Salocin

Telecoms is Exciting?

I work in telecommunications, an industry in which companies have to constantly reinvent themselves in order to survive. This may make it sound exciting, but where the rubber hits the road, the work remains more or less the same as in any industry: we make budgets, do forecasts, measure revenues and costs, calculate commission payments, monitor expenses and do the hundred other things that a business needs to do in order to run. This apparent monotony belies the grinding effects of technical innovation on our industry.

At business school, one of the many concepts you study is disruptive innovation or disruptive technologies. The idea is that some new technologies cause massive shifts in the profitability of various industries, resulting in incumbents having their previously dominant positions challenged by apparent start-ups, and previously monopolistic or oligopolistic companies finding themselves powerless to prevent an erosion of their revenues and margins because the way that their businesses are configured makes it impossible for them to compete.

One such innovation is the development of Voice over IP (VoIP). In it's simplest incarnation, this is the Skype service, a system that allows two individuals to talk over the internet, using their computers, as though they were talking over the telephone. Skype has a service called SkypeOut, where the system links with the PSTN (the public telephone network) and allows individuals to call normal telephone numbers from their computer for only the cost of a local call, irrespective of where in the world they are calling. This is possible because the Internet carries the call most of the way, leaving only the cost of the local connection at the end, the so-called "last mile". To do this, Skype has had to get agreements with incumbent national telephone companies to carry the call down the wire to the telephone itself - it has these already.

Skype is, however, nothing more than the bridgehead. The real disruption will come with the next iteration of this technology - the combination of VoIP, mobile handsets and wireless networking.

It isn't hard to install a bit of software into a telephone handset that allows it to connect to a wireless access point, and therefore to the internet. Once you've got this installed, it takes very little additional work to install software on that telephone that can communicate telephone calls over IP in exactly the same way as Skype does. What you would then have is a telephone handset capable of making telephone calls using the same technology as SkypeOut, but completely bypassing both the GSM and the GPRS networks. Assuming you were a Vodafone subscriber with one of these telephones, that would mean you could make calls - while within range of a wireless access point - without ever connecting to the Vodafone network. In fact, Vodafone wouldn't even know you made the call.

For this to be possible, the technology has to be free (as in unconstrained). As people like Motorola and Nokia develop these phones, they're going to want to generate ongoing revenues from the sale, and so the handsets will be unable to simply connect to the internet and make telephone calls over any service the user cares to choose - that wouldn't be very profitable for anyone. At least at first, consumer choice will be limited as corporations try to skim the market. They have to do this to give them time to find new business models that allow them to continue to exist.

A company like Vodafone (or Sprint, or t-Mobile, or any mobile operator) should be extremely worried about such a development. Essentially, they're going to see their customers using their service less and less because it's cheaper to use VoIP connections.

The first thing to go will be roaming revenues : these are the exorbitant prices applied to individuals using (for example) a UK telephone in France. You get charged extra for being a guest on someone else's network, and then extra again because every time you receive a phone call, it's basically being routed internationally. The mobile operators make a killing on these price plans. Who in their right mind would pay upwards of 40p (72 cents) per minute to call home when they can make the same call for about 1p per minute (today's Skype price).

The next thing to go will be international calls - it costs a fortune to call (for example) India over a mobile phone, but only 10p per minute using Skype, if the mobile phone can connect to the internet, there's no reason anyone should pay more than the Skype price (and this will probable fall over time too).

As the high-rate revenues decline, the mobile operators will have further problems because the high contributions from these products go towards maintaining their network infrastructure. That maintenance cost is unlikely to fall nearly as fast as their revenues, and this will cause their pre-tax profits to plummet. These companies are also trying to recoup the cost of the 3G licenses they bought for outrageous amounts of money from government auctions some time ago - these new developments call into question investments these companies have made in the mobile infrastructure and 3G licenses, because much of this could be rendered suddenly, abruptly, obsolete.

In fact, all this is already possible - all it takes is a small laptop, a wireless connection and a headset. That's an expensive piece of hardware to carry around with you though. When this technology gets built into telephone handsets, it will be within reach of every person on the planet, and anywhere with a wireless connection becomes a low-cost telephone point.

This industry is about to experience a revolution, and how the likes of Vodafone, BT, t-Mobile and others choose to react will decide who is relegated to the ranks of has-beens, and who benefits from the transformation of the industry. While my day-to-day job may not reflect the excitement of what's going on in the wider industry (and more's the pity), there's no denying that it's a fascinating case study to observe.

Note : I do not work for any of the companies mentioned above.

Posted by nlvp at January 3, 2006 10:43 AM