Why defend the bell system?

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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