How to Win the VoIP Wars
As AT&T, Vonage and others are proving everyone right that VoIP is a race to the bottom by lowering prices repeatedly, it's worth thinking about how to create a profitable VoIP company. Since the main value of VoIP providers today is to offer connections to the PSTN, one can draw meaningful comparisons to ISPs, who offer connections to the Internet. Similar services, different networks. Below is a discussion of various business models, the history of their application in ISPs, and implications for VoIP providers.
Least cost provider - As the market for dialup ISPs matured, United Online emerged as the least cost operator. UOL outsources the network services to Level3 to minimize CapEx, markets a simple value proposition through mass media to minimize acquisition costs, and manages intensely its customer service costs. The critical elements in this model are a maturing market since this provider cannot afford to create the category, and scale. This strategy is the likely fall-back plan for the insurgents like Vonage if they fail to achieve their current plans. However, the market is not evolved enough yet.
Mass marketing brand differentiation - The ISP example is AOL. With the largest number of subscribers and highest cash flow, they were able to spend the most on marketing and maintain their lead. This is the classic BCG growth-share model at work. Clearly, AT&T is attempting this model in VoIP. It may work if somebody else doesn’t quickly execute another more powerful model.
Feature differentiation - This is Earthlink's ISP plan. From the beginning, Earthlink offered tools to make it easy for new users. Now Earthlink strives to enhance the users experience and relieve critical inhibitors, such as pop-ups and spam. The trouble with this model is that it only works as well if the company continues to innovate and outpace the competition. In a way, the risks are similar to Hollywood studios or videogame publishers...you are only as good as your last hit. Vonage says that it will create new features that people want and differentiate it from the competition. I am skeptical but wish them luck.
Positive feedback loop lock-in - A positive feedback loop is when the addition of users increases the value of the service and therefore attracts new users. The lock-in comes from closed, proprietary technology. There are no ISP examples anymore as AOL, CompuServe and MSN were forced to open themselves to the Internet. eBay and ICQ are other Internet examples. The VoIP world, this is what Skype is trying to accomplish. However, with the high level of competition today and the active open source community, it will be very difficult to gain the critical mass necessary to execute this model. Skype might need 50-100M active subscribers, which would be 2-5% of all phone connections worldwide, to maintain a dominate position.
Platform lock-in - This is the Windows model and I believe the most likely to succeed model in the VoIP world. It relies on 3rd party developers and content owners to provide innovative solutions for users. The lock-in comes from owning the API's for the developers and having the largest user base for developers to sell into. Applying financial portfolio theory here tells us that the lowest risk approach to creating a killer application is to have a large number of innovators trying (and mostly failing) to create different solutions. The question is how to execute this model. Apple is attempting the same in media with iPod - consumer electronics packaging for the iTunes distribution service. Unfortunately, Apple is so far forgetting why Mac lost and Windows won, but that’s another discussion. Another approach is salesforce.com - software as service with generic devices.
In future postings, I'll discuss what Microsoft, Yahoo and Apple should do with VoIP based on this framework.
Least cost provider - As the market for dialup ISPs matured, United Online emerged as the least cost operator. UOL outsources the network services to Level3 to minimize CapEx, markets a simple value proposition through mass media to minimize acquisition costs, and manages intensely its customer service costs. The critical elements in this model are a maturing market since this provider cannot afford to create the category, and scale. This strategy is the likely fall-back plan for the insurgents like Vonage if they fail to achieve their current plans. However, the market is not evolved enough yet.
Mass marketing brand differentiation - The ISP example is AOL. With the largest number of subscribers and highest cash flow, they were able to spend the most on marketing and maintain their lead. This is the classic BCG growth-share model at work. Clearly, AT&T is attempting this model in VoIP. It may work if somebody else doesn’t quickly execute another more powerful model.
Feature differentiation - This is Earthlink's ISP plan. From the beginning, Earthlink offered tools to make it easy for new users. Now Earthlink strives to enhance the users experience and relieve critical inhibitors, such as pop-ups and spam. The trouble with this model is that it only works as well if the company continues to innovate and outpace the competition. In a way, the risks are similar to Hollywood studios or videogame publishers...you are only as good as your last hit. Vonage says that it will create new features that people want and differentiate it from the competition. I am skeptical but wish them luck.
Positive feedback loop lock-in - A positive feedback loop is when the addition of users increases the value of the service and therefore attracts new users. The lock-in comes from closed, proprietary technology. There are no ISP examples anymore as AOL, CompuServe and MSN were forced to open themselves to the Internet. eBay and ICQ are other Internet examples. The VoIP world, this is what Skype is trying to accomplish. However, with the high level of competition today and the active open source community, it will be very difficult to gain the critical mass necessary to execute this model. Skype might need 50-100M active subscribers, which would be 2-5% of all phone connections worldwide, to maintain a dominate position.
Platform lock-in - This is the Windows model and I believe the most likely to succeed model in the VoIP world. It relies on 3rd party developers and content owners to provide innovative solutions for users. The lock-in comes from owning the API's for the developers and having the largest user base for developers to sell into. Applying financial portfolio theory here tells us that the lowest risk approach to creating a killer application is to have a large number of innovators trying (and mostly failing) to create different solutions. The question is how to execute this model. Apple is attempting the same in media with iPod - consumer electronics packaging for the iTunes distribution service. Unfortunately, Apple is so far forgetting why Mac lost and Windows won, but that’s another discussion. Another approach is salesforce.com - software as service with generic devices.
In future postings, I'll discuss what Microsoft, Yahoo and Apple should do with VoIP based on this framework.
posted by dury at 11:54 PM
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