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Voice, is still the king

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Andrew Odlyzko has an uncanny ability of being always right. He is not a pundit, you don’t see him making bold predictions and trying to get publicity. What you see him do is analyze everything, use his immense experience and come up analysis that is always spot on. I remember chatting with him about five years ago for my book, Broadbandits, and we bonded. First over our mutual disdain for the money grubbers, and secondly we agreed that hype often chokes reality. We turned to the 3G licenses and all the wild speculation. He pointed out that carriers were painting a wireless broadband future, when the biggest and most important killer app for 3G networks was high quality voice. He emailed me a paper he wrote: “Talk, Talk, Talk: So who needs streaming video on a phone? The killer app for 3G may turn out to be–surprise–voice calls.”

But wait–wasn’t the industry hoping to expand beyond what was seen as a nearly saturated market for voice? True, when over 70% of the population has cell phones (as in Finland today, and probably in the U.S. in a couple of years), subscriber growth will slow. However, penetration ratios ignore intensity of usage. Fact is, we’ve hardly begun to talk. This may seem surprising, given how often we see people using cell phones in public. However, in the U.S. the total volume of wired voice calls is still more than six times as high as that of mobile calls. This explains why cell phones are still far from providing effective competition for wired phones.

So why do I bring it up today? Well, I was reading this earlier in the morning, and Andrew’s words rang true. What the report says essentially is that over next five years nearly 29 billion euros are going to be sucked away from fixed line voice to mobile voice. That is if the 3G carriers suddenly and smartly start offering big buckets of minutes to their users. Instead of focusing their dollars on high end 3G video and music services, which may or may not work in the near term, voice packages can boost their sales quite a bit. 3G carriers have to do this now – because if they don’t, then the fixed line phone operators can roll out VoIP based networks and offer cheap buckets of minutes, ensuring some stickiness.

Any move that slows the fall in voice revenues is worth a great deal to incumbent operators, that are facing the prospect of declines of between 6% and 10% per year depending on how aggressively 3G operators target fixed voice substitution. “BT is the first operator in Europe planning a Class 5 central office migration to VoIP and this has the potential to bring massive savings of 43% on the opex of the voice network and deployment of broadband, as well as the ability to offer more sophisticated broadband products.

3 Responses to “Voice, is still the king”

  1. If prices go down by half, but volume quadruples, revenue doubles. But if margins are less than 50%, and costs per minute stay flat when prices go down by half, margin goes negative. So you lose money on each minute, but make it up on volume.

    Now, most costs of carrying minutes on a network (wireless or wireline) are not straight marginal costs — instead, there are generally large fixed costs and significant step-function costs at specific capacity breakpoints. (The exception is intercarrier compensation, which is pretty much completely marginal cost per minute. But that’s a topic for another discussion.) So the magic is in pricing to capture incremental revenue from additional usage of existing capacity that drives no incremental cost. Hence unlimited off-peak usage (which is nothing more than an evolution of “evening rates” for long distance, for anyone old enough to remember when the cost of long distance calls mattered…).

    Now here’s a scary thought: Name another industry with high fixed costs, effectively zero incremental cost per additional unit carried up to a capacity threshold, resulting in sophisticated pricing models to maximize incremental revenue within the capacity threshold.

    Air travel.

    And how many profitable airlines are there?

  2. Sunil Chhaya

    I’ve always thought that VoIP over 3G will be the way to go!! There’s way too much bandwidth to be used productively for data apps.