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Take This Job And Shove It — Why I Retired From Telecom

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Written by Brian McConnell

I have been designing phone services and starting phone companies for about 15 years, since I was in college. But I recently retired from telecom, concluding after all this time that it is not a good industry for entrepreneurs, especially those who don’t have access to vast amounts of capital or who don’t want to take on institutional financing.

There was a brief period in the mid-to-late 1990s when garage-based phone companies really were possible. The last remnants of Ma Bell had been deregulated, and there was an explosion of new technologies (VoIP, new switch architectures, the web as a distribution channel, etc). Big companies were disoriented by this, and had little clue as to how to deal with the rapid change. As a result, there were lots of big and small opportunities for startups to exploit new and rapidly growing niches.

Most of the profitable niches in telecom are now gone. Home phone service, long distance, small business phone service, conference calling, mobile — all have become low-margin commodity markets dominated by established companies. The capital costs of prototyping new phone services have declined, but not nearly as much as retail pricing, and hence, the margins are near zero. The liquidity and exit opportunities for small telecom companies are also not good. You either need massive amounts of capital, or you need to be bought by a phone company (the stereotypes about phone companies exist for a reason). There are exceptions, of course, but they are rare.

Mobile should be a huge opportunity for developers, but unless and until the carriers open their platforms and create something like Ad Sense for developers, it’s a rotten business to be in. The mobile operators micromanage application developers, and they do not share revenue freely. They often charge for network access when they should be rewarding you for stimulating usage.

The industry is currently clogged with VoIP services whose main offering is cheap phone service, because as a commodity product the only thing that matters is the price. Services like Jaxtr and Jahjah may get a lot of hype locally, but I don’t see how what they’re doing is all that different from what all those prepaid card vendors have been doing for years. The prices seem about the same, and the prepaid cards work from any phone.

Where does this leave today’s better-known telecom startups? Unfortunately, some combination of distribution problems and consumer apathy will kill most of them. Ooma is a good example. They make an appliance that allows you to make free calls by rerouting calls between their hubs over the Internet.

It sounds neat, but most consumers don’t spend enough time on the phone to make it worth using. For the majority of users, phone service is “cheap enough,” and once a product reaches that threshold, convenience outweighs price – which is the main reason mobile operators can charge a premium for essentially the same product. I think it’s only a matter of time before companies like Metro PCS set the norm with flat-rate pricing for mobile. But then where does that leave VoIP?

There are a few standouts that I think will find success, but these are mostly platform companies that are doing serious R&D. In VoIP, Gizmo is a favorite. I don’t think the economics of Gizmo as a service by itself are great, but they have been steadily developing a broad platform that enables standards-based VoIP on almost any device — not a trivial task. Someone will eventually buy them for their service plus this technology base.

When I compare telecom to the web, the big difference I see is that the web is both a destination and a distribution channel. This really makes it a unique medium. Telephone services, on the other hand, are products that are only loosely coupled to the web, if it all. A cool web site attracts users because it is clever or interesting. A phone service, at the end of the day, is just a dial tone. I think Skype was a hit because it was really a clever instant messaging client that happened to allow free/cheap phone calls. There were many VoIP services before Skype — Delta Three, Net2Phone and Dialpad, to name just a few.

What’s the message in all of this for entrepreneurs? Telecom seems like a great industry. After all, billions of people use cell phones. The problem is that there is nothing like the web for mobile, and by that I mean the entire set of standards and business practices that have grown around it. It’s hard to see this changing significantly in the near future. It’s also important to learn from history. If you’re building a phone product, spend some time on the former site for PhoneZone, the first company I started in California before selling it to Helio Direct in 1999. Some of my favorite products from that time, such as the Internet PhoneJACK (the first low-cost VoIP peripheral) and the Jetstream FrontDesk (great SoHo phone system), are also all long gone.

This is why I decided to quit telecom and focus on completely different projects. I am spending the next several years working on the Worldwide Lexicon, which aims to do for translation what Wikipedia did for encyclopedias. It may or may not turn out to be a good business, but it’s an interesting project, and it’s something new, whereas if I stayed in telecom, I’d be spending the next several years designing more bad IVR systems for banks and airlines.

No thanks.

19 Responses to “Take This Job And Shove It — Why I Retired From Telecom”

  1. Visitor

    I started working on SIP and IMS from last few years now, so I don’t claim to be a Telecom expert. But with little experience I have, the way I see is that the building blocks (i.e. Telecom infrastructure) being built and exposed (Third Party access gateways) by Carriers, Operators and other Enterprise vendors are aimed at brining the developer community into the eco-system to build interesting applications and drive more network traffic.

    I might not seeing something which some of the Telco Gurus, who have been around for a while see it, I suspect there is tremendous opportunity for start-ups to exploit this and develop interesting situational applications. Recently BT launched a SDK exposing their network. With IMS, SIP and SDPs promising to make Telecom more open and accessible for developers/entrepreneurs, isn’t it too early to write it off then?

  2. Saul Wainwright

    I am certainly no expert here. But, my experience with such services as ooVoo (for whom I am currently working) have changed my ability to communicate with my family around the world. I think that there is plenty of opportunity in integrating the open web with telecommunications in ways that we can only imagine. For me the ability to video-chat with up to 6 members of my family, who are distributed across three continents for free, or even for a small amount, is something I never imagined being able to do.
    As I head off to South Africa to visit one side of the family for 4 months I leave another side behind. But, they will be able to see our 5 month old baby girl grow and smile because ooVoo offers these services to us for free.
    I wish you luck in your new ventures Brian and hope that you have as much success in those activities as you have had in the telecom realm.

  3. Knowing Brian personally, I would add that I am sorry to see him leave the industry (as I am planning to hang on for the foreseeable future myself..). Brian has great respect for UI and user experience as a whole, something that – remarkably – still lacks in telecom. Although it’s better than it used to be. Web 2.0 companies – the leaders at least – are proving that user experience can in fact be marketing in itself. The same can be telecom companies, especially those bringing hosted services to the market. Use the control that hosted provides (over CPE) to create user experiences better than yesterday.

    Lastly I would add that while minute stealing is a diminishing return, it does allow some runway time for these companies to figure out how to change their revenue models from one predicated on transport to one predicated on application value. It can be done, and will make for some very profitable new telephony companies.

    Good luck with the WWL, Brian.

  4. The “good old days” are over, eh?

    The greatest tragedy in all this is (to me) the waste of years and years of solid experience and knoweledge … no longer being applied (directly).

    We’re trying to “capture” some of that knowledge at “The Brain Trust” – which launches in Jan ’08.

    The ability to “tap” latent knowledge is exciting and useful from an entrepreneurs’ perspective.

    JP Maroney, CEO
    Marocom Group

  5. Having worked for companies and project on both sides, I really think that the major difference between the Internet and the phone services business is a matter of how the ecosystem works.

    The Internet is based on a widely open ecosystem.

    Phone services, either voice or data, fixed or mobile, are still suffering from being part of the “closed garden” “locked-in” ecosystem established for years by telcos.

    This is imho the very big issue.

  6. If you look at companies like RingCentral, they provide a significant value to SMB market and that market is huge. Also, look at Microsoft’s EVS 2.0, they are attacking the same market. Although, all of these solutions have to go through telecoms PSTN cloud, the equations will change when companies like MS jump onto VoIP’s bandwagon and telcom becomes another service running in your datacenter just like any other application.

    Where there is opportunity, is integration of telco in applications especially enterprise applications (not just click 2 call, but verities of voice features like conferencing, call control, media control, barge/call center features) . There are tonne of innovations that could happen. How and who will make most money is yet to be seen.

  7. Brian McConnell

    I have two key points to make, one is that the web is a medium (destination) as well as a distribution channel. Phone service, in whatever form it takes, is a product that requires distribution. It is a big difference and affects the economics of the business a lot.

    Another important point is the UI. With a phone, the UI is fundamentally limited to doing phone-like things (voice, messaging, etc). There are only so many possible permutations. On the web, you can build practical services, art, ridiculous bullshit that draws an audience. You’re only limited by creativity. While a lot of stuff on the web is crap, the range of possible ideas and applications is essentially unlimited as it is an immersive audio/visual medium like TV.

    I am not forecasting doom and gloom about telecom. I think it will remain an important sector. My point is that it is very difficult to bootstrap a telecom company in a garage, which was pretty common in the mid 1990s. That just means the new telecom industry is more mature, and the price of entry is much greater amounts of capital. If that’s a game you like to play, great, but I don’t like being on the dole, and prefer to do things independently if I can.

  8. Great read. I too spent the past 8 years starting a company in Telecom. I agree with most of the points here. The greatest opportunity in a Telecom play IMO are platforms, hosted IVR and hosted call center. The reason is plain and simple. Barriers to entry are much higher than providing just dial tone and this advantage allows you to charge a premium for the services.
    If you are starting a Telecom type company and decide to take on an outside VC investment do your homework. From first hand experience I will tell you that this was the WORST move we ever made. The VC’s we took on were complete morons and incompetent. Their arrogance and lack of knowing the “Telecom” business killed the hyper growth we had been experiencing. Sure, I take some responsibility, but in the end when you take VC money it becomes their way of the highway.
    When this venture is clear and done I will write about these particular VC’s as means to stay away from. Times have changed and it’s time to expose such losers in the VC community.

  9. I also heard Brian speak at Etel and am a huge admirer, I couldnt agree more with Moshe’s comment above but I feel if all Brian sees for the future is IVR then maybe its a good thing her is taking a break.
    IVR came and went and good bloody riddance to it.
    Might be worth a while taking a look at what Voicesage and Flatplanet are doing Brian.

  10. I admire Brian for what he has done, ever since I heard him speak at Etel 2007.

    His comments, and Scott Rafer’s comment are valid when looking at companies like Skype and Jajah who sell cheap calls. But if you remember that voice is just another packet of bits moving over the IP network, opportunities are endless. Sure we are still tied down to the PSTN and Big Telecom, but the ubiquitous bandwidth, coupled with universal IP access is giving birth to new and profitable applications.

    Look at people like Thomas Howe and companies such as Ribbit and you will have a glimpse of the future…

  11. What a bummer. But at least, having realized that working for telecom is not what you really want to do, you are now ready to surge ahead and try something new. It’s always hard at the beginning, but I think things will work themselves out. I mean, even if you’re not sure yet whether the business you’re into with Worldwide Lexicon may not prosper well, at least you find the project interesting. that’s a good start, I think.

  12. Outside In

    Having been a part of the telecom world pre-divestiture (from AT&T), back when telecom was called telephony and start-ups large and small were called interconnects, I too have been disappointed with the state of the industry Brian seems so disconnected from yet seemingly sorry to leave.

    But I respectfully disagree with him on his apparently exhausted view as to the futility of it all.

    Currently, I am both an Adjunct Professor and in the business of programming and production content right now, as in television networks, and yes, those once promising web-based start-up services are now focusing on becoming platforms as their business models, rather than anything more.

    But why can’t that be a good thing? Why can’t Brian et al look at improving the “interactivity” of content as it’s being delivered to mobile devices or to car radios over non-traditional spectrum? That interactivity is where we need smart and creative people like Brian to help us with the argument as to which controls, content or delivery? Who better to control that interactivity than a telecom network veteran like Brian? Sumner Redstone, head of Viacom and constant champion of content as dominator, clearly is banking his entire organization on content driving his company’s share prices upward, caring less about who’s platform or distribution channel is paying him.

    There are also companies creating radios that are being placed in hotel rooms worldwide that exclusively connect to web-based programming worldwide, sans computers. Don’t a number of biz opportunities pop into your head that would require the right telecom apps., despite Brian’s correct view as to the commoditization of telephone calls? I can easily think of two.

    Anyway and no, I am not as gloom-and-doom on the state of telecom as Brian and others may be, but then again, unlike years past, here’s what does bother me. The Internet does not really allow any start-up to do its betas quietly. Whether from personnel changes and departures and/or VC announcements for seed or angel financing and/or ego-driven entrepreneurs hiring P.R. firms to help generate early buzz, the Internet as a community, will inherently be poised to scrutinize every start-up. With no right or wrong value judgments assigned, however fascinating and insightful the buzz is on GigaOm, NewTeeVee, TechCrunch, Mashable, Ars and Slashdot, both editors and readers alike can often be amusingly relentless – – – yet also very capable of destroying any start-up well before launch. Again, that’s just the way it is.

    Anyway, Brian, I wish you good luck . . . but hang in there.

    Our industry needs you.

  13. Having shifted to advertising/Mac from mobile telephony/IBM, around august end, though the same eco-system, I have to say that I agree with everything Brian has said.
    I kept trying to understand why things were so complicated… and thankfully, Brian had some of the answers!

    Although, I tend to disagree with the thought that one has to fully leave the mobile industry, due to mentioned issues.
    Digital advertising, in my opinion, gives one the best of both worlds.. where the opportunity to traverse technology and creativity in equal measures… exists!