Finally a killer app

VoIP really is the killer app we have all been waiting for. Once it really takes hold, there will be no looking back

My phone has been ringing off the hook. Inquiring minds want to know how fast Internet telephony will take off. This question is quickly followed by, “Is voice really the killer app for broadband?”

Both are important questions, especially in light of the rapid uptake of Skype, whose Internet telephony software enables high-fidelity computer user to computer user voice conversation for free—once you have a reasonably fast Internet connection. The beta software came out October 2 and downloads of the client are at 2 million and counting—partly (no pun intended) by word of mouth, and partly by huge press coverage.

Let’s tackle the “disruptive thing” first. The short answer is YES. Voice over Internet Protocol (VoIP) is a killer app. It is “disruptive,” and is so in two important ways:

1. As mentioned in previous columns, VoIP destroys wireline business models already under intense pressure from cable company provided telephony, fixed and mobile wireless services, service bundling of local and long-distance, and the requisite need to offer unlimited calling at flat rates. Metered voice services are a thing of the past for savvy domestic users. International services are next. The kicker in the U.S. markets is—and this is why states and the FCC are keen to possibly regulate emerging VoIP competitors as common carriers—VoIP bypasses the access charge regime and obliterates distance as a charging criteria. Goodbye traffic. Goodbye profit margins. Goodbye universal service funding. Goodbye…

2. The knock on why broadband penetration rates have not been as robust in the U.S. as elsewhere has been that the substantial base of dial-up Internet users did not see the value of broadband’s added expense. VoIP, with inexpensive or free unlimited calling that is easy to use and manage, makes the business case for customers to switch their phone service to the Internet. This presumes there remains a price differential between VoIP and things like wireless minutes buckets and/or unlimited local and long-distance offers. But, rough equivalence is good enough because of the bundling opportunities. Goodbye to the need for separate voice and data lines.

In an ironic twist, and a classic case of being careful what you wish for, VoIP is emerging as a key driver for acceleration of broadband penetration.

In an ironic twist, and a classic case of being careful what you wish for, VoIP is emerging as a key driver for acceleration of broadband penetration.  More broadband, but for telcos, less revenues. It is the ultimate in pair gain—a quaint industry term that used to have positive connotations because it meant service providers could charge extra (as much as 2x) for services that used to run on two individual physical connections even as they shared one physical connection.  Pair gain offered telcos tremendous operating efficiencies and great margins.

The second point highlights why incumbents are in a tough spot. Competition has eliminated pair gain gains. What should they do?  Chase the likes of VoIP pioneer Vonage on price, thereby further eroding margins? Or, let them go as a niche player, hoping that the niche can be contained? Chasing, while readying ones own hopefully lower cost (not necessarily lower priced), more “feature rich” service as part of a super bundle, seems to be the only non-regulatory option. To not do so is to possibly risk losing  all of the traffic of premium customers. For the moment, chasing has ensued, but the major response seems to be to get the upstarts regulated and then see where their pricing models land them.

ONLINE EXCLUSIVE A turning point for VoIP by David H. Yedwab TelephonyOnline.com, Oct 10 2003 ON THE WEB Four VoIP calculators Can be used in the technical design and analysis of VoIP Ohio State's VoIP Resources

This is not a great strategy. The ability for smart consumers to use cable modem-based VoIP makes this a sticky wicket. This is a quagmire of huge proportion in the making. The lobby with as much clout as the telcos is the cable industry. They are delighted to get the traffic and incremental revenue. They will be loathe to be regulated as common carriers.  Plugging this dike with a finger is an invitation to be flooded. The tale of the broadband market tape—where cable modem continues to hold a substantial lead with a gap that seems difficult to appreciably close given low churn rates—is not a good omen.

While all of this jockeying about how not to get one’s ox gored, and how to slow up the other guy wends its way through the regulatory process, all that will happen is that more and more traffic will leave incumbent networks, because rational consumers consume rationally. Time is up. Disruption will happen on this watch. It is not a question of if, but how fast.

The pundits have had a field day weighing in on the “how fast” issue. They point to Skype being only computer-to-computer. They say that offerings such as Microsoft Netmeeting (and now MSN Messenger), AOL IM and Yahoo have had computer-to-computer telephony functionality for several years without many takers, and computer-to-phone connectivity has even fewer. They say such services must be easy to use, and people want to call a phone and have a “quality” conversation.

This was all true before, but not anymore. You can have an easy-to-use, quality conversation between a phone and a computer-based VoIP capability, or between two IP phones. Don’t believe me? Send me an e-mail with your phone number. I’ll give you a call from an IP phone attached to my laptop over the Wi-Fi connection that is hooked into my cable modem. Hearing is believing. This is not a Skype offer yet, but it is coming from them. But you don’t have to wait because there are lots of others already in the field.  

And, this is just in the mass market. In the enterprise market, most international faxes already go IP. A quick look at the IP telephony system sales from Cisco, Avaya and Siemens shows that VoIP is now center stage. The kinks—power, 911 and remote survivability—have been worked out. Carriers at least have taken notice with managed voice services (think IP Centrex), but the historic relationship of the enterprise rolling their own vs. using Centrex does not bode well. Centrex is the niche.

Historical context about “how fast” is also in order. Mosiac brought the Internet into the mass market less than a decade ago. Softbank’s VoIP service in Japan caused a moribund broadband market to leap frog U.S. penetration rates in less than two years. NTT seems stumped as to how to fight back. While incumbents fiddle, Rome may burn. But it does not have to, as BellSouth’s earnings showed recently.

I quit the prognostication business years ago after witnessing—and on very, very rare occasions being part of—too many over-estimates of “hot markets” that never materialized, or complete misses of “the big one” (mobile telephony and the Internet fall into the latter category). However, when it comes to VoIP I am a convert. In the name of disclosure,  I can even report that I have no financial stake in any vendor in the space. I come at this solely as a pleased user.

The telecommunications industry is used to thinking of “disruptions” in their business models as manageable because they tend to take years and sometimes decades. Certain industry players are in denial if they believe the model for VoIP feels familiar. Things like IP phones, Windows XP with its SIP client for softphone calling, Skype, Vonage and AOL IM say this will be a revolution—and not a manageable one. Voice is the killer app. Cable modems, Wi-Fi and a plethora of new SIP-enable devices are the incendiaries to stoke the fire.  It is all going to happen, sooner and not later.  

Talk to you on the Internet.

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Peter Bernstein is President of Infonautics Consulting Inc. He can be reached at pb111451@optonline.net.