What the Recession Will Do to VoIP

Updated: April 30, 2009

Signs indicating a potential U.S. recession are all around: collapsing home values, soaring oil and precious-metal prices, a falling dollar, rising unemployment and, perhaps most ominously, reduced business spending. While it's still not certain that a recession is inevitable, the recent string of gloomy government and private statistics make an economic slump increasingly likely.

During the last U.S. recession in 2001, the VoIP market barely existed. Today, IP telephony is an established telecommunications technology with large numbers of business and residential users purchasing products and services from a growing number of vendors .

Exactly how a recession would affect the VoIP industry and its customers is hard to say at this point. Still, it's possible to make some educated guesses and to understand that an economic downturn may have both bad and good implications for the VoIP industry and its customers.

The Bad

When businesses are pinched by falling revenues, they often respond by scaling back expansion plans, curtailing new initiatives and cutting back on purchases. This could be bad news for VoIP equipment makers — the vendors who build everything from servers to gateways to phones — as more businesses cancel orders, switch to products with less power or fewer features or simply never place orders. Software vendors will also likely feel the pinch as fewer businesses purchase their offerings.

As businesses trim their staffs by setting hiring freezes and laying off employees, VoIP service providers may see more companies asking for smaller, less expensive service contracts designed to meet the needs of shrunken work forces. Businesses that fail entirely won't contract for any services at all, of course. On the other hand, sagging product and service markets could be a bonanza for VoIP customers, as vendors and providers slash prices and rates in order to unload excess inventory and network capacity.

The Good

While cold logic dictates that a recession should be universally distressful, there's also good reason to believe that the VoIP industry may not be hurt as much as many other businesses. VoIP's big draw is, and always has been, that it is cheaper than traditional telephony. So it stands to reason that as more businesses look to cut their telecom costs, many will decide to make the switch to VoIP. In fact, a recession could turn out to be VoIP's golden moment, as more enterprises dump costly, aging telephone systems in order to take advantage of VoIP's cost-saving potential and technological flexibility.

Rising travel costs could also work in VoIP's favor, as more businesses order their managers to cancel expensive trips to customer sites and industry events. VoIP's ability to provide cheap, easy and high-quality communication services, including video conferencing, makes it an attractive choice for businesses looking to rein in travel costs.

Still, as markets dwindle, there's a distinct possibility that some smaller and highly leveraged VoIP vendors and service providers will close up shop. That's obviously bad news for those businesses and their employees. But it could be great news for the failed companies' competitors, who will rush in and scoop up remaining customers. Therefore, a few firms might be able to seize on their competitors' misfortune to build market share that could be maintained in future, more prosperous times.

Despite any silver clouds, a sharp, prolonged U.S. recession would likely be painful to most VoIP businesses and their customers. The industry as a whole, however, should suffer no permanent damage. While sales may drop over the short term, VoIP is now a firmly established industry, one that should be able to resume its growth as soon as the general economy begins to recover.

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