September 16, 2005

How VOIP could impact telecom industry - part 2

I recently posted my take on an article published in the economist about how VOIP could disrupt the traditional telecom model.

A few days later e-bay bought out skype (a VOIP service which allows users to make calls from their computers to any one in the world for free - and also to regular phone , but for free).

There is a great article on this deal in the economist - The meaning of free speech .

A snippet from the article below

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.

And more -

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 mobile.”

This is likely to hit the indian telecom providers hard. Somehow the valuation of these companies does not seem to be reflecting that. Its possible that it is early days for this technology in india ( we barely have phones , much less internet and broadband ). But i think it will eventually hit the indian telecom providers too ( maybe starting with the international calls where the margins are higher ).

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