VoIP Hype: Could It Lead to a Bust?

Investors seem willing to shell outs billions for VoIP companies. But are these outfits, like Skype and Vonage, worth it? Chances are, the answer is no. And today's irrational exuberance over VoIP companies could lead to a bust.

Every week, it seems Web-calling provider Skype is said to be for sale for a greater amount. In the past month, the company's alleged price tag has jumped from $2 billion to $5 billion. My colleague Rob Hof had blogged recently on how ridiculously high this amount is, considering that Skype's revenues are likely still tiny.

I think the Web-calling (or VoIP) market has entered what Alan Greenspan had categorized as "irrational exuberance." Greenspan's words related to the dot-com boom, which resulted in a bust. I believe that we'll see the VoIP world coming down to earth sooner rather than later, too.

Consider, there are more than 1,100 providers of VoIP services in North America alone, according to surveys by gearmaker Sandvine. Lots of these companies, such as Vonage and Skype, are expected to go public. And investment bankers already expect these IPOs to take off like rockets even though these companies' long-term profitability is hardly assured.

Lots of these outfits are rumored to be in negotiations to sell out to, say, Google or eBay, for astronomical amounts -- entirely disproportionate to their revenues. Most VoIP outfits are still losing tons of money and are likely to lose even more as competition in this market ramps up.

In response to our Friday article on Skype, I got an e-mail from a reader who pointed out that all these services differ little in technology. They offer similar features.

So, that begs the question: Why would anybody be willing to pay billions for these companies?

The answer: Because we are irrationally exuberant once again, only, this time, over VoIP.

I bet that, just as the dot-com bubble imploded, this boom won't last, either.

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