Broadband versus voice is perhaps the toughest dilemma facing operators today. Skype has not taken over fixed voice, but it has eaten into it substantially, and at the same time it has stimulated rivals and network operators to offer their own versions of voice over an IP connection that was originally set aside for data, and which was priced accordingly.
Now that same dilemma is hitting mobile and the news this week that Skype on the iPhone has been downloaded over 1 million times in just the first two days of availability has left MNOs scrambling to work out their position vis-‘-vis Skype.
A variety of views and positions are being adopted, anything from wishing to ban the feature, to limiting to it wi-fi, to embracing it, to competing with it. We suspect that these initial positions will change as Skype on the mobile picks up momentum. Naturally the network neutrality stick is being waved at most major operators where they are threatening to ban its use ‘ if MNOs moan too much they will convince civil liberties groups, regulators and the general public to get behind Network Neutrality legislation, and then the outcome is likely to be worse than the passive non-cooperation that is tolerated right now.
A Microsoft which let any old browser sit on its PC was fairly safe, but a Microsoft that stopped browsers (or any other software) from working on its PC operating system, which integrated their own browser which could not be deleted, all set the scene for embracing open source, wide ranging anti-trust punishments and constant vigilance by rivals and consumers alike. Similarly a cellular operator which resents the intrusion of mobile IP voice from a third party must be careful. It’s fine not to advertise rival products on the handset, or from the portal, and it’s fine to offer services which are ‘better’ than Skype which use data services to carry voice. It is not fine to throttle back Skype calls using deep packet inspection or try to intimidate Apple into removing it from the Apple App store.
The iPhone Skype policy in Germany where Deutsche Telekom has exclusive rights to the iPhone, is that it will cancel the contracts of subscribers who attempt to install workarounds to use Skype. But because dominance in anti-trust law can mean holding anything above 30% of a market in any given country in cellular voice, then you can see that the European Commission is likely to intervene and prevent this type of view from European Cellcos, complete with legal remedies. The European Commission and Deutsche Telekom are old enemies and the German telco is reactionary and stagnant in its views.
Right now most Skype activity is confined to wi-fi connectivity, as in the case of the AT&T iPhone, and as such some operators may see it as part of their dual mode strategy, but as data services get faster there is no way that Skype will remain wi-fi only.
Prior to Skype entering the fixed voice arena, voice was under pressure already. Operators had to contend with discount wholesale voice operators, who had the benefit of most regulators insisting that fixed voice had been largely rival-less for too long, and that practically anything that would open it up for competition was a good thing. So when Skype hit, just as broadband lines were taking off, fixed operators were already used to thinking about ways to contain price falls, and were beginning to offer their own versions of IP services, which would boast better integration with their own systems. Most of them were not free, and most of them never took off, and after a while fixed operators became more likely to cut deals with Skype, rather than try to ban it.
That’s not so true of video. When IP video services began to be offered harnessing P2P clients, fixed line operators like the big US cable companies such as Comcast, began to look for video packets and slow them down. Comcast had also once tried to slow down Vonage IP voice packets and been waned off by the FCC.
But by and large IP video services using P2P like Joost and Babelgum, and eventually streaming services like YouTube, are now transparently offered by most fixed carriers, who are not allowed to put their traffic on the back burner by treating it as second class.
The whole problem though is pricing. If there was a universal carriage rate for a byte, and that price was sufficiently high, then everyone that offers IP data networks could make a decent living. But that has all got confused with services. Operators, have separately priced services as ‘additional’ revenue and use it to raise ARPU by offering a bundle of services, which allow core services to under price new entrants.
The whole pricing thing comes back to wi-fi. When rogue operators sprang up thinking they could offer wi-fi services cheaply they endorsed a flat rate pricing model, a model which infected Broadband suppliers. Flat rate uncapped models made all forms of broadband take off. But underneath that assumption was that operators ‘still had their voice revenues.’ As soon as something like Skype comes along, with its virtual costless structure, this assumption is no longer true.
And yet there is STILL a subsidy going on. The servers which maintain Skype directories and which sustain calls are made up of tiny pieces of individual personal computers. The networks which this data travels over is the open internet, the fixed broadband lines of fixed line operators and cable suppliers. Without all of this in place cellular Skype could NOT work. The handsets do not do the processing work to run the network, and they do not maintain their own directories, or Instant Messaging servers, and they are not even maintained on the cellular network. Even if they did the back channel of data running up and down the cellular network would slow cellular to a grind, so handsets do not do their fair share of Skype work.
So Skype has a advantage which cellular operators cannot compete with. And there is a perverse form of anti-trust going on here. Skype is using the capabilities and the customer base of the fixed lines operators such as AT&T, Comcast, British Telecom and Deutsche Telekom and hijacking it to undermine the businesses of their cellular counterparts ‘ Vodafone, Telefonica, AT&T Mobility, Orange and T- Mobile. In some cases Skype is borrowing processing and connection power from one network (say AT&T) and using it to undermine the same company (AT&T Mobility).
It is a loophole in their own business models where broadband data is not capped, and where uplinked fixed broadband has no surcharge. It’s too late to change that business model without losing huge swathes of market share, but as we say, this has given rise to a perverse form of anti-trust. As the brand leader in cellular IP, Skype has shut out the opportunity for anyone else to get 300 or 400 million downloads of a P2P client on PCs, and so it has a form of monopoly.
No-one else can offer totally ‘free’ cellular IP because they would have to provide server farms, and pay for connectivity. If they did offer it for free, they would have to subsidize it from other revenues (which might also be considered anti-trust).
It’s true that many operators are charging something like $25 a month for fixed broadband, and $15 a month for cellular broadband, so they have plenty of revenues to go about the process of competing with Skype. But at the same time if services emerge which undermine their own services, and which lower the market expectation for voice pricing, for roaming, for video service pricing and for instant messaging services ‘ then the cellular operators are stuck. They are paying for the network, they are paying for the access devices, they are now building and paying for new service infrastructure, but are having to compete with companies that do not have those costs.
To most people this is capitalism as it should be, dog eat dog, and in this case a small smart dog is eating the lunch of the big fat dog, so we support the underdog. But that way ahead will undermine innovation because if networks cannot get paid for what they do, they will stop doing it. Investors will stop investing, and the fat times of cellular will go away, and that’s not good for the telecommunications community.
Imagine the howls of complaint that would have occurred if the cellular operators themselves had create Skype, and gone and loaded a P2P client onto 300 million live devices to harvest processing power (there have been 646 million Skype downloads and around 160 million are switched on at any one time so we estimate 300 million current users). The howls from fixed line operators would have been loud and long if that power was then used to provide switching for cheap cellular services by those same operators. But because it is tiny Skype, no-one seems too concerned.
Right now we don’t know of any move to build a rival network to Skype coming from the combined telecommunications operators. But now that the heartland of one of the most impressive smart phones, and a US favorite, in the iPhone, has been infected with the idea, it could be a reasonable future step.
If the answer to YouTube was Hulu, a rival built by the incumbents, and if the answer to iTunes is to put free ad supported cable content on the internet, then the answer to Skype (once it gets troublesome enough) is to get fixed line operators who are also cellular operators, to build into their broadband efforts the download of a P2P application which can support a free network like Skype on both fixed and cellular networks. Of course collective action by those operators would immediately be banned as a cartel by financial regulators, but there’s nothing to stop Microsoft launching its own P2P client (yes it does have one), bundling it into a PC, and then selling the harvested power to the telecommunications industry in a revenue share for new services.
The reason that has not happened (and no we don’t realistically see it happening) is that the services provided in this way are not very good. Skype is only used because people cannot afford the alternatives. Would you prefer a conference call where the voice quality is guaranteed, or one where there are constant pauses in the speaker’s voice and where the call collects the ambient noise of all the participants? As Skype so often does.
And because of this quality differential, Skype services are inferior, and that’s its real strong point. No self respecting cellular operator, especially after years of trying to improve voice quality, is going to be happy putting out inferior call quality. And yet there’s a need for it.
Skype may eventually break, because as the world moves away from devices which are constantly connected to electrical power sockets, towards MIDs and Netbooks, the old Skype client may run out of steam. If those 300 million PCs become 100 million and they try to support 1 billion handsets, the processing sums are not going to add up. But while it does survive it offers ‘best effort’ services which are half as good as existing voice, but for a fraction of the price and that’s a formula for disruption and success.
All of this is about going from an analog world to a digital one. Analog voice gave way to switched circuit voice, which will, in LTE and WiMAX networks become pure IP networks, and the job of carrying bits from one place to another will become a viable, but unexciting business, a bit like water and power utilities are today.
But during that transition the cellular operators must learn from companies like Skype ‘ they need to sit down and work out how to use service integration to make digital IP services better simply because they are all from the same source and all use the same core network and core services.
We see an example of this in Google voice, by trying to create an integrated set of upgradeable and downgradeable services which can be switched on and off through a web interface, which is what the modern telco/cellco needs to become.
All IP services need to become bit pipes ‘ it’s where they will inevitably end up. Fixed line broadband operators DID try to prevent voice over IP services, they did try to prevent innovations like Joost and Babelgum and IP video, but they have now realized they are just like PCs and applications ‘ the more services you can get on a broadband line the more attractive and valued that line is. What they need to do is scrabble for market share, and when the broadband market shakes out, they must look hard at their pricing.
Right now in Skype, SMS and IM messages are not interchangeable, you need separate identities on Skype from your phone number, there is no quality of service on voice, there is no way of setting up group and corporate accounts and there is no way to integrate cellular and fixed voicemail with Skype. What LTE needs to bring to cellular operators (and they must start work on this now) is a way of creating whole classes of service interoperability or their business will be eaten by virtual operators with the imagination to do this, and Skype will be the least of their worries