Jamie's Blog

Lessons from a life of startups, coding, countryside, and kids

Telecoms

I bought The Economist during the week (it’s the Technology Quarterly issue) and I finally got around to reading it. There’s a feature article on Skype, VoIP and the current telecoms operators:

Skype announced that it had agreed to be taken over by eBay…[for] $2.6billion in cash and shares.
That’s quite an achievement for a company that’s only 3 years old. But this is the paragraph that really got my attention:
Google, the world’s most popular search engine, launched it’s own voice-chat software in August. A week later, Microsoft bought Teleo, a San Francisco company that lets people callconentional telephones from their computers.Yahoo! had alaready bought Dialpad, another Skype-like firm, in June. AOL, Apple and others have similar products.
What’s happening is not that Skype is going to rule the world, because they’re not, but that there is a market growing in VoIP products and it’s being pushed by large international brand names. Here’s the next lightbulb:
“We want to make as little money as possible per user,” says Mr Zennstrom [of Skype], because “we don’t have any costs per user, but we want a lot of them.” This is the exact opposite of the traditional business model in the telecoms industry, which is based on maximising the average revenue per user, or ARPU. And that has only one logical consequence… a future in which all voice communication, near or far, will be free.

Even before VoIP makes 100% of telephones calls in the world completely free (which may take many years), it utterly ruins the pricing models of the telecoms industry. Factors such as the distance between callers or the duration of a call, the key determinants of cost today, are simply irrelevant with VoIP.
Hmmm… so VoIP is one of those disruptive technologies which has the power to destroy established industries. The article goes on the discuss how certain operators (hint, hint, Vodafone) are very exposed to this threat, with voice calls accounting for over 80% of their revenues, whereas other operators such as BT have diversified and embraced VoIP technology.

The article didn’t discuss in enough depth how the telecoms industry will adapt; it wont “die”. I’d foresee some big pricing changes coming when free peer-to-peer VoIP calls start cutting into operator’s revenues. First off, line rental is going up. The operators will have to move from a value-added service provider model, to a flat subscription model simply for the use of their physical cable. They’ll need to recoup their investments in laying all those miles of cable and then (endlessly) digging up roads to service it. The next surprise: broadband charges aren’t going to tend to towards zero. In fact, I reckon they aren’t going to fall by more than 50%, ever. Without any innovations in their business model, the line rental and broadband subscriptions (possibly combined?) will have to make up the shortfall in voice revenues. In the mobile sector, there will be a short-term tension between the price of voice calls and the pricing per KB of data calls. If the data calls are too cheap, the operators will (eventually) lose their voice revenues. If data is too expensive, all they’ll have is voice revenues and they’ll finally have killed the fanciful 3G scenarios of video conferencing, TV snippets, etc. In the long-term, all mobile operators are betting on the sucess of mobile data, so they’ll probably integrate VoIP into their networks and handsets, and then give away (essentially) free voice access with their data plans. Line rental is going to go up (or at least not down) in the mobile sector too.

Lastly, it’s worth bearing in mind that VoIP is only going to change the telecoms industry if: a) they let it or b) they’re made to change. According to the article, some Vodafone contracts in Germany state that they may, in the future, restrict VoIP over their data network. Other operators around the world have already blocked the VoIP protocol. BT seems to be one of the embracing companies whereas I’m pretty sure Eircom is going to hold out against VoIP for as long as possible… and then a little bit more, until ComReg finally kick them in the head). Which brings me to regulation: the telecoms regulators are going to have a tough time ensuring that VoIP technology isn’t strangled by the incumbant operators. Since these operators own all the physical lines, and provide access to broadband functionality, they’re in a prime position to block VoIP in order to protect they’re voice market. They’re also in a prime position to disuade VoIP companies from making calls into their network by charge extortionate interconnect fees (which we’ve all seem the result of in roaming charges). As far as I know, interconnect fees are negotiated individually between operators and are not subject to regulatory approval (I’ll have to check with my little ex-regulator when she gets home). At the same time, the regulators have to ensure that universal access is still provided, and emergency calls are still possible, which all require the existing operators to still be around. It’s an interesting balancing act.

As an aside, I imagine that there are quite a few Eircom (hmm… and Ericsson) employees whose whole careers have been built on fixed-line telephony, and they just don’t have the agility left to change. I’d start getting a little worried if I was them.

Incidentally, the Observer’s ‘Cash’ section has a consumer-focused look at VoIP products available in the UK.