The Economist magazine (today's UK edition) runs a front page that
screams "How the internet (sic) killed the phone business". Inside
there's an editorial and a 'special report' article. It's available at www.economist.com
but is 'subscription only' and so I have pasted both
articles below this post.
I take no issue with the main thrust of their contention that VOIP
calls will eventually undermine the traditional POTS voice network.
What I think is myopic on their part is their acceptance of the fact
that there will be business opportunities in VOIP in the long term
(for those such as Skype et al). It's my view that companies currently
offering VOIP services on the Internet are taking advantage of a
technology in its infancy. Once the technology reaches maturity it's
inevitable that business opportunities will be few and far between and
the 'Skype bubble' will burst.
Basically, all Skype currently offers is:
1) A 'gateway' between the Internet and the traditional phone network
so that subscribers can make outgoing calls
2) A traditional phone number so traditional phone network users can
call Skype subscribers
3) A pretty basic suite of VOIP software
4) A voicemail service
If, as The Economist suggests, the technology evolves so that all
phone subscribers (mobile and fixed) will have broadband Internet
connectivity as standard then why use Skype? In the coming years most
fixed line subscribers will have a wireless router installed in their
master socket and mobile phone users will have the appropriate
software installed on their mobile phones. All will have an IP address
(or the equivalent) and will be able to call each other by dialling IP
addresses (or dynamic DNS host names). Where is the need for Skype in
this equation? The 'gateways' in 1) and 2) above will be unnecessary.
The software in 3) is essentially open source and/or freeware and I
can't see millions being made from 4) a voicemail service.
Two articles follow; copy/pasted from www.economist.com
How the internet killed the phone business
Sep 15th 2005
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 "click 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. "We 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
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.
The meaning of free speech
Sep 15th 2005 | LONDON AND SAN FRANCISCO
From The Economist print edition
The acquisition by eBay of Skype is a helpful reminder to the world's
trillion-dollar telecoms industry that all phone calls will eventually
NIKLAS Zennstrom and Janus Friis, the founders of Skype, which
distributes software that lets people make free calls from their
computers to other Skype users anywhere in the world, don't usually
travel to America. Legally, they probably could. But they prefer to
avoid that jurisdiction, since they also founded (and subsequently
sold) KaZaA, a peer-to-peer software company whose product many people
use to share copyrighted songs. So setting foot in America could
invite some legal trouble. This does not mean, however, that they
cannot appear at conferences in Silicon Valley, where Skype-which uses
the same basic idea of KaZaA, but applies it mainly to voice
communication-is considered the next big thing.
Thus, in July, Mr Zennstrom appeared, via a Skype video call, on the
screen of a packed auditorium at Stanford University, while sitting in
Estonia next to Tim Draper, a venture capitalist who invested $10m in
Skype. Mr Draper is the ultimate loud American, whereas Mr Zennstrom
is a sombre Swede. "He's already taken down one industry and he's on
to the next one," hollered Mr Draper-referring to recording studios
and telecoms companies. Mr Zennstrom started shifting uncomfortably.
"I never wanna sell my stock until it's a hundred billion," Mr Draper
yelled, then started singing and dancing. The blushing Mr Zennstrom
Of course, Mr Draper was posturing. That became clear on September
12th, when Skype announced that it had agreed to be taken over by
eBay, based in Silicon Valley and the world's largest online
marketplace. Mr Draper and Skype's other investors will get nothing
like $100 billion, but eBay is paying a hefty sum-$2.6 billion in cash
and shares and perhaps more if certain criteria are met-nonetheless.
This pairing took many people by surprise. There have been rumours
that Yahoo!, Google, Microsoft and other technology companies were
also interested in buying Skype. Any of these might have made a more
obvious fit, since each also has instant-messaging software that can
be used for free phone calls (or "voice chats", as opposed to text
chats) between computers. Google, the world's most popular internet
search engine, launched its own voice-chat software in August. A week
later, Microsoft bought Teleo, a San Francisco company that lets
people call conventional telephones from their computers (as Skype
also does, for $0.02 a minute). Yahoo! had already bought Dialpad,
another Skype-like firm, in June. AOL, Apple and others have similar
As Meg Whitman, eBay's boss, and Mr Zennstrom explain it, a
combination of eBay and Skype is not all that far-fetched. From eBay's
point of view, placing cute Skype buttons on the web pages where
people trade used cars, houses and other items that usually require
voice bargaining "reduces friction", says Ms Whitman. Buyers can
simply click on the button and talk to sellers. Another idea is to
make money from "pay-per-call" advertising, where advertisers would
place voice links (ie, Skype buttons) on certain pages just as they
now place text links on, say, the search-results pages of Google.
Whenever a web surfer clicks on one of these links and talks to a
salesperson, the advertiser would pay eBay and Skype a fee. Google got
rich by doing this in the text world; there is no reason why eBay
might not be able to do it in the voice world.
From Skype's point of view, the deal strengthens its existing link
with PayPal, eBay's online bank, which it uses to charge for services
such as calls from computers to conventional telephones (called
SkypeOut) or from conventional phones into Skype (called SkypeIn).
This involves prepaid accounts, which Skype users can top up via
PayPal with their credit cards.
For Skype, however, the main attraction may be that eBay, unlike the
other potential suitors, plans to leave it largely alone, both as a
brand and as a business. "When Yahoo! and Microsoft buy companies,
they typically disintegrate them," says Mr Zennstrom. His vision for
Skype, by contrast, is to become the world's biggest and best platform
for all communications-text, voice or video-from any
internet-connected device, whether a computer or a mobile phone.
This is every bit as audacious as it sounds. Mr Zennstrom, in general,
is a modest man. But his company is only three years old, will
probably make only $60m in revenues this year, and will certainly not
turn a profit. So it is the fact that his ambition is not nearly as
ridiculous as it sounds that should make incumbent telecoms firms
everywhere break out in a cold sweat.
That is because Skype can add 150,000 users a day (its current rate)
without spending anything on new equipment (users "bring" their own
computers and internet connections) or marketing (users invite each
other). With no marginal cost, Skype can thus afford to maximise the
number of its users, knowing that if only some of them start buying
its fee-based services-such as SkypeOut, SkypeIn and voicemail-Skype
will make money. This adds up to a very unusual business plan.
"We want to make as little money as possible per user," says Mr
Zennstrom, because "we don't have any cost 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.
According to Rich Tehrani, the founder of Internet Telephony, a
magazine devoted to the subject, Skype and services like it are
leading inexorably to a future in which all voice communication, near
or far, will be free.
End of the line
The technical term that encompasses all forms of voice communication
using the internet is voice-over-internet-protocol, or VOIP. This
includes pure computer-to-computer calling as well as the various
hybrid states, such as a Skype user connecting to the traditional
telephone network, or even two people talking on seemingly
conventional phones that are linked, behind the scenes, via the
internet. It also includes residential VOIP providers such as Vonage,
based in New Jersey and the market leader in America with over 1m
subscribers, that supply their customers with adapters so they can
plug ordinary telephones into their broadband connections without
using a computer.
Sandvine, a telecoms-equipment firm, estimates that there are 1,100
VOIP providers in America alone. But the trend is worldwide. IDC, a
market-research firm, predicts that the number of residential VOIP
subscribers in America will grow from 3m at the end of 2005 to 27m by
the end of 2009; Japan already has over 8m subscribers today.
Worldwide, according to iSuppli, a market-research firm, the number of
residential VOIP subscribers will reach 197m by 2010. Even these
numbers, however, do not include people using VOIP without subscribing
to a service (ie, by downloading free software from Google, Skype or
others). Skype alone has 54m users.
Even before VOIP makes 100% of telephone 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 the
callers or the duration of a call, the key determinants of cost today,
are simply irrelevant with VOIP. Vonage already lets its customers
choose telephone numbers in San Francisco, New York or London, no
matter where they live. A Londoner calling the London number is making
a "local" call, even if the Vonage subscriber is picking up the phone
in Shanghai. As when checking e-mail on, say, Hotmail, the only thing
needed is a broadband-internet connection, but it can be anywhere in
the world. Sooner or later, people will discard their unwieldy phone
numbers altogether and use names, just as they do with their e-mail
addresses, predicts Mr Zennstrom.
Call duration is also becoming irrelevant. "A lot of people open a
Skype audio channel and keep it open," says Mr Zennstrom. After all,
it costs nothing. Many people with Apple computers are already
accustomed to this. They open an application called iChat, which is a
video and voice link, and stay connected to their loved ones far away.
Increasingly, members of a family or a business team can stay online
throughout the day, escalating from unobtrusive instant-messaging
("Can you talk?") to a conference call, a video call and back to a
little icon on their screen.
It is thus altogether wrong to call this phenomenon the end, or death,
of telephony. "Calling it the death of telephony suggests people
aren't going to make calls, but they are," says Sam Paltridge, a
telecoms guru at the OECD. "It's just the death of the traditional
pricing models." In short, all this is great news for consumers and
awful news for telecoms operators. "VOIP will destroy voice revenues
faster than most analysts' models predict," says Cyrus Mewawalla, an
analyst at Westhall Capital. "Voice will very rapidly cease to become
a major revenue generator for all telecoms operators, fixed and
That said, some telecoms carriers are much more vulnerable to VOIP
than others, says Mr Mewawalla. Telecoms operators offer and charge
for a number of services besides pure voice calls. Because VOIP will
cause only the revenues from voice calls to shrink, it will hit those
operators hardest that are most dependent on their revenues from voice
(see chart 2).
For pure mobile operators, such as Vodafone or Taiwan Mobile-as it
happens, Taiwan is the country with the highest ratio of Skype
users-VOIP could be an "enormous problem", says Mr Mewawalla, because
voice accounts for over 80% of their revenues. By contrast, VOIP is
less threatening to integrated operators (ie, those offering both
fixed and mobile services) such as Deutsche Telekom or Japan's NTT.
And those carriers-such as BT, France Telecom or KPN-that are
currently building next-generation networks based on internet
technologies will be able to offer VOIP services themselves, bundled
with other offerings, and might emerge relatively unscathed.
Some operators are taking an unenlightened view by trying to delay the
advance of VOIP. China Telecom has been blocking access to Skype from
Shenzen, according to local newspaper reports. Vodafone has introduced
wording into new contracts for some German subscribers reserving the
right to block VOIP in future, though a spokesman for the company says
it is not doing so at the moment. Clearwire, an American
wireless-broadband provider, also reserves the right to block VOIP
traffic. In February, Madison River Communications, a rural phone
company in North Carolina, was fined $15,000 by regulators for
blocking access to Vonage's VOIP service. Occasionally, operators have
even blocked access to Skype's website, thus preventing people from
downloading the software or topping up their calling credit.
The more enlightened approach-which most operators in rich countries,
to varying degrees, accept-is to compete with VOIP openly or even to
embrace it. Already, says Mr Paltridge, pricing of traditional phone
services is changing quite radically as operators "try to adjust and
to compete with the Skypes of this world". Operators are moving
towards flat-rate pricing plans for traditional telephone service, so
that the marginal price of making calls falls to zero. Many American
regional operators offer unlimited local and national calling for a
fixed monthly fee, and such schemes are also becoming popular in other
Several incumbent operators have also launched their own VOIP
services, such as Verizon's VoiceWing and BT's Broadband Voice. These
offer lower prices than traditional telephone service but are
generally not as cheap as a call between Skype and a regular phone.
"If you can't beat 'em, join 'em," says John Delaney of Ovum, a
consultancy. Such services are an admission that a less lucrative VOIP
customer is better than no customer at all. Switching to VOIP also
helps operators by lowering their own costs dramatically. BT and
others are building new, internet-based networks behind the scenes,
which will carry all voice traffic as VOIP even if the calls start or
end in the traditional way.
The other argument for embracing VOIP is that the incumbents can then
start offering the fun new services that VOIP makes possible and
charging for them. This goes far beyond traditional voicemail.
Video-conferencing and unified messaging-whereby all forms of
communication, from voicemail and video messages to e-mails or entire
electronic documents go into one virtual "inbox"-will become common,
says Wendy McMillan-Turner, head of voice services at BT. Since all of
these features are essentially software programmes, they can all be
integrated with applications that people today use on their computers,
such as Outlook calendars and contacts files.
The service that many telecoms operators are most excited about,
however, is IPTV, which refers to television (and entertainment in
general) being delivered over new and super-fast broadband-internet
connections into homes. This would allow them to charge for a bundle
of services, including broadband access, entertainment and voice. The
voice component could then atrophy gracefully and eventually be thrown
in for nothing. "Ultimately-perhaps by 2010-voice may become a free
internet application, with operators making money from related
internet applications like IPTV," says Mr Mewawalla.
Cable operators are coming at VOIP from exactly the opposite
direction. They already offer television and entertainment, as well as
broadband access, so they might as well offer cheap telephony as well.
This puts the cable companies in a good position. Unlike the telecoms
operators, they do not depend on voice for their revenues today, so
they can use cheap VOIP service as a competitive weapon to make life
difficult for the telecoms operators, who are increasingly their only
competition. In California, for example, most people have a choice
between one cable company, Comcast, and one traditional telecoms
carrier, SBC. Since voice uses very little bandwidth compared with
television, the cable companies need not even add a lot in the way of
The result, says Mr Mewawalla, is that voice service is fast becoming
a marketing freebie to make customers "sticky"-to keep them loyal. "I
would expect people to advertise free calls with VOIP, subsidised by
other elements of the package," says Ms McMillan-Turner. Thus, BT will
consider value-added services sold around VOIP as voice revenues in
future, she says. BT hopes that selling such services will offset the
inevitable decline in traditional voice revenue. Evalueserve, a
consultancy, predicts that American and European fixed operators'
long-distance voice revenue will decline by around 40% by 2008, and
that in Europe 50% of broadband users will give up their voice lines
Mobile operators face a far greater challenge than fixed-line
carriers. Voice accounts for the bulk of their business and they
cannot (at least today) offer broadband access as easily as the cable
and fixed-line companies. New "third-generation" (3G) networks were
supposed to make possible whizzy new data services to compensate for
flat and even declining revenues from voice calls, but consumer
adoption has been slow.
Worse, those very 3G networks that are supposed to provide future
growth for the industry could now undermine it, since they make
possible VOIP calling over mobile networks. Already, one mobile
operator, E-Plus in Germany, has announced a deal that will allow
subscribers to use Skype on its 3G network. Users would thus pay only
for the internet connection, while making free calls to other Skype
users and to other telephones for very little. E-Plus hopes to win
valuable business customers and to put pressure on much bigger but
less agile rivals such as Vodafone.
Today, VOIP calling over 3G networks is still very much a minority
sport, but as 3G coverage and transmission speeds improve-something
the industry is racing to achieve-it will become common. This
represents a mortal danger for mobile operators. "VOIP on mobile is
the first real threat they are going to face, and they are in a state
of shock," says Mr Mewawalla. Mobile operators generally charge three
to five times as much as fixed operators for each minute on the phone,
so they have far more to lose from falling voice prices. International
travellers will use VOIP over hotel-room broadband links or Wi-Fi
hotspots in airports to save on the roaming charges by their
Vodafone counters that, like BT, it is moving towards internet-based
networks that will reduce its own cost of carrying calls and make
possible new value-added services. But this sounds unconvincing. Much
more so than fixed-line operators, mobile operators would have to
cannibalise their current business in order to generate new revenues
from VOIP. Ironically, this means that BT, once regarded as a
dinosaur-like incumbent, is now being held up as a shining example of
an operator that is embracing the future, while Vodafone, whose
pure-mobile strategy once seemed visionary, now stands accused of
being on the wrong side of history. At the end of the day, there is no
getting around the reality, as Skype's Mr Zennstrom says, that
"something that is a great business model for us is probably a
terrible business model for them."