Myopic Economist article: Skype and "How the internet killed the phone business"

Discussion in 'UK VOIP' started by Valiant, Sep 16, 2005.

  1. Valiant

    Valiant Guest

    The Economist magazine (today's UK edition) runs a front page that
    screams "How the internet (sic) killed the phone business". Inside
    there's an editorial and a 'special report' article. It's available at but is 'subscription only' and so I have pasted both
    articles below this post.

    I take no issue with the main thrust of their contention that VOIP
    calls will eventually undermine the traditional POTS voice network.
    What I think is myopic on their part is their acceptance of the fact
    that there will be business opportunities in VOIP in the long term
    (for those such as Skype et al). It's my view that companies currently
    offering VOIP services on the Internet are taking advantage of a
    technology in its infancy. Once the technology reaches maturity it's
    inevitable that business opportunities will be few and far between and
    the 'Skype bubble' will burst.

    Basically, all Skype currently offers is:

    1) A 'gateway' between the Internet and the traditional phone network
    so that subscribers can make outgoing calls
    2) A traditional phone number so traditional phone network users can
    call Skype subscribers
    3) A pretty basic suite of VOIP software
    4) A voicemail service

    If, as The Economist suggests, the technology evolves so that all
    phone subscribers (mobile and fixed) will have broadband Internet
    connectivity as standard then why use Skype? In the coming years most
    fixed line subscribers will have a wireless router installed in their
    master socket and mobile phone users will have the appropriate
    software installed on their mobile phones. All will have an IP address
    (or the equivalent) and will be able to call each other by dialling IP
    addresses (or dynamic DNS host names). Where is the need for Skype in
    this equation? The 'gateways' in 1) and 2) above will be unnecessary.
    The software in 3) is essentially open source and/or freeware and I
    can't see millions being made from 4) a voicemail service.


    Two articles follow; copy/pasted from (subscription

    Article 1)

    How the internet killed the phone business
    Sep 15th 2005
    From The Economist print edition

    Almost-free internet phone calls herald the slow death of traditional

    THE term "disruptive technology" is popular, but is widely misused. It
    refers not simply to a clever new technology, but to one that
    undermines an existing technology-and which therefore makes life very
    difficult for the many businesses which depend on the existing way of
    doing things. Twenty years ago, the personal computer was a classic
    example. It swept aside an older mainframe-based style of computing,
    and eventually brought IBM, one of the world's mightiest firms at the
    time, to its knees. This week has been a coming-out party of sorts for
    another disruptive technology, "voice over internet protocol" (VOIP),
    which promises to be even more disruptive, and of even greater benefit
    to consumers, than personal computers (see article).

    VOIP's leading proponent is Skype, a small firm whose software allows
    people to make free calls to other Skype users over the internet, and
    very cheap calls to traditional telephones-all of which spells trouble
    for incumbent telecoms operators. On September 12th, eBay, the leading
    online auction-house, announced that it was buying Skype for $2.6
    billion, plus an additional $1.5 billion if Skype hits certain
    performance targets in coming years.

    This seems a vast sum to pay for a company that has only $60m in
    revenues and has yet to turn a profit. Yet eBay was not the only
    company interested in buying Skype. Microsoft, Yahoo!, News
    Corporation and Google were all said to have also considered the idea.
    Perhaps eBay, rather like some over-excited bidder in one of its own
    auctions, has paid too much. The company says it plans to use Skype's
    technology to make it easier for buyers and sellers to communicate,
    and to offer new "click to call" advertisements, but many analysts are
    sceptical that eBay is the best owner of Skype. Whatever the merits of
    the deal, however, the fuss over Skype in recent weeks has highlighted
    the significance of VOIP, and the enormous threat it poses to
    incumbent telecoms operators.

    For the rise of Skype and other VOIP services means nothing less than
    the death of the traditional telephone business, established over a
    century ago. Skype is merely the most visible manifestation of a
    dramatic shift in the telecoms industry, as voice calling becomes just
    another data service delivered via high-speed internet connections.
    Skype, which has over 54m users, has received the most attention, but
    other firms routing calls partially or entirely over the internet have
    also signed up millions of customers.

    A price of zero
    The ability to make free or almost-free calls over a fast internet
    connection fatally undermines the existing pricing model for
    telephony. "We believe that you should not have to pay for making
    phone calls in future, just as you don't pay to send e-mail," says
    Skype's co-founder, Niklas Zennstrom. That means not just the end of
    distance and time-based pricing-it also means the slow death of the
    trillion-dollar voice telephony market, as the marginal price of
    making phone calls heads inexorably downwards.

    VOIP makes possible more than just lower prices, however. It also
    means that, provided you have a broadband connection, you can choose
    from a number of providers of VOIP telephony and related add-on
    services, such as voicemail, conference calling or video. Many
    providers allow a VOIP account to be associated with a traditional
    telephone number-or with multiple numbers. So you can associate a San
    Francisco number, a New York number and a London number with your
    computer or VOIP phone-and then be reached via a local call by anyone
    in any of those cities.

    Furthermore, your phone (or computer) will ring wherever you are in
    the world, as soon as it is plugged into the internet. So you can take
    your Madrid number with you to Mumbai, or your San Francisco number to
    Shanghai. Skype and other VOIP services, in other words, are leading
    to lower prices, more choice and greater flexibility. It is great news
    for consumers-but terrible for telecoms operators. What can they do?

    Watching the elephants dance
    As is always the case with a disruptive technology, the incumbents it
    threatens are dividing into those who are trying to block the new
    technology in the hope that it will simply go away, and those who are
    moving to embrace it even though it undermines their existing
    businesses. Since VOIP will cause revenue from voice calls to wither
    away, the most vulnerable operators are those that are most dependent
    on such revenue.

    In particular, that means mobile operators, which have been struggling
    for years to get their subscribers to spend more on data services, but
    are still hugely dependent on voice. Worse, the very "third
    generation" (3G) networks that are supposed to provide future growth
    for these firms could now undermine them, because such networks make
    mobile VOIP possible too. Least vulnerable, by contrast, are those
    fixed-line operators that are now building new networks based on
    internet technology, which will enable such firms to benefit from the
    greater efficiency and lower cost of VOIP compared with traditional

    These operators are taking an "if you can't beat 'em, join 'em"
    approach and getting into the VOIP business. While their voice
    revenues will slowly evaporate, they will then be well placed to offer
    fee-based add-on services over their new networks. Again, this is a
    common pattern with disruptive technologies: forward-looking
    incumbents can end up giving upstart innovators a run for their money.

    It is now no longer a question of whether VOIP will wipe out
    traditional telephony, but a question of how quickly it will do so.
    People in the industry are already talking about the day, perhaps only
    five years away, when telephony will be a free service offered as part
    of a bundle of services as an incentive to buy other things such as
    broadband access or pay-TV services. VOIP, in short, is completely
    reshaping the telecoms landscape. And that is why so many people have
    been making such a fuss over Skype-a small company, yes, but one that
    symbolises a massive shift for a trillion-dollar industry.

    Article 2)

    The meaning of free speech
    Sep 15th 2005 | LONDON AND SAN FRANCISCO
    From The Economist print edition

    The acquisition by eBay of Skype is a helpful reminder to the world's
    trillion-dollar telecoms industry that all phone calls will eventually
    be free

    NIKLAS Zennstrom and Janus Friis, the founders of Skype, which
    distributes software that lets people make free calls from their
    computers to other Skype users anywhere in the world, don't usually
    travel to America. Legally, they probably could. But they prefer to
    avoid that jurisdiction, since they also founded (and subsequently
    sold) KaZaA, a peer-to-peer software company whose product many people
    use to share copyrighted songs. So setting foot in America could
    invite some legal trouble. This does not mean, however, that they
    cannot appear at conferences in Silicon Valley, where Skype-which uses
    the same basic idea of KaZaA, but applies it mainly to voice
    communication-is considered the next big thing.

    Thus, in July, Mr Zennstrom appeared, via a Skype video call, on the
    screen of a packed auditorium at Stanford University, while sitting in
    Estonia next to Tim Draper, a venture capitalist who invested $10m in
    Skype. Mr Draper is the ultimate loud American, whereas Mr Zennstrom
    is a sombre Swede. "He's already taken down one industry and he's on
    to the next one," hollered Mr Draper-referring to recording studios
    and telecoms companies. Mr Zennstrom started shifting uncomfortably.
    "I never wanna sell my stock until it's a hundred billion," Mr Draper
    yelled, then started singing and dancing. The blushing Mr Zennstrom
    was speechless.

    Of course, Mr Draper was posturing. That became clear on September
    12th, when Skype announced that it had agreed to be taken over by
    eBay, based in Silicon Valley and the world's largest online
    marketplace. Mr Draper and Skype's other investors will get nothing
    like $100 billion, but eBay is paying a hefty sum-$2.6 billion in cash
    and shares and perhaps more if certain criteria are met-nonetheless.

    This pairing took many people by surprise. There have been rumours
    that Yahoo!, Google, Microsoft and other technology companies were
    also interested in buying Skype. Any of these might have made a more
    obvious fit, since each also has instant-messaging software that can
    be used for free phone calls (or "voice chats", as opposed to text
    chats) between computers. Google, the world's most popular internet
    search engine, launched its own voice-chat software in August. A week
    later, Microsoft bought Teleo, a San Francisco company that lets
    people call conventional telephones from their computers (as Skype
    also does, for $0.02 a minute). Yahoo! had already bought Dialpad,
    another Skype-like firm, in June. AOL, Apple and others have similar

    As Meg Whitman, eBay's boss, and Mr Zennstrom explain it, a
    combination of eBay and Skype is not all that far-fetched. From eBay's
    point of view, placing cute Skype buttons on the web pages where
    people trade used cars, houses and other items that usually require
    voice bargaining "reduces friction", says Ms Whitman. Buyers can
    simply click on the button and talk to sellers. Another idea is to
    make money from "pay-per-call" advertising, where advertisers would
    place voice links (ie, Skype buttons) on certain pages just as they
    now place text links on, say, the search-results pages of Google.
    Whenever a web surfer clicks on one of these links and talks to a
    salesperson, the advertiser would pay eBay and Skype a fee. Google got
    rich by doing this in the text world; there is no reason why eBay
    might not be able to do it in the voice world.

    From Skype's point of view, the deal strengthens its existing link
    with PayPal, eBay's online bank, which it uses to charge for services
    such as calls from computers to conventional telephones (called
    SkypeOut) or from conventional phones into Skype (called SkypeIn).
    This involves prepaid accounts, which Skype users can top up via
    PayPal with their credit cards.

    For Skype, however, the main attraction may be that eBay, unlike the
    other potential suitors, plans to leave it largely alone, both as a
    brand and as a business. "When Yahoo! and Microsoft buy companies,
    they typically disintegrate them," says Mr Zennstrom. His vision for
    Skype, by contrast, is to become the world's biggest and best platform
    for all communications-text, voice or video-from any
    internet-connected device, whether a computer or a mobile phone.

    This is every bit as audacious as it sounds. Mr Zennstrom, in general,
    is a modest man. But his company is only three years old, will
    probably make only $60m in revenues this year, and will certainly not
    turn a profit. So it is the fact that his ambition is not nearly as
    ridiculous as it sounds that should make incumbent telecoms firms
    everywhere break out in a cold sweat.

    That is because Skype can add 150,000 users a day (its current rate)
    without spending anything on new equipment (users "bring" their own
    computers and internet connections) or marketing (users invite each
    other). With no marginal cost, Skype can thus afford to maximise the
    number of its users, knowing that if only some of them start buying
    its fee-based services-such as SkypeOut, SkypeIn and voicemail-Skype
    will make money. This adds up to a very unusual business plan.

    "We want to make as little money as possible per user," says Mr
    Zennstrom, because "we don't have any cost per user, but we want a lot
    of them." This is the exact opposite of the traditional business model
    in the telecoms industry, which is based on maximising the average
    revenue per user, or ARPU. And that has only one logical consequence.
    According to Rich Tehrani, the founder of Internet Telephony, a
    magazine devoted to the subject, Skype and services like it are
    leading inexorably to a future in which all voice communication, near
    or far, will be free.

    End of the line
    The technical term that encompasses all forms of voice communication
    using the internet is voice-over-internet-protocol, or VOIP. This
    includes pure computer-to-computer calling as well as the various
    hybrid states, such as a Skype user connecting to the traditional
    telephone network, or even two people talking on seemingly
    conventional phones that are linked, behind the scenes, via the
    internet. It also includes residential VOIP providers such as Vonage,
    based in New Jersey and the market leader in America with over 1m
    subscribers, that supply their customers with adapters so they can
    plug ordinary telephones into their broadband connections without
    using a computer.

    Sandvine, a telecoms-equipment firm, estimates that there are 1,100
    VOIP providers in America alone. But the trend is worldwide. IDC, a
    market-research firm, predicts that the number of residential VOIP
    subscribers in America will grow from 3m at the end of 2005 to 27m by
    the end of 2009; Japan already has over 8m subscribers today.
    Worldwide, according to iSuppli, a market-research firm, the number of
    residential VOIP subscribers will reach 197m by 2010. Even these
    numbers, however, do not include people using VOIP without subscribing
    to a service (ie, by downloading free software from Google, Skype or
    others). Skype alone has 54m users.

    Even before VOIP makes 100% of telephone calls in the world completely
    free (which may take many years), it utterly ruins the pricing models
    of the telecoms industry. Factors such as the distance between the
    callers or the duration of a call, the key determinants of cost today,
    are simply irrelevant with VOIP. Vonage already lets its customers
    choose telephone numbers in San Francisco, New York or London, no
    matter where they live. A Londoner calling the London number is making
    a "local" call, even if the Vonage subscriber is picking up the phone
    in Shanghai. As when checking e-mail on, say, Hotmail, the only thing
    needed is a broadband-internet connection, but it can be anywhere in
    the world. Sooner or later, people will discard their unwieldy phone
    numbers altogether and use names, just as they do with their e-mail
    addresses, predicts Mr Zennstrom.

    Call duration is also becoming irrelevant. "A lot of people open a
    Skype audio channel and keep it open," says Mr Zennstrom. After all,
    it costs nothing. Many people with Apple computers are already
    accustomed to this. They open an application called iChat, which is a
    video and voice link, and stay connected to their loved ones far away.
    Increasingly, members of a family or a business team can stay online
    throughout the day, escalating from unobtrusive instant-messaging
    ("Can you talk?") to a conference call, a video call and back to a
    little icon on their screen.

    It is thus altogether wrong to call this phenomenon the end, or death,
    of telephony. "Calling it the death of telephony suggests people
    aren't going to make calls, but they are," says Sam Paltridge, a
    telecoms guru at the OECD. "It's just the death of the traditional
    pricing models." In short, all this is great news for consumers and
    awful news for telecoms operators. "VOIP will destroy voice revenues
    faster than most analysts' models predict," says Cyrus Mewawalla, an
    analyst at Westhall Capital. "Voice will very rapidly cease to become
    a major revenue generator for all telecoms operators, fixed and

    That said, some telecoms carriers are much more vulnerable to VOIP
    than others, says Mr Mewawalla. Telecoms operators offer and charge
    for a number of services besides pure voice calls. Because VOIP will
    cause only the revenues from voice calls to shrink, it will hit those
    operators hardest that are most dependent on their revenues from voice
    (see chart 2).

    For pure mobile operators, such as Vodafone or Taiwan Mobile-as it
    happens, Taiwan is the country with the highest ratio of Skype
    users-VOIP could be an "enormous problem", says Mr Mewawalla, because
    voice accounts for over 80% of their revenues. By contrast, VOIP is
    less threatening to integrated operators (ie, those offering both
    fixed and mobile services) such as Deutsche Telekom or Japan's NTT.
    And those carriers-such as BT, France Telecom or KPN-that are
    currently building next-generation networks based on internet
    technologies will be able to offer VOIP services themselves, bundled
    with other offerings, and might emerge relatively unscathed.

    Some operators are taking an unenlightened view by trying to delay the
    advance of VOIP. China Telecom has been blocking access to Skype from
    Shenzen, according to local newspaper reports. Vodafone has introduced
    wording into new contracts for some German subscribers reserving the
    right to block VOIP in future, though a spokesman for the company says
    it is not doing so at the moment. Clearwire, an American
    wireless-broadband provider, also reserves the right to block VOIP
    traffic. In February, Madison River Communications, a rural phone
    company in North Carolina, was fined $15,000 by regulators for
    blocking access to Vonage's VOIP service. Occasionally, operators have
    even blocked access to Skype's website, thus preventing people from
    downloading the software or topping up their calling credit.

    The more enlightened approach-which most operators in rich countries,
    to varying degrees, accept-is to compete with VOIP openly or even to
    embrace it. Already, says Mr Paltridge, pricing of traditional phone
    services is changing quite radically as operators "try to adjust and
    to compete with the Skypes of this world". Operators are moving
    towards flat-rate pricing plans for traditional telephone service, so
    that the marginal price of making calls falls to zero. Many American
    regional operators offer unlimited local and national calling for a
    fixed monthly fee, and such schemes are also becoming popular in other

    Several incumbent operators have also launched their own VOIP
    services, such as Verizon's VoiceWing and BT's Broadband Voice. These
    offer lower prices than traditional telephone service but are
    generally not as cheap as a call between Skype and a regular phone.
    "If you can't beat 'em, join 'em," says John Delaney of Ovum, a
    consultancy. Such services are an admission that a less lucrative VOIP
    customer is better than no customer at all. Switching to VOIP also
    helps operators by lowering their own costs dramatically. BT and
    others are building new, internet-based networks behind the scenes,
    which will carry all voice traffic as VOIP even if the calls start or
    end in the traditional way.

    The other argument for embracing VOIP is that the incumbents can then
    start offering the fun new services that VOIP makes possible and
    charging for them. This goes far beyond traditional voicemail.
    Video-conferencing and unified messaging-whereby all forms of
    communication, from voicemail and video messages to e-mails or entire
    electronic documents go into one virtual "inbox"-will become common,
    says Wendy McMillan-Turner, head of voice services at BT. Since all of
    these features are essentially software programmes, they can all be
    integrated with applications that people today use on their computers,
    such as Outlook calendars and contacts files.

    The service that many telecoms operators are most excited about,
    however, is IPTV, which refers to television (and entertainment in
    general) being delivered over new and super-fast broadband-internet
    connections into homes. This would allow them to charge for a bundle
    of services, including broadband access, entertainment and voice. The
    voice component could then atrophy gracefully and eventually be thrown
    in for nothing. "Ultimately-perhaps by 2010-voice may become a free
    internet application, with operators making money from related
    internet applications like IPTV," says Mr Mewawalla.

    Cable operators are coming at VOIP from exactly the opposite
    direction. They already offer television and entertainment, as well as
    broadband access, so they might as well offer cheap telephony as well.
    This puts the cable companies in a good position. Unlike the telecoms
    operators, they do not depend on voice for their revenues today, so
    they can use cheap VOIP service as a competitive weapon to make life
    difficult for the telecoms operators, who are increasingly their only
    competition. In California, for example, most people have a choice
    between one cable company, Comcast, and one traditional telecoms
    carrier, SBC. Since voice uses very little bandwidth compared with
    television, the cable companies need not even add a lot in the way of

    The result, says Mr Mewawalla, is that voice service is fast becoming
    a marketing freebie to make customers "sticky"-to keep them loyal. "I
    would expect people to advertise free calls with VOIP, subsidised by
    other elements of the package," says Ms McMillan-Turner. Thus, BT will
    consider value-added services sold around VOIP as voice revenues in
    future, she says. BT hopes that selling such services will offset the
    inevitable decline in traditional voice revenue. Evalueserve, a
    consultancy, predicts that American and European fixed operators'
    long-distance voice revenue will decline by around 40% by 2008, and
    that in Europe 50% of broadband users will give up their voice lines
    by 2008.

    Mobile operators face a far greater challenge than fixed-line
    carriers. Voice accounts for the bulk of their business and they
    cannot (at least today) offer broadband access as easily as the cable
    and fixed-line companies. New "third-generation" (3G) networks were
    supposed to make possible whizzy new data services to compensate for
    flat and even declining revenues from voice calls, but consumer
    adoption has been slow.

    Worse, those very 3G networks that are supposed to provide future
    growth for the industry could now undermine it, since they make
    possible VOIP calling over mobile networks. Already, one mobile
    operator, E-Plus in Germany, has announced a deal that will allow
    subscribers to use Skype on its 3G network. Users would thus pay only
    for the internet connection, while making free calls to other Skype
    users and to other telephones for very little. E-Plus hopes to win
    valuable business customers and to put pressure on much bigger but
    less agile rivals such as Vodafone.

    Today, VOIP calling over 3G networks is still very much a minority
    sport, but as 3G coverage and transmission speeds improve-something
    the industry is racing to achieve-it will become common. This
    represents a mortal danger for mobile operators. "VOIP on mobile is
    the first real threat they are going to face, and they are in a state
    of shock," says Mr Mewawalla. Mobile operators generally charge three
    to five times as much as fixed operators for each minute on the phone,
    so they have far more to lose from falling voice prices. International
    travellers will use VOIP over hotel-room broadband links or Wi-Fi
    hotspots in airports to save on the roaming charges by their
    mobile-phone company.

    Vodafone counters that, like BT, it is moving towards internet-based
    networks that will reduce its own cost of carrying calls and make
    possible new value-added services. But this sounds unconvincing. Much
    more so than fixed-line operators, mobile operators would have to
    cannibalise their current business in order to generate new revenues
    from VOIP. Ironically, this means that BT, once regarded as a
    dinosaur-like incumbent, is now being held up as a shining example of
    an operator that is embracing the future, while Vodafone, whose
    pure-mobile strategy once seemed visionary, now stands accused of
    being on the wrong side of history. At the end of the day, there is no
    getting around the reality, as Skype's Mr Zennstrom says, that
    "something that is a great business model for us is probably a
    terrible business model for them."
    Valiant, Sep 16, 2005
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  2. Most people will have difficulty in changing their mindset from phone
    numbers to IP addresses. In addition, some IP addresses have more than
    one SIP phone behind them; will people have to remember to dial a port
    as well as an address? As for IPv6, that could mean dialling huge
    numbers such as FEDC:AB19:12FE:0234:98EF:1178:8891:CAFF!

    Mapping domain names to IP addresses may help a bit, but I think that we
    will continue to use phone numbers long after all phones are VoIP and we
    will continue to need phone companies to issue those numbers and provide
    additional services such as call records and voicemail.

    Steven Sumpter, Sep 16, 2005
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  3. Valiant

    Nick Ward Guest

    I had the dubious privilege of being at Voice Over Net 200 in San Jose,
    where 80% of the participants were all getting excited about VoIP
    blowing out the PSTN. Indeed, readers of at that time might
    have concluded that it was time to hire a skip to haul away all that
    redundant equipment. Maybe things would have been different without
    the tripple whammy of the flop, collapse in bandwidth prices
    and 3G fresh-air auctions, but it seems to me that VoIP's "hype vs.
    reality" curve is going to have a second anticipated but unfulfilled
    forecast spike. I'm afraid it still looks like we'll get carrier-grade
    VoIP only when BT and the cable companies churn their rusting,
    collapsing narrowband switches for softswitches in about 2010.
    Nick Ward, Sep 16, 2005
  4. Valiant

    Ivor Jones Guest

    Which is precisely the function of "eNum" (Electronic Number Mapping).
    It's how Sipgate, Vonage or whoever allocate a normal phone number to your

    More info here:

    A Google search on "enum" produces a load more..!

    Ivor Jones, Sep 16, 2005
  5. Valiant

    Ivor Jones Guest

    Actually that really should be "tElephone Number Mapping" I think, but you
    know what I mean..!

    Ivor Jones, Sep 16, 2005
  6. I had e164 in mind when I mention mapping numbers to domains, but I
    don't think that solves the problem of who allocates numbers. Another
    problem is that many people have installed equipment that requires a SIP
    proxy to work and doesn't necessarily work with direct calls to the IP
    address of the sort via enum.

    I think we will need SIP providers for the next decade at least.

    Steven Sumpter, Sep 16, 2005
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