TELECOM Digest OnLine - Sorted: How the Internet Killed the Phone How the Internet Killed the Phone

Marcus Didius Falco (
Fri, 09 Dec 2005 21:58:02 -0500

Telecoms and the internet

From The Economist print edition

Almost-free internet phone calls herald the slow death of traditional

THE term 'disruptive technology' is popular, but is widely misused. It
refers not simply to a clever new technology, but to one that
undermines an existing technology and which therefore makes life very
difficult for the many businesses which depend on the existing way of
doing things. Twenty years ago, the personal computer was a classic
example. It swept aside an older mainframe-based style of computing,
and eventually brought IBM, one of the world's mightiest firms at the
time, to its knees. This week has been a coming-out party of sorts for
another disruptive technology, voice over internet protocol (VOIP),
which promises to be even more disruptive, and of even greater benefit
to consumers, than personal computers (see article).

VOIP's leading proponent is Skype, a small firm whose software allows
people to make free calls to other Skype users over the internet, and
very cheap calls to traditional telephones -- all of which spells
trouble for incumbent telecoms operators. On September 12th, eBay, the
leading online auction-house, announced that it was buying Skype for
$2.6 billion, plus an additional $1.5 billion if Skype hits certain
performance targets in coming years.

This seems a vast sum to pay for a company that has only $60m in
revenues and has yet to turn a profit. Yet eBay was not the only
company interested in buying Skype. Microsoft, Yahoo!, News
Corporation and Google were all said to have also considered the
idea. Perhaps eBay, rather like some over-excited bidder in one of its
own auctions, has paid too much. The company says it plans to use
Skype's technology to make it easier for buyers and sellers to
communicate, and to offer new =93click to call advertisements, but
many analysts are sceptical that eBay is the best owner of
Skype. Whatever the merits of the deal, however, the fuss over Skype
in recent weeks has highlighted the significance of VOIP, and the
enormous threat it poses to incumbent telecoms operators.

For the rise of Skype and other VOIP services means nothing less than
the death of the traditional telephone business, established over a
century ago. Skype is merely the most visible manifestation of a
dramatic shift in the telecoms industry, as voice calling becomes just
another data service delivered via high-speed internet
connections. Skype, which has over 54m users, has received the most
attention, but other firms routing calls partially or entirely over
the internet have also signed up millions of customers.

A price of zero.

The ability to make free or almost-free calls over a fast internet
connection fatally undermines the existing pricing model for
telephony. If you believe that you should not have to pay for making
phone calls in future, just as you don't pay to send e-mail, says
Skype's co-founder, Niklas Zennstrom. That means not just the end of
distance and time-based pricing it also means the slow death of the
trillion-dollar voice-telephony market, as the marginal price of
making phone calls heads inexorably downwards.

VOIP makes possible more than just lower prices, however. It also
means that, provided you have a broadband connection, you can choose
from a number of providers of VOIP telephony and related add-on
services, such as voicemail, conference calling or video. Many
providers allow a VOIP account to be associated with a traditional
telephone number or with multiple numbers. So you can associate a San
Francisco number, a New York number and a London number with your
computer or VOIP phone and then be reached via a local call by anyone
in any of those cities.

Furthermore, your phone (or computer) will ring wherever you are in
the world, as soon as it is plugged into the internet. So you can take
your Madrid number with you to Mumbai, or your San Francisco number to
Shanghai. Skype and other VOIP services, in other words, are leading
to lower prices, more choice and greater flexibility. It is great news
for consumers but terrible for telecoms operators. What can they do?

Watching the elephants dance

As is always the case with a disruptive technology, the incumbents it
threatens are dividing into those who are trying to block the new
technology in the hope that it will simply go away, and those who are
moving to embrace it even though it undermines their existing
businesses. Since VOIP will cause revenue from voice calls to wither
away, the most vulnerable operators are those that are most dependent
on such revenue.

In particular, that means mobile operators, which have been struggling
for years to get their subscribers to spend more on data services, but
are still hugely dependent on voice. Worse, the very third generation
(3G) networks that are supposed to provide future growth for these
firms could now undermine them, because such networks make mobile VOIP
possible too. Least vulnerable, by contrast, are those fixed-line
operators that are now building new networks based on internet
technology, which will enable such firms to benefit from the greater
efficiency and lower cost of VOIP compared with traditional telephony.

These operators are taking an "if you can't beat 'em, join 'em"
approach and getting into the VOIP business. While their voice
revenues will slowly evaporate, they will then be well placed to offer
fee-based add-on services over their new networks. Again, this is a
common pattern with disruptive technologies: forward-looking
incumbents can end up giving upstart innovators a run for their money.

It is now no longer a question of whether VOIP will wipe out
traditional telephony, but a question of how quickly it will do
so. People in the industry are already talking about the day, perhaps
only five years away, when telephony will be a free service offered as
part of a bundle of services as an incentive to buy other things such
as broadband access or pay-TV services. VOIP, in short, is completely
reshaping the telecoms landscape. And that is why so many people have
been making such a fuss over Skype, a small company, yes, but one
that symbolises a massive shift for a trillion-dollar industry.

Copyright 2005 The Economist Newspaper and The Economist Group.

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