a cord. While only 3%own a wireless headset, 11% report they plan on purchasing one in the next 6 months – a huge 367% increase.Motorola (8%) and Nokia (8%) are the top choices for those who plan to buy headsets, followed by Jabra (7%) and Plantronics (5%).

• Verizon Increases Lead as Top Cellular Service Provider. Verizon (27%) – the leading cellular service provider – increased its market share by 4-percentage points since the previous survey, while AT&T (16%) lost 4-points. Sprint (15%) and Cingular (12%) were the only other companies to attain double digits.

• Cingular’s PopularityIncreasing. While Verizon (23%) is still the top choice among respondents who say they are likely to change cellular service providers, Cingular (11%) has surged to the number two spot, with T-Mobile (9%) third. In contrast, AT&T (5%) has tumbled by 50% to 4th place since the previous survey.

Bottom Line: These Consumer Telecom survey results show a sweeping transformation continuing within the industry led by Cell Phones and by Voice over Internet Protocol (VoIP) – which is now becoming a mainstream product in the home.

The survey results also show Local Phone Companies have surpassed AT&T to become the market share leaders for home long distance.

The consumer telecom transformation is roiling markets and creating a new generation of leaders:

• While Vonage (23%) is the market leader among current VoIP users – those who plan to deploy VoIP during the next 12 months say they’re more likely to choose “My Cable Company” (15%) or 8X8 (14%) as their service providers.

• While Nokia continues to lose market share among cell phone manufacturers, LG, Palm/Handspring and Blackberry are making gains.

• While Verizon is still the dominant cell service provider, both Cingular and Nextel are increasing their customer satisfaction ratings, and Cingular is gaining among respondents who say they’re likely to change cell service providers.

• While Motorola and Nokia lead among Cell Headset manufacturers, Jabra and Plantronics alsolook strong – and wireless headset sales look to more than triple over the next 6 months.

The ChangeWave Alliance is a group of 4,700 highly qualified business, technology, and medical professionals in leading companies of select industries—credentialed professionals who spend their everyday lives working on the frontline of technological change. ChangeWave surveys its Alliance members on a range of business and investment research and intelligence topics, collects feedback from them electronically, and converts the information into proprietary quantitative and qualitative reports.

Helping You Profit From A Rapidly Changing World ™

Table of Contents

Summary of Key Findings...... 5

Introduction...... 5

The Findings...... 6

Part One: VoIP in the Home – A Closer Look...... 6

Part Two: Home Long Distance and VoIP...... 11

A. Home Long Distance Service ...... 10

B. Local Phone Service...... 13

Part Three: Cell Phones and Service Providers...... 13

ChangeWave Research Methodology...... 22

About ChangeWave Research...... 23

I. Summary of Key Findings

eader One

Introduction

Last December, the results of a previous Alliance Consumer Telecom survey showed that “The killer combination of cable companies, cell phone service providers, local telco’s, and now VoIP is turning the traditional telecom industry upside down.”

In the current survey, completed September 28, 2004, we revisited these Consumer Telecom trends – including cell phone usage, home telephone service, and VoIP – to get an up-to-the-minute perspective on where the industry is heading. A total of 1,166 Alliance members participated.

The findings are presented in three sections:

Part One:VoIP in the Home – A Closer Look

Part Two:Home Long Distance and VoIP

Part Three:Cell Phones and Service Providers

II. The Findings

Part One: VoIP in the Home – A Closer Look

(1) Question Asked: Some Alliance members have used a Voice Over Internet Protocol (VoIP) service in their home during the past year. Have you used VoIP in your home at any time over the past 12 months?(n=1166)

Current Survey Sep ‘04 / Previous Survey Dec ‘03
Yes / 9% / 7%
No / 89% / 88%
Don’t Know/No Answer / 2% / 5%

VoIP Use is Growing. Nine percent (9%) of respondents say they have used VoIP in their home at some point in the past year. This is an increase of 2-percentage points since the December 2003 survey.

(1A) Question Asked: Are you satisfied or unsatisfied with your home VoIP service?(n=106)

Current Survey Sep ‘04 / Previous Survey Dec ‘03
Very Satisfied / 39% / 22%
Somewhat Satisfied / 39% / 46%
Somewhat Unsatisfied / 8% / 20%
Very Unsatisfied / 7% / 9%
Canceled my VoIP Service / 7% / NA
Don't Know/No Answer / 1% / 3%

Rise in Home VoIP Customer Satisfaction. A total of 78% of the respondents who have used VoIP in their home during the past year say they are “Very” or “Somewhat” satisfied with the service – a big 10-point jump from the previous survey (Dec 2003). And the percentage who say they are “Unsatisfied” (or have canceled) their VoIP service has dropped from 29% to 22%.

(1B) Question Asked: Which of the following factors are most important to you about your home VoIP service? (Choose No More Than Three)(n=106)

Quality of Calls / 69%
Lower Price / 59%
Lower International Calling Rates / 42%
Flat Rate Pricing (Unlimited Calling) / 37%
Additional Value Services (caller ID, conferencing) / 19%
Voicemail and Unified Messaging Features / 10%
Lower Domestic Rates / 8%
No Taxes / 8%
Broadband Reliability / 8%
Number Portability and/or Picking Your Own Number / 5%
Videophone / 0%
Customer Service / 0%
Don't Know / 1%
Not Applicable / 0%
Other / 0%

(1C) Question Asked: Which of the following factors are least important to you about your home VoIP service? (Choose No More Than Three)(n=106)

Videophone / 52%
Number Portability and/or Picking Your Own Number / 30%
No Taxes / 25%
Additional Value Services (caller ID, conferencing) / 22%
Lower International Calling Rates / 21%
Voicemail and Unified Messaging Features / 18%
Customer Service / 12%
Lower Domestic Rates / 11%
Flat Rate Pricing (Unlimited Calling) / 9%
Lower Price / 4%
Broadband Reliability / 4%
Quality of Calls / 1%
Don't Know / 4%
Not Applicable / 3%
Other / 0%

Net Difference Score

Most Important / Least Important / Net Difference Score
Quality of Calls / 69% / 1% / +68
Lower Price / 59% / 4% / +55
Flat Rate Pricing (Unlimited Calling) / 37% / 9% / +28
Lower International Calling Rates / 42% / 21% / +21
Broadband Reliability / 8% / 4% / +4
Lower Domestic Rates / 8% / 11% / -3
Additional Value Services (caller ID, conferencing) / 19% / 22% / -3
Voicemail and Unified Messaging Features / 10% / 18% / -8
Customer Service / 0% / 12% / -12
No Taxes / 8% / 25% / -17
Number Portability and/or Picking Your Own Number / 5% / 30% / -25
Videophone / 0% / 52% / -52

It’s All About Quality and Price. Quality of Calls (Net Difference Score = +68) and Lower Price (Net Difference Score = +55) are the factors rated most important for Home VoIP service. Flat Rate Pricing (+28) and Lower International Calling Rates (+21) are also important to respondents who have used VoIP in the past 12 months.

(2) Question Asked: Which of the following best describes the current status of VoIP in your home?(n=1166)

Current Survey Sep ‘04 / Previous Survey Dec ‘03
I currently use a VoIP service / 7% / 5%
I currently do not use a VoIP service but plan on deploying VoIP during the next 12 months / 23% / 20%
I currently do not use a VoIP service and have no plans to deploy VoIP in the future / 59% / 56%
Don't Know / 8% / 13%
No Answer / 3% / NA
Other / 1% / 6%

Consumer VoIP Market to Accelerate in Next 12 Months.In the nine months since our last Consumer Telecom survey, the percentage of respondents who report that they“Currently Use VoIP at Home” has risen two percentage points – from 5% to 7%. In addition, the percentage who report they “Plan on Deploying VoIP Over the Next 12 Months” has increased from 20% to 23%.

In sum, the total market for Home VoIP has increased from 25% in December 2003 to 30% in the current survey.

(2A) Question Asked: How is VoIP currently utilized in your home?(n=78)

I have a VoIP service but still rely primarily on traditional home phone service / 40%
I have a VoIP service but rely primarily on cell home phone service / 15%
I use VoIP as my primary home phone service / 32%
I use VoIP as my only home phone service / 10%
Not Applicable/No Answer / 3%
Other / 0%

Current Home Use. Forty-two percent (42%) of current VoIP users say they use VoIP as either their primary or only home phone service. Another 40% still rely primarily on traditional home phone service and 15% rely primarily on cell phone service.

(2B) Question Asked: Which one of the following companies provides your VoIP service?(n=78)

Vonage / 23%
My Cable Company / 13%
8X8 (Packet8) / 13%
AT&T (CallVantage) / 6%
Net2Phone (VoiceLine) / 5%
Verizon (VoiceWing) / 1%
Don't Know / 4%
Not Applicable/No Answer / 35%
Other / 0%

Vonage is Market Leader Among Current VoIP Users. Vonage (23%) has the largest share of the market among respondents who currently have home VoIP. Tied for second place are 8X8 (13%) and “My Cable Company” (13%).

(2C) Question Asked: How likely is it that you will change your VoIP service provider within the next 6 months?(n=78)

Very Likely / 5%
Somewhat Likely / 13%
Unlikely / 76%
Don't Know / 5%
No Answer / 1%

Most are Unlikely to Change VoIP Provider. Better than three-in-four respondents (76%) say it is unlikely they’ll change VoIP providers within the next 6 months. Another 13% say it is “somewhat likely,” while only 5% say they are “very likely” to change providers.

These next two questions were asked only of members who currently do not use a VoIP service but plan on deploying VoIP during the next 12 months.

(3) Question Asked: Which of the following factors are most important in your decision to deploy VoIP? (Choose No More Than Three)(n=271)

Flat Rate Pricing (Unlimited Calling) / 54%
Quality of Calls / 54%
Lower International Calling Rates / 32%
Lower Domestic Rates / 27%
Feedback / 25%
Additional Value Services (caller ID, conferencing) / 15%
Number Portability and/or Picking Your Own Number / 13%
Brand Name and/or Trusted Company as Provider / 7%
Videophone / 7%
No Taxes / 7%
Broadband Reliability / 6%
Voicemail and Unified Messaging Features / 4%
Customer Service / 4%
I Need to Get a Broadband Connection / 4%
Don't Know / 1%
Not Applicable / 1%
Other / 2%

It’s About Flat Rate Pricing and Quality. Among respondents who plan on deploying VoIP during the next 12 months, Flat Rate Pricing (54%) and Quality of Calls (54%) are the most important factors influencing the decision. Other important factors include Lower Rates – both International (32%) and Domestic (27%) – and Feedback from Friends/Associates that Use VoIP (25%).

(4) Question Asked: Which company are you most likely to choose as your VoIP service provider?(n=271)

My Cable Company / 15%
8X8 (Packet8) / 14%
Vonage / 6%
Verizon (VoiceWing) / 5%
Net2Phone (VoiceLine) / 2%
AT&T (CallVantage) / 1%
Don't Know / 49%
Not Applicable/No Answer / 7%
Other / 3%

Cable Companies and 8X8 are the Top Choices of Those Planning to Get VoIP. Respondents who plan on deploying VoIP during the next 12 months report they are most likely to choose “My Cable Company” (15%) or 8X8 (14%) as their service provider. Vonage (6%) and Verizon (VoiceWing) (5%) came in 3rd and 4th, respectively.

Part Two: Consumer Telephone Services and VoIP

A. Home Long Distance Service

(1) Question Asked: Who currently provides your home long-distance service?(n=1166)

Current Survey Sep ‘04 / Previous Survey Dec ‘03 / Previous Survey May ‘03
My Local Phone Company / 21% / 19% / 16%
AT&T / 17% / 22% / 24%
Use My Cell Phone for Long Distance / 10% / 10% / 12%
Verizon / 9% / 8% / 6%
Sprint / 7% / 9% / 9%
Worldcom/MCI / 6% / 8% / 12%
My Cable Company / 3% / 3% / 3%
Stand Alone VoIP Service (e.g., Vonage, 8x8) / 2% / 2% / NA
IDT / 1% / 2% / 1%
Peer to Peer (e.g., Skype) / 1% / NA / NA
Don't Know / 2% / NA / NA
Not Applicable/NA / 20% / NA / NA
Other / 18% / 16% / 16%

Local Phone Companies Surpass AT&T in Market Share. Local Phone Companies (21%) have surpassed AT&T (17%) as the top long-distance provider among respondents. The percentage of respondents who report they “Use My Cell Phone for Long Distance” (10%) remains unchanged from the December 2003 survey.

(1A) Question Asked: How likely is it that you will change home long-distance service providers within the next six months? (n=1166)

Current Survey Sep ‘04 / Previous Survey Dec ‘03 / Previous Survey May ‘03
Very Likely / 8% / 9% / 11%
Somewhat Likely / 14% / 17% / 17%
Unlikely / 68% / 66% / 67%
Don’t Know / 6% / 8% / 6%
Not Applicable/NA / 5% / NA / NA

Current Survey – Breakout of Customers by Provider – September 2004

Total / AT&T / World-
Com/
MCI / Sprint / Verizon / Local Phone
Co. / Local Cable Co. / Use Cell Phone / Stand Alone VoIP
Very/Somewhat Likely / 21% / 32% / 39% / 21% / 20% / 19% / 15% / 12% / 7%
Unlikely / 68% / 59% / 51% / 72% / 74% / 74% / 76% / 69% / 89%

VoIP Users Sticking With Their Home Providers. Only 7% of respondents who currently use VoIP for home long-distance report they are likely to change providers in the next six months – a key sign of strength and the best rate in the telecom industry.

On the other hand, respondents who use WorldCom/MCI and AT&T reported they were most likely to change home long-distance providers within the next 6 months (39% and 32%, respectively).

Among traditional long distance providers, we note that Sprint (21%) is the most noticeably improved – 16 percentage-points better than the December 2003 survey, when 37% of Sprint users reported they were likely to change home long-distance providers within 6 months.

(1B) Question Asked: For those of you who are likely to change home long-distance service, which company are you most likely to switch to? (n=249)

Current Survey Sep ‘04 / Previous Survey Dec ‘03* / Previous Survey May ‘03*
Stand Alone VoIP Service (e.g., Vonage, 8x8) / 21% / 15% / NA
My Local Phone Company / 10% / 8% / 15%
Use My Cell Phone for Long Distance / 10% / 6% / 4%
Verizon / 6% / 7% / 9%
My Cable Company / 6% / 8% / 6%
AT&T / 3% / 3% / 7%
Sprint / 2% / 2% / 3%
Peer to Peer (e.g., Skype) / 2% / NA / NA
IDT / 1% / 2% / 3%
Worldcom/MCI / 0% / 2% / 4%
Don't Know / 24% / 38% / 37%
Not Applicable/NA / 14% / NA / NA
Other / 1% / 9% / 12%

Note that this question was addressed only to those members who said they were either “Very Likely” or “Somewhat Likely” to change home long-distance service within the next 6 months.