Economist falls for Skype-hype: wrongly predicts end to mobile voice calls

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.

Comments

[Kristian Tørning]

You convinced me!

[David Doherty]

Would be very excited as to whether or not you have considered how Project Bluephone (Vodaphone & BT offering with handing over between fixed line and cellular) could mean that they may infact have got it right?

[Tomi T Ahonen]

Hi Kristian and David

Thank you for the comments. David, yes I've looked at the Bluephone opportunity - and I believe so has Alan actually - for quite some time.

I feel the Bluephone - and similar solutions such as that in Korea - are the right way for the fixed wireline operators/carriers to go. It then depends most on effective marketing activities (as opposed to a "perfect technology" on how well the converged but home-centric solution will do in the market.

Definitely has the potential, but much like BT's MVNO interests, I am afraid they are heavily constrained by internal inertia. We will have to see..

Tomi Ahonen :-)

[Martin Geddes]

The Economistas also forgot to differentiate between the collapse of the call origination market, and the termination one. The latter, despite regulatory pressure on prices, looks rather healthy for mobile operators, and non-negligible for fixed ones.

And then there's the "0870" type numbers springing up in the UK for businesses, and expect to see personal equivalents spring up too.

Telephony will be zero-margin between people within trust groups. The only place I'd differ with Tomi is that there is user price-sensitivity, and cross-elasticity between wireless and wireline. Home broadband + WiFi may not be universal, but it's credible existence will help to flatten mobile price plans (e.g. unlimited 'free' calls from home cell).

In the medium term (3-10 years), a Qualcomm/Flarion type network could bring about some of what the Economist predicts for mobile operators, but only in certain localities with the right spectrum, popularion and market conditions. (Lots of 'ifs'.) Longer term (10-25 years) mobile mesh spells serious doom for centrally planned networks, by eliminating much of the capacity scarcity, but it's still really a DARPA research problem today. (Think: Internet c. 1970).

Given it was the cover story, it deserved much better research. Seems hastily put together.

[Richard Spence]

Tomi

Not sure if I got all the train stuff but ....

Isn't there a threat to mobile operators from hybrid phones that can select between voip (via wireless IP) and the mobile network. Although we may not have wired networks at home most of us live and work in metropolitan areas where we could easily (more easily) connect to a wirless IP network.

Cheers

Richard

[Tomi Ahonen]

Hi Martin and Richard

Martin - I agree with the WiMax etc scenario. It will play out over an extended period of time, and will require mobile operators to adjust and react. Yes, a very likely scenario as you paint it, and I agree also with your time scales.

Richard - yes, there will be an opportunity for miscellaneous service providers through hybrid phones and hybrid solutions, so that users will hop between say WiFi networks and 3G. I for example had a WiFi service, but now with my 3G modem card, I stopped paying for my WiFi subscription. As the 3G card offers a most compelling data service in terms of price/data load, but 3G also gives me almost unlimited roaming (as it also has GPRS 2.5G as the backup system) - I get reasonably high speeds at all locations. It is rare for me to find a free WiFi network when I would want it..

But yes, you offer a valid proposition. But how many users will want to pay extra for that ability in the handset? Some will, not all. And of those, how many are in a free hotspot. After all, if you want the WiFi for its "free" services, then you would not want to pay for a subcription in ADDITION to the cellular coverage? As to offering that at home or in the office, for this there are many pricing solutions by mobile operators (with something called Home Zones, first introduced in Denmark some years ago) that will effectively kill out the mass-market appeal of this idea.

Yes, in principle it can be done with hybrids. There are many obstacles to it becoming universal. And long before the threat becomes truly meaningful, mobile operators can destroy that market niche with pricing solutions they already have in their arsenal. No, VoIP will not cause disruption to mobile operators. But VoIP will cause massive further headaches to fixed wireline operators. Again, Richard, your example - it is not a very compelling offering to most mobile phone owners (bigger handset, more expensive handset, worse battery life etc) but will be a most compelling offering to the home/office phones of today, that are either wired, or cordless. They will of course migrate to the "Bluephone" type of hybrid WiFi and mobile phones. These will therefore further threaten the business model of the fixed wireline operator/carrier.

Tomi Ahonen :-)

[Daniel Taylor]

Tomi,

Thanks for hitting these points. Good job on the post!

Last week, I read the Economist article and had begun to fear dotcom-era groupthink. In addition to the constraint of radio spectrum, Martin's mention of termination charges raises the larger issue of subsidies. How is the Internet subsidized, and what will happen to the network as the subsidies decrease?

Here in the U.S., declining long distance revenues have significantly reduced what was a pretty substantial subsidy for the local telephone network. As a result, local telephone rates have risen.

I suspect the same thing will happen for fixed-line Internet access. As voice services decline, the remaining data services (e.g. DSL and cable) will have to carry a greater portion of the burden.

Will VoIP over fixed line broadband be less expensive than current fixed line telephone services? I honestly don't know. But we currently have telephone service that works when the power goes out. I guess we lose that when we go to VoIP.

[Chris Partridge]

No - the young are not abandoning fixed lines because they want broadband to play games on. My 17 year old son would rather ditch his expensive mobile rather than his (free) broadband line. This is why VoIP will disrupt traditional telecoms networks very quickly. I suspect the ISPs will soon offer data/voice packages for fixed rates and everyone will abandon their analogue phones, but not the copper wires.
I predict that very soon the government will have to offer the rump of elderly luddites who want to hang on to their regular phones free VoIP phones that look and operate exactly like their familiar landlines, just to allow BT to switch analogue off.

[Chris Partridge]

Moreover, the Economist article doesn't say the telcos are doomed, simply that their business model has changed. They can survive because VoIP is not, repeat not, free - it is paid for by a subscription that is charged by the telco. If analogue voice calls disappear, the subscription will rise to fill the shortfall.
On the other hand, even with rising subscriptions, VoIP calls will still be much cheaper than POTS calls, especially long distance. So cellular calls will appear to be even worse value than they appear today, putting pressure on the mobile operators.
Chris

[Paul Jardine]

I think the Economist definitely got the timescales wrong, but I think it's inevitable that VoIP will become the delivery mechanism for voice and that voice will be 'bundled' with the subscription. Does that mean the end of the mobile operators? Well, maybe the current ones, but whatever takes their place will also provide mobile network access - so it's all semantics really.
The key is the device manufacturers (Nokia, Motorola, Cisco, Zyxel, HP etc), as people (young or old) don't really care which network they are on so long as they have the functionality/access to use the services they want with a fashionable form; and voice is going to be one of the major services for a long time yet.

[Chris Rodger]

Surely the point of 3G isthat it provides lots of mobile bandwidth – so we can surf the net and watch TV on our phones. Assuming this is the case, for operators to recover their investment in 3G, they need users to take-up these new data services. And one of those data services is likely to be VOIP, whether the operators want it or not. The challenge for the operators is then to set the prices for data low enough such that it encourages subscribers to make use of data, but high enough to compensate for the loss of voice revenues.

Thus, if all voice traffic switched to VOIP, and hence voice revenues fell to zero, operators would attempt to price their data package (based on a fixed monthly fee) at about the level of the current voice ARPU. This would give them the same revenues as they currently get. Operators would then need to try and drive up the ARPU to recover the cost of capital of the 3G investments – by offering enhanced data packages maybe, or using the billing relationships they hold with subscribers to offer services to content providers using their networks.

All of this sounds very nice and simple, but it depends on whether the market will accept a (probably relatively high) fixed data fee. This is related to perceptions of value, attitude of pre-pay customers and competition. Currently, there is little real competition for mass-market mobile connectivity – the mobile operators have a practical monopoly. However, if new players enter the market, e.g. if WiFi telephony becomes widespread, this could change. The capital costs of WiFi are likely to be lower than a 3G mobile network, which means WiFi operators could charge lower prices to users. Although the functionality would be more limited for users, in particular the ability to make calls on the move, there may an acceptable trade-off of lower call price/lower performance that some (many?) users are prepared to make. This would drive down the prices that the mobile operators could charge.

[Tomi Ahonen]

Hi Daniel, Chris P, Paul and Chris R

I am currently chairing a major TV-Mobile conference in Berlin, so have only limited time to reply. I will return to these themes more thoroughly with a second original blog posting at end of this week.

Daniel - I agree

Chris P - your 17 year old son is definitely in the very small minority of young users. Every survey of youth technology preferences since the landmark studies in France and UK March 2001 by Orange, and across Asia in February 2002 by Siemens, show a strong preference by the youth indicating that the mobile phone has become their number 1 must-have gadget, and the one they are most addicted to. I write about these things and lecture about it at Oxford University. I have not seen one, not one inconsistent study to these findings but literally dozens supporting it, including Timo Kopomaa's book City in the Pocket, Howard Rheingold's Smart Mobs, and Mark Curtis's Distraction. The same findings have more recently been identified even in mobile telecoms-laggard North America, such as the mobile telecoms youth panel, that I chaired at the big wireless conference in Calgary earlier this year. I must be swayed b the majority of academic research into this field, ha-ha, I hope you won't hold that against me..

Paul - Agree about time scales. I hear you about the chance that current mobile operators would be replaced by new ones. I think it is a plausible scenario, but almost definitely unlikely. From first-hand experience with strategic planning at literally dozens of mobile operators/carriers on six continents, I can testify that they ALL are aware of this technology and are prepared for it. A mobile operator faces MUCH GREATER price pressure from more disruptive and acute threats from "MVNO's" ie Mobile Virtual Network Operators - such as Virgin in the UK, Telmore in Denmark, and say Seven-Eleven and ESPN in the USA; as well as mobile number portability. These will threaten the profits of mobile operators in leading countries. Hong Kong, Denmark and Finland have already gone through the blood-letting because of these threats, and their price levels have adjusted accordingly. We are seeing similar effects now starting in the next countries, such as the UK and Sweden.

Chris R - A thoughtful reply and clearly you have put some thought into the 3G business case. I happen to be the global authority on this, having written the first book on it (m-Profits, global bestseller in 2003) and developed the world's first business course on the 3G Business Case, run at Oxford since 2002; and chairing most major 3G related conferences and workshops on the 3G business case, not to mention being quoted in major press on the 3G business case from Business Week and the Wall Street Journal to Telecommunications and 3G Mobile; as well as countless TV and radio interviews around the globe. I can attest, that in NO 3G BUSINESS CASE anywhere, is either "surfing the net" nor "watching TV" a significant part of revenues for a 3G operator. The majority of 3G revenues will be voice, text messaging, picture and video messaging, gaming, music, m-Commerce and advertising - all ahead of any web surfing and mobile TV. In fact, since the "WAP flap" all operators have dramatically scaled down their web surfing revenues, and TV on mobile will be mostly delivered via separate digital tuners (imagine your set-top box bolted onto a mobile phone) due to capacity issues - trust me, the conference on this very topic here in Berlin - the location of the world's first test of this technology and collected here actual managers who are running or ran the other world's leading tests into TV-mobile, have all been in consensus. The only viable technical way to deliver mass-market TV to portable devices is NEVER via 3G or 3.5G technologies, but ONLY via direct digital broadcast.

So Chris, while your analysis is very good, its basis is faulty. I will address this whole 3G Business Case more thoroughly in a separate posting, as it is probably of considerable interest to many visiting our blogsite, and I will develop the main elements more completely.

Thank you all for posting. I will write a new blog posting to summarize some of the discussions and add a more considered follow-up blog by me.

Dominate !

Tomi Ahonen :-)

[Tomi Ahonen]

Chris P

Sorry, meant to reply to your other posting too. About "Moreover, the Economist article doesn't say the telcos are doomed, simply that their business model has changed." etc

No, actually, from the cover "killed the phone business" and the conclusions of its editorial, the Economist writes "It is no longer a question of whether VOIP will wipe out traditional telephony, but a question of how quickly it will do so." which the Economist then goes on to conclude will happen in 5 years.

So sorry, Chris, no you read it perhaps too quickly. The Economist did not suggest that only the business model is threatened. (I could accept that). No, the Economist actually claimed as a certainty that traditional telecoms operators will die. This because of VOIP. And that the most vulnerable are mobile operators. So that is why I took such issue with this outrageous claim, and it compelled me to blog about it.

Again, Chris, I don't mean that the article does not ALSO talk about the business model changing. But you were wrong to say that the Economist did not predict the demise of traditional telcos. It does, in very clear bold letters on the cover and explaining it in the first editorial and so on.

Tomi Ahonen :-)

[Jonathan Tregear]

I'm not buying the argument that people will be abandoning landline cable to receive television anytime soon. In fact, I think just the opposite has happened. And if that is the case, then I can find you a "WiFi network when you would want it." In your house! What percentage of calls do you think that people make over their wireless phones from home? Fifty percent, seventy percent? If you had a hybrid phone and were able to move your home calling to to a commodity bandwidth pricing model, that would indeed blow a hole in wireless provider business models.

[Jonathan Tregear]

The more that I think about it, it's even worse than that. How much of your phone calling is done at either home or at work? That has to be close to seventy percent or higher. I have free WIFI bandwidth at work and commodity priced WIFI bandwidth at home. A hybrid phone that transparently connected to those two WIFI networks alone would save huge amounts of money over service differentiated wireless provider bandwidth. Certainly enough to pay for the unsubsidized phone I will have to buy to take advantage of it. The phone will be have to be unsubsidized because, if you want a verifiable prediction, no wireless provider in his or her right mind will ever carry a hybrid phone. It's a business model killer.

[Tomi Ahonen]

Hi Jonathan

I hear you, and I have heard that argument so many times over the past years. It makes so much sense, on a logical and intuitive level.

However.

ACTUAL statistics of ACTUAL usage in ADVANCED markets like Italy, Japan, and Finland all echo IDENTICAL patterns, totally DISPROVING your point.

I agree with your logic, Jonathan, it makes sense. But in this case that logical thinking has been proved to be wrong, by imperical facts. And we have to accept, if countries as relevant as Japan with 130 million people and Italy with 60 million show these patterns, and geographically so diverse as Finland, Italy and Japan, then it is no longer an isolated incident.

The facts prove your thesis wrong. Even when people have "very expensive" voice calls on a cellphone in their hand, and free or almost-free calls on fixed wireline phones in the same room, the tendency is to be lazy and irrational (remember the mass market is normal people, not engineers) - and all facts prove that this behaviour moves to mobile phones.

Free calls. No it will not change this global trend. Not at all. Sorry.

Tomi Ahonen :-)

[Chris Rodger]

Jonathan, I agree with you. And particularly so when TV is readily available over broadband, and we can pull it when we want it rather than having it pushed at us. Surely we are going to need our landlines to do that?

Taking the usage of WiFi further, I have wondered whether there is a market for a gadget (piece of software?) that enables third parties to connect to my broadband landline internet via my WiFi router. The gadget/software would have to make access secure (i.e. prevent them accessing my PC and stop them downloading illegal stuff), and then could charge them for doing so and give me a share of the revenue. Most of the capacity on my WiFi router is unused by me, and there is no marginal cost to me when others use it - so making that unused connectivity available to someone passing imy house and monetising it is attractive. And if eventually many people and businesses have WiFi routers, we may end up in a situation where there is actually pretty reasonable coverage - in urban areas at least.

Is there a business here to develop the gadget/software and set-up the charging and pay-out systems?

[Jonathan Tregear]

Tomi, The evidence you cite proves that users are very attached to their cellphones (i.e. the device itself). Ok, I won't argue with that. But just because they love their cellphones doesn't mean they have any great love for their wireless service provider or derive a higher intrinsic level of satisfaction from using wireless provider bits vs. other available bits like WIFI. A bit is a bit as long as it's available, reliable, and accessible from a user's preferred device.

A hybrid WIFI/Wireless phone provides a third choice to the limited choice between separate landline phones or wireless phones that your argument precariously depends on. A hybrid phone allows users to continue to love their cellphones and continue to use them for all of their voice communications. The only difference is that a hybrid phone would transparently switch carrier transport to cheap commodity bandwidth when it is available and only use expensive wireless bandwidth when necessary. And "when necessary" only really applies to when users are in motion. In motion minutes is when there really isn't any good alternative at the moment to wireless bandwidth. But as I said in my previous comment I think those "when necessary" wireless minutes are a fraction of users total calling minutes, although the actual fraction will obviously vary from user to user based on things like the length of their commute, how much they like to call people when they are out shopping, etc.

If given this third choice of a hybrid WIFI/Wireless mobile phone that trasparently selected least cost available carrier bandwidth, users would obviously adopt it. If commodity bandwidth priced WIFI were only available at home and also at work (not to mention the ever increasing number of publically available hotspots) users requirements for expensive wireless minutes would drop precipitously and lead to the serious impact on the business models of wireless providers as well as landline providers.

[Tomi Ahonen]

Hi Chris and Jonathan

As I said many times before, I totally agree with the Economist article main premise that the WiFi/Skype/VoIP threat is to the fixed landline carrier/operator. Chris what you talked about, and Jonathan much of what you discuss, will threaten the business, revenues and very survival of the fixed wireline telecoms carriers/operators.

But I also pointed out that this threat is not the same to cellular telecoms providers (carriers/operators/service providers). Jonathan, when you expand the opportunity to the hybrid provider, and the impact is to the telecoms traffic which is "not in motion" - then again we are in agreement, this hits specifically the fixed wireline carriers/operators. In a hybrid solution there would be part that is delivered via WiFi and "free" connectiveness, and another part delivered via cellular telecoms. By definition this means that there is even in your scenario, a significant business opportunity for the existing wireless/cellular carriers/operators to continue to charge for at least all the traffic that is generated when the person is in motion. And if we have to migrate all phones from current home/office fixed wireline phones and current "single function" cellphones to hybrid phones with WiFi and cellular - then we also have a long transition period from the current to that eventuality. And that transition will not even start until Nokia, Motorola, Samsung and SonyEricsson roll out mass-market phones with this capability. Notice that excluding weekends, Nokia sells one million cellphones every day of the year..

So until that happens, the whole SHIFT to your future scenario cannot even start to happen. There are two very significant other issues. The congestion at public (free) WiFi locations - would totally crumble the WiFi system if all cellphone users would also put their voice traffic to WiFi. Who pays for that upgrade? If the service is free - like offered at a given Starbucks - and they have now seen that there is little money coming in from that - why would they upgrade to meet the high demand unless someone pays. If we shift the WiFi to a pay-model, it kills the idea that free services will cannibalize the cellular traffic.

The other concern is WiFi capability and the cellular carriers/operators. Most of the mobile phones in the world are sold via the mobile operators, and in most markets this is done with enormous subsidies. Often phone with a 500 dollar retail value is given for free with an annual or two-year subscription. It may even seem like the "natural state of things" to some readers of this posting, but notice that in some of the world's leading mobile countries countries with over 100% penetration, like Italy and Finland - there are no subsidies, and users pay full retail price for their phones.

Anyway, the cost of integrating WiFi to a cellphone adds cost, size, weight and drains the battery. Some addicted to the mobile phone will simply not want the heavier bulkier phones - witness preferences of Nokia Communicator 9300 (without WiFi but much smaller) vs its bigger brother Communicator 9500 (with WiFi but much larger).

More importantly, as the mobile operators/carriers are the sales channel for cellphones, and they tend to subsidise them at most markets, cellphone manufacturers have to be remarkably brave to launch hybrid phones and expect the carriers to a) sell them and b) subsidise them. Why would a cellular operator/carrier want to support such a cannibalizing threat to their business?

Jonathan, my main points here are that even if that is technically possible now, it will take a long time for manufacturers to agree to do it, for fear of alienating their distribution channel. Witness how hostile the carriers were to Nokia's N-Gage gaming phone - where carriers were expected to subsidise a platform that supported sales of games that would bypass the carriers themselves as the sales channel. Once the handset makers do roll out such devices - and they will come of course - even then, it will take a few years until the full model range is fitted with this feature (if ever) and only after that can we expect the mass market to shift to "hybrid behaviour"

That will take years.

After that shift in behaviour will start to happen, we will still have cellular carriers/operators getting (in your scenario, a gradually diminishing) portion of the total revenues from the traffic while in motion. Meanwhile most free WiFi sites will grow increasingly congested. Some will upgrade, others will not. Of those that upgrade, some will shift to pay-models for WiFi. As free WiFi spots diminish, that eats into the "ceiling" of the opportunity in your scenario.

All in all, we both agree that there is some size of a business opportunity for cellular telecoms in a converged hybrid world. I personally believe it is quite large for the cellular carriers/mobile operators. But even so, it is very clear that any cannibalization cannot take this whole market in five years, meaning that the Economist's conclusions - and what prompted me to write my blog in the first place - were seriously misguided.

Dominate !

Tomi Ahonen :-)

[Jonathan Tregear]

Tomi, I think we have general agreement here! We do differ on how much of a threat commodity VoIP is to the business model of wireless providers and it also remains to be seen how long it might take for a hybrid phone model to impact wireless providers.

Like you, I don't believe in the WIFI hotspot model for mobile communications and for many of the same reasons. On the other hand, just having uncongested WIFI access (through cable broadband) to a hybrid device at home would put a serious dent in the demand for wireless minutes.

And I definitely agree with you (and believe I wrote many paragraphs ago) that we're not likely to see wireless providers subsidize hybrid phones. That will slow down adoption, but the differential in cost between wireless minutes and commodity VoIP minutes is so large that we might see uptake of unsubsidized hybrid phones faster than one might think even at unsubsidized prices. Just the fact that we agree that that wireless providers will not subsidize hybrid devices also somewhat validates the argument (the Economist's argument) that wireless providers perceive commodity VoIP as a business model threat.

There are also some devices coming to market fairly soon that will make these hybrid scenarios possible. I believe I read recently that LG is building a hybrid WIFI/Wireless phone. The HTC Universal has WIFI and can run Skype. We will see if the HP6715 with WIFI will have enough CPU power to run mobile Skype. Interestingly, the Treo 700w that Palm, Verizon, and Microsoft are set to introduce will not include WIFI, which to me validates the conclusion that in order to get Verizon to sell this thing, Palm had to disable WIFI.

Since we agree that it's more than unlikely that any of the current wireless providers will subsidize a hybrid phone, maybe it will take an outside entity with substantial interest in the commodity VoIP market to go the other way and step into the wireless business and make the hybrid market happen. Ebay could buy TMobile for example or perhaps a Microsoft/Teleo play. Someone will eventually step up to the plate though, because there's no technical reason why this can't be done now only protectionist reasons. When it finally does happen, consumers will find the cost advantages hard to ignore.