Analyst warns of multiple-technology substitution

A voice-over IP product on its own may not be enough to give wireline service providers a run for their money, but take the category as a whole and add in an amplifying technology, and telcos will have ample reason to reexamine how they do businesses, according to Alistair Davidson, managing partner at Eclicktick Consulting.

Davidson, a former CEO of several high-tech startups and author of three books on technology and strategy, poses the theory that when disruptive products are inexpensive, change-inducing experimentation costs only a consumer’s time. This logic could be applied to essentially any industry, but it’s particularly apt in the case of consumers substituting landline service in favor of VoIP.

The general pattern Davidson has identified is an established product or service category, like fixed-line phone service, finds itself competing against multiple disruptive services, like VoIP, which makes consumer behavior harder and harder to predict. Users will initially pay for duplicate functionality as they try substitutable services. Once they gain experience with the alternatives, they will likely drop the less-used and now redundant original service – in this example, circuit-switched phone service. The process is only expedited in the face of economic triggers, such as a layoff or the general economic downturn.

Davidson calls this trend multiple technology substitution (MTS). Rather than lose business to a single, inexpensive albeit lesser-performing product, carriers are hurting because of a collection of products that compensate for individual weaknesses when used together.

“When a company is very enamored with its own products, as telephone companies are, they tend to look at these disruptive technologies and say ‘these are secondary products, they are not really important; if people have the choice they are not going to give up the higher-quality fixed landline for a MagicJack, because the quality of the MagicJack just isn’t there,’” Davidson said. “But what [carriers] are missing is the fact that there are actually so many complementary technologies floating around.”

The emergence of complementary, or amplifying, technologies like unified communications solidifies a consumer’s migration to VoIP, he added. Google’s Grand Central service, rebranded as Google Voice, is a prime example. Similar to Alcatel-Lucent’s new Rich Communications Manager designed for telcos, Google Voice is a free UC service that lets consumers have a single number they control over the Web to automatically ring all the phone numbers they specify. With both services, the choice of which phone to pick up is up to the consumer.

“The point that becomes interesting is after awhile you realize you have the ability to arbitrage between the levels of service and the available pools of minutes that you have if you are trying to control your budget, because you can now pick up whatever phone you feel like because they all ring,” Davidson said. “So I see Google Voice as being the amplifying technology that changes the value of these fixed lines and VoIP lines.”

This is all good news for VoIP providers, but not for their traditional telco competitors. Davidson recommends that telcos focus on tracking the usage and opinions of their users to identify those at risk and develop fighting brand products to keep them. They can’t just track consumers’ opinions of their own service either, Davidson noted. Carriers have to track their perception of the quality of VoIP substitutes and any other potential disruptive technology. He advises that carriers then develop their own disruptive product but separate the marketing of it from traditional fixed-line management, as to not have to simultaneously defend and attack their own product. In the case of mobile-only service providers, it could mean introducing a fixed-mobile substitute product, like T-Mobile has done with its low-cost IP service over broadband. For any company, a final key is to also focus on gateway products, like fixed-line broadband, that subscribers will not drop, he said.

“The second thing you need to understand, and this is the most difficult thing for any company facing a disruptive technology, is that although you are doing all the right things to make your service excellent and of superior value, you may be over-delivering a service that customers don’t really want to pay for,” Davidson said. “This is the classic example: there are lots of features you are forced to buy with a fixed-line service that you might not want. You are forced to buy a bundle of features that cost you more than the line itself if you are not careful. You need to be able to have fighting brands or services targeted at customers who are at risk of switching.”

Davidson noted that most telcos have not yet picked up on UC with a single ring (Alcatel-Lucent has signed up Telefonica and an unnamed tier-two North American carrier), but those that do will gain an advantage and reinforce the primacy of their relationship with consumers who don’t want to change their phone number.