I am a passionate fan of the Economist, and have read the weekly periodical religiously for over 30 years. I also greatly enjoy its technology and business-oriented stories. I have been honoured to be quoted in it, and to have spoken at an Economist conference, and have even had the Economist New York HQ as my customer when I sold computer networks on Manhattan as I started my career into IT. This week's cover issue - and lead editorial - is "How the internet killed the phone business."
The story is about VoIP (Voice over Internet Protocol) with the eBay purchase of Skype forming a major part of the story, and with the other case example being the other big internet voice disruptive player, Vonage. The main thesis of the story, the majority of the emphasis etc, is on how the voice calls of fixed wireline telecoms business are under serious threat by VoIP such as offered by Skype and Vonage. I totally agree with this main thesis, and have written, spoken and blogged about it to great extent over the years. I've even chaired the biggest VoIP event, Pulver's VON.
The article, however, in a surprisingly superficial manner considering the heritage of the Economist, makes unsupported claims that mobile telecoms will suffer the same fate. In fact the cover story says that mobile operators are more threatened than traditional fixed wireline telecoms operators. They write "The most vulnerable are those operators that are most dependent on (voice) revenues. In particular this means mobile operators." I am afraid that for once the meticulous journalists at the global business weekly have been taken in by marketing hype, and have leapt to conclusions that will be found to be totally unsustainable.
As telecoms is a trillion dollar industry - bigger than advertising, military spending or the global automobile industries for contrast - and now the Economist predicts its demise, I will want to examine the issue with the support of facts rather than mere marketing hype. And as I wrote the world's first business book on how to make money with advanced mobile telecoms (m-Profits, a global bestseller in 2003) and I regularly lecture on this very topic at Oxford University, I think I have to address this issue and the fallacies in the otherwise excellent article.
So lets be clear. I agree that VoIP services such as those of Skype and Vonage will dramatically threaten the existing fixed wireline telecoms business of traditional telecoms operators. I do not agree that this same threat is in any way meaningful for mobile operators. To use an analogy, it is like the introduction of electric and diesel trains to transportation in the middle of the last century. They did radically disrupt the existing steam-based train business. But diesel trains and electic trains did not particularly affect the emerging airline business. And by the 1950s it was very obvious that airlines were the preferred means of travel, rather than trains. In the same way VoIP will threaten the fixed wireline telecoms voice business, but the preference (and majority of users and majority of revenues) is already with mobile telecoms.
Why would VoIP service providers not disrupt the mobile telecoms industry? On the fixed telecoms side, most landline connected households and offices in the Western world already have either narrowband or broadband internet. If a family or business is paying a monthly fee for its internet connection, it can "upgrade" to some VoIP based phone service and get essentially voice calls for free. If that household or office currently spends money on the fixed wireline phone based voice calls, this becomes a very compelling offering. Why pay a monthly charge of say 10 or 20 dollars to the telephone company for the fixed wireline phone, if a cheap headset etc can be connected to the PC and suddenly internet based free calls become possible. Again, I totally agree with this scenario as cannibalizing voice calls made from fixed wireline phones in the home or office.
Now, lets look into the future. We see it already in Scandinavia today. In Finland and Sweden, already 40% of all homes have abandoned the fixed phone line completely, and use only mobile phones. It doesn't matter how inexpensive or free there would be a Skype or Vonage -type VoIP service on the fixed internet connection, when the home does not have a wired connection of any kind anymore ! The same trend is happening in all advanced mobile markets, following the Finnish and Swedish example with a short delay. Take for example my sister. She has no fixed line phone in her home. It doesn't matter how free we make Skype or Vonage, she will not go back to the phone company (or her cable TV company or any other provider), and start to pay a monthly subscription for another fixed connection, to then get free calls that are tied to her home. She has cut the cord, and will never go back.
This this is preposterous? Look at your own kids. They are growing up knowing only a mobile phone. They will not WANT a fixed line at their home. Only old fogies bother with wired connections. No matter how free some services might be on it.
So even if we assume that "all" fixed wireline phone calls migrate to VoIP, this will leave a large part of the mostly young population that is beyond the reach of the service. It is like the diesel and electric engines to the trains. Wonderful for crossing a continent, better than a steam engine. But they cannot cross an ocean. A part of travel can only be covered by airplanes, and no matter how great we make the new train engines, a part of the business is beyond their reach.
Worldwide in 2003 the total number of mobile phone subscriptions grew ahead of the total number of fixed telecoms subscriptions. This year, 2005, we have seen the total mobile telecoms revenues exceed fixed telecoms revenues. So of the trillion dollar industry, in fact the Skype and Vonage opportunity only directly deals with less than half. Less than half of all users can even be reached by VoIP. Less than half of the total telecoms revenues are directly affected.
Now lets examine the threats by VoIP to the mobile telecoms voice business. Last week Skype made its first announcement of a mobile telecoms operator launching Skype on its network. E-Plus in Germany became the first mobile operator to offer Skype (and thus VoIP) openly and officially on its network. Did it crash the revenue model of mobile operators in Germany? Actually, the Skype service is offered at a monthly flat fee of 39.95 Euros !!! Not at all "free calls." In fact the exact opposite. Skype costs about DOUBLE what voice calls cost in Germany on average. The average voice revenues on German mobile networks, are about 24 Euros per month. At 40 Euros, Skype will not even be attractive to any users who don't spend more than twice the national average on voice calls alone.
Here we now come to the fundamental truths why VoIP will not disrupt the mobile telecoms business model. On fixed wireline telecoms networks, mostly capacity is not an issue. There is enough fibre cable connectivity between connecting points of the network that the actual cost of delivering a bit of data (such as a bit of a voice call) is almost zero. However, the radio spectrum is not built to excess capacity; quite the opposite. The radio spectrum is a very sparse natural resource. We are already at capacity during rush hour in most major western cities. There is no excess capacity. No provider can offer you voice calls on mobile networks for free or near-free because they have a capacity ability to do so. Where some new entrant operators, such as 3/Hutchison in some markets, have done that, it is only because their network is so new it has not yet reached any meaninful utilization levels. Once they are approaching normal user numbers, they will be equally constrained.
What does that mean on a practical level? It means that any VoIP connection that is enabled on a mobile phone - and I can do that today with for example my Nokia Communicator - will consume a limited radio resource. There are only a few simultanous connections that any one base station can maintain at any one time. That is why every time I connect, whether using a voice call, or read a WAP page, or download a music file - or connect using VoIP for a voice call - there will be a charge, that is proportional to the load that I will put on the network.
Again, to use a train and plane analogy. Trains are rather heavy. To add the weight of a single person will not materially add to the costs of delivering that train on schedule to its destination. For the most part, trains (in the Western world, for human travel, not counting city trains in rush hour) have excess capacity. They would not suffer directly if one additional person rode on any given trip; the only real damage could be to long-term price levels. So if they wanted, they could offer free travel under given situations and not "harm" the daily operation of the railroad (note this would dramatically affect long-term pricing models, which is why trains are not doing it). But airlines are severely constrained. Not by the availability of seats on the plane - but by the limited natural resource of landing slots at major airports. London Heathrow cannot take more planes every day. There is a limit to how many planes can land say from Singapore. That is why Virgin, British Airways, Singapore Airlines, Quantas etc all fly 747 Jumbo Jets on that route. Because they are limited how many times they may land, they want to bring in the biggest planes they possibly can. This is why airline travel will not be free for any foreseeable future. Because the costs to create more space in the congested environment (airports) is too expensive.
Back to my criticism of the Economist. They make a good point about VoIP disrupting fixed wireline telecoms. They unfortunately did not interview any mobile telecoms experts on what will be the impact to mobile. In their various conclusions that are relevant to fixed, they then extend the same conclusion to mobile, and make a hasty generalization. The article includes a table listing the most threatened telecoms operators, with China Mobile, Vodafone and China Unicom first as the most exposed operators and BT Group, SBC and Cable & Wireless - fixed wireline operators the least exposed. I totally disagree. VoIP is a natural threat to the voice business of fixed operators (thus BT, SBC and C&W should be on the top of the table). They are already severely under threat by new discount service providers in the long distance and international call business; the entries of cable TV operators into the voice teleocms business; and the migration of younger customers away from any fixed wireline phone connection whatsoever. VoIP will be the final nail to their coffins.
"Pure" mobile operators such as China Mobile, Vodafone and China Unicom, are actually the most insulated from cannibalization of VoIP. We have had 100% ability to use VoIP on mobile phones since 1998 when the first Nokia Communicator was released, and no such threat has materialized. For the very reason I explained above: that any "free" VoIP service on a mobile phone will still incure usage charges on the "data" side that totally wipe out any possible "savings" gains from the VoIP calls. Look at your own "internet" service on your mobile phone or laptop modem card - you are charged per megabyte or by minute, or if not, you have a monthly limit of how much "fair usage" you can have per month. There is no such thing as free internet on the mobile network. There is a natural resource scarsity that guarantees this.
Yes, we will see VoIP services on mobile networks. They will be rolled out by the mobile operators just like E-Plus has done in Germany. These services will not be free. They will not be cheap. They will support the price levels of mobile operators. With 30% of the global population already addicted to mobile phones, these users, their traffic, and their revenues will not migrate BACK to being tangled up with a cord. No, mobile telecoms is like airplanes were to trains: the preferred means to travel. People will be willing to pay a premium for the convenience of mobile calls, and VoIP will do nothing to alter that.
By the way, the Economist says the end will come in about 5 years, so we will see who is right about this. I am certain Alan Moore and I will still be here at this blogsite five years from now. And having watched that VoIP technology slowly evolve - I placed my first VoIP call in 1997 - I am totally confident that here is one prediction where I will be proven right and the Economist wrong. Lets see what happens, and I suggest you don't hold your breath that mobile operators will go under. No, it will be the fixed operators that are threatened by VoIP, not mobile.