Take the leap

This is no time for circuit-switched telephony providers to circle the wagons. The self-protective strategy the pioneers used will be too little, too late when the raiders come gunning for the vast but vulnerable middle ground of the telecom market.

The invaders are well-armed with a variety of telephony and related services built around Internet protocol. They are verging on the mainstream market from both sides.

The low-end providers of cheap long-distance voice for the price-conscious (too small a market to matter to most telcos) are providing new functionality with upmarket appeal. From the other direction, the IP players that have been providing state-of-the-art private network services to big corporations are emerging with lower-cost alternatives for smaller enterprises.

This pincers movement is inevitable-the motivations are practically a biological imperative for IP providers at both ends of the spectrum. History would suggest that to ignore IP-to see only the disproportionate dominance of revenues from circuit-switched traffic-could lead to catastrophe.

What's going on at the bottom of the market begins to look like the stories in Clayton M. Christensen's book, The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail. Christensen shows that as "inferior" technologies such as IP reach performance levels acceptable to more demanding and desirable customers, industry leaders tend to cede the lower portions of their markets. The incumbents focus on new services for higher-paying customers and new providers move in. Even if incumbents could match the technologies, they cannot match the cost structures of the lower-end players.

Packet-switching and companion technologies are improving, and users are finding IP service more reliable. More important, IP providers are offering features that resemble telco services: messaging, call waiting, conferencing and real-time audio. They are also innovating in ways that bandwidth-constrained telcos will be hard-pressed to match, with capabilities such as whiteboarding, video attachments for e-mail and real-time video.

The view of the middle is similarly attractive. There, IP providers have gained experience, and the costs of deploying IP networks have fallen. Middle-tier users are interested in getting the same features and benefits available to larger corporations, and IP-based VPNs are evolving to give them access to integrated voice, data and multimedia.

Consider the wish of a mid-size global head-hunting firm. Today, with caller ID provided by its telco, the firm's recruiters can tell when a client or candidate is calling and begin to pull relevant information from the Internet. But the recruiter would really like the phone to do the work.

An IP-based telephone's caller ID could automatically trigger the company's database or preselected Web sites to present the needed information-in the time it takes the recruiter to clear his throat.

The traditional telecom industry has thrived on value-added services and, through its control of the core network, has maintained value pricing. But the new generation of enhanced services delivered over alternate networks could quickly erode a telco's ability to value-price.

Some viable options will permit telcos to survive and perhaps prosper in an increasingly IP-based marketplace. They can build their own businesses to develop IP capabilities or alternatives, or they can acquire IP and alternative capabilities through acquisitions and alliances.

Traditional carriers need to develop some unusual approaches, not only to live within the IP revolution, but also to deal with other disruptions that could be waiting in the wings. They need to identify effective counters to IP provider offerings and devise disruptive threats of their own. They can develop hot-spot networks that invest in "incubators" of innovation, both internally and externally.

Christensen's research suggests some ways to live with disruption and embrace innovation:

* Commercialize a disruptive technology by seeking customers that value its distinctive attributes.

* Embed disruptive technology in a firm that is small enough to get excited about small wins.

* Plan to fail early and inexpensively.

Circuit-switched providers need to respond to IP with well-planned ventures with full management support. Observation is a poor substitute for participation.