The hidden crisis in VoIP people are only whispering about

After the innovators and the acquirers, new lines of technology businesses tend to attract the mediocre-skilled, hordes who have read about business opportunities for that industry in some magazine and remortgage their homes to start up what they naively view as the path to riches.

We saw this 20 years ago with pay phone resellers. There have been long-distance resellers, cellular resellers, and now VoIP connection resellers.

In the examples I have just cited, only a few lucky early players made any substantial money. The rest were underfunded me-too operations with no distinguishing service or product characteristics.

The problem for VoIP connection resellers is related to the crowded competitive playing field of big pure-play VoIP players, VoIP-offering broadband service providers, and then the IMers.

In a common scenario, the connection resellers have been spending huge cash outlays up front, buying large blocks of minutes from the telcos, and then reselling these VoIP minutes for less than the telcos charge.

With per-minute prices slouching toward zero, though, the established VoIP players can undercut the wholesale prices they sold their smaller, me-too competitors. So the me-too competitors have to cut to stay even with the sellers they bought the minutes from.

But it is not just a matter of covering your minutes. I hear true stories of VoIP connection resellers that spent lots of money to buy the equipment necessary to run VoIP services. With the price wars now making profitability even more difficult, some VoIP connection resellers are not even able to stay current on their equipment financing.

I have heard (but have been sworn to secrecy about this) that in some cases, the situation is even more dire. Equipment cash-up-front deals demanded by vendors or VoIP technology equiment resellers have not only caused a cash crunch on some VoIP connection reseller books, but is injecting a toxin of distrust against new VoIP startups.

So to sum up:

Minutes resellers are being undercut by major competitors. Lower-than projected cash flow from the minutes resellers buy are rendering some undercapitalized and financiall delinquent.