Friday, September 23, 2005

Why all the phones in the world will become free, thanks to "a very unusual business plan".

There's a principle in economics that the price of a product or service moves towards the marginal cost of providing it.

We've seen this principle play havoc with the old legacy airlines following their deregulation. Now the The Economist explains the implications of Voice Over Internet Protocol (VOIP) for telephone service...
[Founder Niklas Zennstrom's] vision for Skype 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 ... 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...

...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 ...
I'm one!

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...
First technology does in the telephone tax, then the telephone bill itself.