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Summary:

Salon has a muddled piece on VoIP, called The triumph of the telcos. Internet telephony advocates are predicting that free long distance means the downfall of Big Telecom, but the writer defends it by saying that “it won’t be so easy to topple the king.” He […]

Salon has a muddled piece on VoIP, called The triumph of the telcos. Internet telephony advocates are predicting that free long distance means the downfall of Big Telecom, but the writer defends it by saying that “it won’t be so easy to topple the king.” He believes that the Bells and long distance providers will co-opt the technology. They already have. However, it is clear that there is absolute and complete lack of understanding of one market dynamic on part of the writer, the deflationary impact of these little guys, Vonage etc., on the market.

Let me take you back a few years. Back in 1999, it was fiber optics that was all the rage. Today it is voice over the Internet. Then there was belief that the demand for bandwidth would be infinite, and the prices will hold up. The thought that the prices would plummet, was laughable at the time. George Gilder, the bandwidth *genius* mocked me at a Red Herring event. However the bandwidth prices did fall. That changed when dot-coms failed, and the demand for bandwidth sagged. Newer and more desperate carriers (Eg. Enron Broadband) cut prices drastically in order to meet their sales targets and to keep their investors happy.

Eventually the market crapped out. Now the same is happening in the voice business. Voice is the primary revenue generator of the entire telecom industry. Today from Vonage, a VoIP upstart to large giants like Verizon to new entrants like cable providers to cell phone companies are chasing the voice business. They are all offering nearly unlimited voice calling for a fixed price – anywhere between $20 to $100 a month. THIS IS A MAJOR BUSINESS MODEL SHIFT FOR AN INDUSTRY ACCUSTOMED TO PER MINUTE PRICING TO A FIXED PRICE MODEL. When such a shift happens, there is a major upheaval and more chaos. Examples: brokerage and travel business. Telecom is going to go through the same cataclysmic change.

Now there are at-least eight VoIP providers who are selling unlimited voice service for about $40 a month. Bells & AT&T have matched those prices. Soon enough – mark my words – the market is going to get hyper competitive and you will see a price war. And when that happens, everyone suffers, including the Bells who have such high fixed costs that in order to grow their business, they keep firing more people.

bq. Internet telephony will create even more demand for bandwidth, which will be sold by — who else? — telecom and cable companies. The catch, however, is that free telephone service requires a broadband, or high-speed, connection to the Internet. Local telephone companies turn out to be the chief providers of broadband, which means that they can profit from a consumer’s switch to Internet telephony. The calls may be free, but the bandwidth isn’t.

This is simply not true – there are more options available by the day. The data wars are going to break out when the so-called 3G/Wi-Fi/WiMAX go into full effect, and that is within 24 months. Of course this argument does not take into account the fact that two sides, cable and telecos are on the opposite side of the street and would love to kill each other. Another widely known but most overlooked fact – cable guys are all about cash flow, telecoms are about dividend. Wait till this price war breaks out.

The downside of the voice over the Internet is that it does not take too much equipment to get into business. Phone companies which bought million dollar switches now buy a server with some software for less than $100,000. In short, the economics of computer industry have finally come to the telecom business. As a result, the spending on equipment, is going to only decrease. What we are looking at: an ever shrinking phone business.

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  1. What about the requirement of connecting with the FBI’s Carnivore? Won’t that add startup costs and eliminate some of the smaller players?

  2. Olivier Travers Tuesday, March 23, 2004

    Pricing pressure is already happening. Vonage just introduced a lower-priced tier. Now for just $14.99 a month people from the US can call me in Europe without paying international fees (it’s even free if they’re in NYC or use Vonage too), and I get 500 minutes a month to North America as well. I guess they might even introduce a basic plan where you get a phone number without any bundled calls for less than $10 a month.

    The savings work both ways, so the total loss of revenue for big international callers, as well as for the people who call them, can go into the hundreds or thousands of dollars per month.

  3. Call me naive but I am trying to understand the pricing model and who is going to make money. If i need to Use Vonage, First I need broad band connection at home, so, TW costs around $45( Road Runner ) and SBC DSL costs around $50 ( DSL + Local ). Then I have to Pay $40 for Vonage.. Thats eventually $100 for BroandBand and Vonage. From my view most of the long distance callers spend around $40 on an average( Including International ). So, instead of going to VOIP and Broadband, they can have $30 Local + Long distance Service and Pay $40 on Long distance call for a month. A typical consumer saves $30. So where is the savings for a normal consumer.

    So as a normal Consumer I dont save anything instead if I become early adopter then I stand to loose $$$$.

    More over the countries people are calling they need to have a really good telecom infrastructure with high bandwith availability for affordable prices. IMHO it might take another 3-4 years before VOIP goes mainstream.

  4. Shiv if you add your own numbers and throw broadband in the mix, the price slides drastically. i think you are missing the big picture here – there is a price war breaking out and it threatens everyone. now when was the last time you paid more for more voice minutes on a wireless plan. the offer you have can be easily replaced by a cellphone plan that costs $40 a month. if you get broadband, then you can get voice as a tack-on from one of the VoIp providers – the pricing model is now broken

  5. I agree with many of your points OM. BUT

    These logic trains about Vonage beating the bells would run if the telco lobbyists didn’t have the majority of politicians already eating out of their pocket.

    So Salon or whomever else can throw around numbers all day; but the bells own this country and have for decades. Look at anti-muni bills. Look at the eight dollars they charge for a service like call waiting that costs a penny to provide. Look at how they’ve gotten away with phantom equipment reports.

    It simply isn’t a matter of “the best horse winning” and using an abacus to calculate the outcome, because the game is rigged. They can defy trends. They can buck logic with lobbying cash.

    With the other VoIP shoe yet to drop at the FCC, If I were a betting man my chips would always be with Mr. Seidenberg and company.

  6. Om Malik on VoIP Tuesday, March 23, 2004

    VoIPSphere – a daily blog round-up

    Carl Ford Explains dot.Tel Quintum, Tech Data Sign a deal Why Defend the Bell System? GrayBar, Quintum, close and personal UK Telecoms want VoIP support VoIP over Powerline Broadband Defender of the faith…

  7. Alec Saunders .LOG Tuesday, March 23, 2004

    Vo

    In Why defend the bell system?

  8. silentblue | Quantified Tuesday, March 23, 2004

    The killer app

    Having come from hearing the Senior VP of Technology speak to us a few days ago, it hit me; in the IP world, voice is just an application. People crow how VoIP first-movers such as Vonage and Primus TalkBroadband are going to be the “Bell killers”. Tha…

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