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Summary:

Aside from price, the traditional telecom model remains largely unchanged, even with the introduction of VoIP, and a lack of innovation has kept miscommunication a part of our daily lives. The infocom sector needs to move beyond cheap telephone calls.

During the spring of 1995, I participated in a series of meetings at AT&T Bell Laboratories, at which management lamented the impending doom of the telephone business model. The looming threat, however, was neither MCI (which had instigated the breakup of AT&T) nor the Bell companies (which did eventually undermine and absorb AT&T). No, the once-dominant telco feared a $50 software product released by two 20-year-olds at a startup in Israel: Vocaltec Internet Phone, which made voice communication an application of the Internet.

The death of the telecom business remains a standard prediction, but telephone bills continue to arrive 12 years after Vocaltec introduced VoIP to the masses. ITXC (now a part of VSNL) used VoIP to help cut international calling rates to an average of 10 cents a minute currently from 99 cents a minute in 1995. Vonage gets credit as the first to offer flat-rate, unlimited usage plans, erasing the distinction between local and long-distance calling. But aside from price, the telecom business remains largely unchanged by VoIP.

Consider the improvement of infotech platforms since 1995. Intel et al remained true to Moore’s Law by expanding processor performance 100-fold, while the price performance improvements of storage, memory and many other components exceeded this pace. But although improved performance and falling costs usually combine to produce new applications, this does not seem to be the case for VoIP and the voice business.

Reducing the price of a telephone call does not erase all the frustrations associated with communication. Humans can detect sounds of up to 20kHz, yet the frequency response of the traditional telephone call has remained stuck at 3.3kHz since the 1930s. The audio quality of a telephone call compares unfavorably even to the 5.6kHz frequency response of AM radio; we still revert to military radio protocols ( “A” as in alpha and “T” as in tango) when spelling a word.

Miscommunication remains a significant source of daily frustration. CallerID seems to be the best telecom has to offer. (Imagine paying extra for the privilege of knowing who sent you an email.)

The differences in the pace of innovation between telecom and infotech can be traced to differences in their respective business models. Telecom companies chase profit growth through margin expansion, which requires controlling costs and resisting the potential for competition to reduce price (e.g. controlling supply).

Conversely, competition forces infotech companies to chase profit growth through revenue growth. This requires investment in the innovations necessary to create demand. The pace of innovation in communication promises to accelerate as the search for revenue growth leads infotech companies to pursue communication business more aggressively.

Developments in communication shape human history. The Renaissance followed the printing press because less expensive books produced educated citizens that demanded more representative government. The telephone offered more than simply a better telegraph. If the infocom sector can move beyond cheap telephone calls, it might finally represent the threat to the status quo imagined by my AT&T colleagues.

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  1. Good post, Dan. It brought back memories of similar meetings I had at MCI at about the same time as your meetings at AT&T. I still believe VoIP wins in the end, but in a more subtle way. More on my blog at http://ikeelliott.typepad.com/telecosm/2007/12/voip-barbarians.html

  2. Advice Network Monday, December 10, 2007

    Daniel,

    I really like this post. I found it to be thought provoking, and really hopeful too. I know sites like Grand Central want to do to phones, but in my opinion, they have yet to come out with the “killer app.” The hope comes in when I try to imagine what a killer app for phones would look like.

    Alex

  3. Markus Göbel’s Tech News Comments Monday, December 10, 2007

    So what is your answer?
    What is it that VoIP can do better than PSTN?

    I think as a member of the VoIP industry you shouldn’t only start discussions but also give answers. Jeff Pulver, with whom you travelled recently to Tel Aviv, made his “Call for More Innovation in Voice Services” yet 5 months ago. The comments’ section to his blog post is now full with Viagra spam.

    Om Malik said 3 months ago that VoIP got boring because the companies deal with “Nothing But The V-Thang”.

    I already read so many posts stating “cheap calls are not enough, VoIP needs to be more”. But then these experts keep me waiting for this “more”. I really hope that FWD comes up with new ideas soon, as promised.

    I for instance would like to see a “Hosted Fring with Grandcentral’s filter rules and international mobile callforward over GSM”:

    http://www.goebel.net/technews/2007/07/my-answer-to-jeff-pulvers-call-for-more.html

    BTW: Free or super cheap calls are already a quite great VoIP application to me.

  4. Daniel Berninger Tuesday, December 11, 2007

    Markus,

    I agree the various calls for innovation do not substitute for the real thing. The column offers a diagnosis of the problem in the dependence of VoIP on the 20th century telephone network. Even Skype found innovation grind to a halt after tying their revenue model to the telephone network.

    A diagnosis represents a necessary step enroute to a cure.

    Dan

  5. We have a service in production today that delivers exactly what you are talking about. HighSpeed Conferencing (www.highspeedconferencing.com) is the only wide-band conference calling service in the world.

    Here’s how it works. You go to the web site and sign up for a FREE 30-day trial. You activate the link in your email and you use SKYPE as the end-point on your desktop. We use 8-12khz codecs and all callers on Skype are wide-band. If you use a regular telephone, you can only get narrowband codecs.

    I urge you to try it for yourself and HEAR the difference. One cool thing to do is for you to call in on Skype, have one friend call in on Skype and a 3rd friend call in on the PSTN.

    You can hear the difference between Wideband/High Definition and regular PSTN.

  6. I am of the opinion that the reason Skype found innovation grind to a halt is not because they tied their revenue model to the telephone network, but because the real innovation was at the client, but they decided to give it away for free. If VoIP is a product and not a service, then how can one give away the product?

  7. well i think the more relevant question at the moment is – what will voip or ip do to the mobile.. just adding presence to the mobile could be such a useful feature…

  8. The carrier’s are starting to bring innovative services to the masses, driven by a need to raise ARPU and reduce churn. Look at some recent deals: Soonr and TeliaSonera (back-up in the cloud), Zimbra and Comcast (unified inbox), Spinvox and Rogers (voicemail delivered as SMS).

    Carriers need features that either get you to switch or keep you from switching. Here’s a perfect example: I’m moving my wireless service over to Rogers specifically to get the SpinVox feature.

  9. Can Ribbit Finally Bring Web & Voice Together? – GigaOM Monday, December 17, 2007

    [...] Ribbit seems to be rising to the challenge posed by Daniel Berninger, who in a column here wrote: The death of the telecom business remains a standard prediction, but telephone bills continue to [...]

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