The growth of VOIP and the threat it poses to the trillion dollar telephone industry is attracting well justified attention and creating lessons in Internet strategy no one can ignore. But the performance of the established telecoms demonstrates that while there’s never a good time to dissatisfy a customer, a “cable guy” approach to customer service is particularly ill timed now that alternative technology is available.

Web guru Tim O’Reilly forecasts that VOIP’s participatory technological model will disrupt the established telephone players. The father of disruptive innovation, Clayton Christensen, cites VOIP as an excellent example of why all industries should evaluate the opportunity or threat created by the radical business models it exemplifies.

Another theory, enthusiastically articulated by a friend of mine who has chosen VOIP over her landline, is: don’t piss off your customers.

While not grounded in the same academic rigour as O’Reilly or Christensen, her experience provides a case study of what happens when an industry facing intense competition fails to provide even basic customer satisfaction: she eradicates them from her life.

The growth of VOIP is remarkable. Japan already has over 8 million subscribers today andIDC predicts that the number of residential VOIP subscribers in America will grow from 3 million at the end of 2005 to 27 million by the end of 2009.

Such growth inevitably captures the attention of the business press, such as The Economist which produced an in-depth report on telecoms and the Internet. It provides startling evidence that the telecom industry will be devastated by VOIP.

The report holds up Skype as a leading example of a disruptive agent terrifying the incumbents, and not because of its current business performance. The three year old company will only make US$60 million in revenue this year and will likely not be profitable.

Skype earns attention because of the credentials of its founders who clearly grasp the participatory, collaborative nature of Internet technology. Niklas Zennstrom and Janus Friis also founded KaZaA, and its their combination of of philosophical insight and business acumen that has drawn the attention of Tim O’Reilly, an influential proponent of Internet-enabled collaboration.

Skype is also a poster child for Christensen’s theory of disruptive innovation, a player that can take out entrenched incumbents by kneecapping them with superior pricing tactics. Consider Skype’s model:

§         It can add 150,000 users a day without spending anything on new equipment or marketing.

§         With no marginal cost, Skype can thus afford to maximise the number of its users, knowing that if only some of them start buying its fee-based services—such as SkypeOut, SkypeIn and voicemail—Skype will make money.

§         As a result, according to Zennstrom: “We want to make as little money as possible per user. We don't have any cost per user, but we want a lot of them.”

§         This is the exact opposite of the traditional business model in the telecom industry, which is based on maximising the average revenue per user.

Not only does the Skype business model have experts like Rich Tehrani, the founder of Internet Telephony, predicting that in the future all voice communication will be free, recently released statistics demonstrate that VOIP may completely eliminate traditional phone service.

According to the Telephia Emerging Personal Communications Options (EPCO) survey of high-tech households, Internet-based telephone service (or Internet telephony) is replacing traditional landline phone service among those who have chosen VOIP.

§         53 percent of high-tech households subscribing to Internet telephony have completely replaced and disconnected their landline phones. (High-tech households are identified as those who currently subscribe to at least three bundled or emerging services—e.g., wireless data, video-on-demand, Internet-based telephony, satellite radio, broadband, DVR, etc.—or expressed an intent to purchase four or more services.)

When asked what the primary reasons were for subscribing or having interest in Internet-based telephone service, the high-tech households responded with explanations that strongly reinforce the pricing model implemented by Skype:

• 59 percent said savings on calls within the United States was the top factor in making the switch.
• Among those who showed interest in adopting Internet telephony, but have not subscribed to a service, 30 percent said that bundled package deals were a key reason for their interest.
• For these “intenders,” 17 percent said interconnectivity across different communication services was important.
• 15 percent cited the ability to switch between telephone networks.
• 11 percent mentioned caller ID on TV as a reason for interest.

Which brings us back to my friend. An executive with a multi-national software manufacturer, she and her husband fit comfortably into the high-tech household category. But she never mentioned the factors above when telling us why they have removed their landline and are now exclusively using VOIP and cell phones for their voice communications.

She chose to disrupt her telephone provider after it was unable to resolve a technical problem after seven service calls (all of which required her to be at home and not all of which resulted in the appearance of a service technician) and long-winded explanations from CSRs about how she might not actually have a problem with her phone line.

There are few industries in which the stakes are as high as telecommunications and the differences in business models between disruptors and incumbents are as stark. Nonetheless, everyone evaluating an Internet strategy must be following the developments in the industry because of the important lessons it provides.

But one can only hope that we don’t need to read the work of business and web theorists to understand that forcing a customer to endure seven service calls to not resolve a problem will motivate them to switch the moment an alternative is available.

Paid search gets a lot of press because it’s making a big bang. However, many advertisers and web managers are still confused about this hotly evolving science (or art depending on your perspective).

Paid search allows an advertiser to pay for small text ads, that sometimes look like they are regular search result listings or they are offset from the regular listings as small promotional boxes, and are served up alongside regular search result listings. For example, do a search for “intranet consulting” and you will produce the following:

The paid ads are those that are highlighted by a red box (the red boxes are strictly for illustrative purposes). The regular search result listings appear as they normally do in the center of the page.

In publishing the ads, you choose the keywords that you want your ad associated with. In the example above, advertisers are paying to have their name associated with the term “intranet consulting.” The advertiser only pays only when someone clicks on the ad. This rate, called Cost Per Click (CPC), is determined by how often users search out that phrase or word, how often they click, and how big the competition is for advertising with that phrase.

The big players in this space are Google and Yahoo! (which bought Overture) with Google still leading the way. MSN recently broke into the space and others offer it but have miniscule audiences in comparison.

Paid search also allows you to track exactly how you’re doing: how many times people are seeing your ad, how many are clicking through, and what is the exact cost to you the advertiser.

However, paid search is part art and part science. You may want to have your ad associated with keywords and phrases, but you will have competition. And getting the top spot is not yet determined solely by price but my algorithm. However, MSN, Yahoo! and Ask Jeeves are all moving to a highest bidder model.

Bidding on keywords can be very expensive if you have rivals jockeying for position. Alternatively, you can bid on more obscure keyword phrases that no other advertiser is using where you can assure yourself the number one ad placement, but you won’t get as much traffic as more popular search phrases.

To determine what keywords to associate with your ad, there are a couple of tools:

·     Hitwise's search term analysis – type a phrase and it will list the sites that receive the most traffic and their percentage share of the total traffic generated by the phrase.

·     WordTracker – competitive analysis tool to seek out the best keywords based on over 300 million keyword phrases.

·     Pay Per Click Galaxy - generates thousands of keyword phrases to consider and experiment.

·     Google link analysis – type in your URL and find out what websites link to your website. 

While traditional online display advertising (banner, spatials, etc.) accounts for 45% of all online advertising, paid search advertising accounts for 34% of the marketing (JupiterResearch) and is growing at a massive clip. In fact it won’t be long until paid search advertising passes all other forms of online advertising. The study forecasts paid search to exceed banner ads by 2010. At the same time, the cost-per-click is anticipated to grow from $.39 in 2004 to $.58 by 2010.

Despite the increase in cost, paid search clearly is good bang for the buck. Forty-two percent of the study respondents that classify themselves as sophisticated marketers plan to increase their paid search budget next year.

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Web marketing (Part I): search engine optimization

The Amazon Lesson

One always has to be careful when using the word “never,” but I can say with confidence that our clients never initiate an Internet strategy without considering how they will manage the groups of people who will be affected by the initiative, particularly the team developing the plan and the users of the sites.

Given the wealth of information about the role people play in developing the Internet—notably usability studies and the detailed metrics generated by all sites—everyone understands the need to factor the human element into their Web strategy. Likewise, books like The HR Scorecard: Linking People, Strategy and Performance have ensured that very few organizations undertake any critical strategic process without incorporating people into the equation.

But while all organizations think about managing groups, the Internet is increasing the need to think about managing individuals. Organizations must be aware that a single customer can spark a raging customer service firestorm with one well-written blog. They must also challenge and engage each knowledge worker, who works on a computer linking her to the addictive wonders of the Internet or, even worse, job search sites.

Whenever we talk about individuals, of course, we have to start with ourselves, which Peter Drucker did when he wrote his excellent article on managing oneself. In it, he puts the Internet into humbling context for those of us who make our living by singing its praises.

“In a few hundred years, when the history of our time will be written from a long-term perspective, it is likely that the most important event historians will see is not technology, not the Internet, not e-commerce. It is an unprecedented change in the human condition. For the first time—literally—substantial and rapidly growing numbers of people have choices. For the first time, they will have to manage themselves. And society is totally unprepared for it.”

After frightening us in the opening lines, Drucker offers reassurance by providing insights into how to become prepared for the challenge. And interestingly, one piece of advice forms a strong backbone for initiating an Internet strategy, because it describes how to combine both the effective management of human resources with the opportunity to challenge smart people with the phenomenal appeal of Internet technology.

“Effective organizations put people in jobs in which they can do the most good,” writes Drucker. “They place people—and allow people to place themselves—according to their strengths. The historic shift to self-management offers organizations four ways to best develop and motivate knowledge workers:

• Know people’s strengths.
• Place them where they can make the greatest contributions.
• Treat them as associates.
• Expose them to challenges.”

Like most great business advice, this is simple to say and hard to do. But we can only hope that after receiving this counsel, organizations never initiate an Internet strategy without considering how they will manage the groups of people who will be affected by the initiative, but also understanding how best to follow Drucker’s four tips for developing and motivating knowledge workers when creating the plan.

HALIFAX, NS - If you’re taking the time to read this then I need not remind you of the power of the web. But just in case you’ve recently come back down from the mountain or emerged from a getaway in a cave here are some of the latest numbers, for the record:

·         Almost 80% of North Americans have Internet access

·         More than 50% have made online purchases (Ipsos-Reid)

·         A majority use the Internet as a decision-making tool

·         The Internet cited as the most influence on luxury purchasing (cited by 44% of affluent purchasers) (IAB)

·         39% of North Americans use online banking (Ipsos-Reid)

·         73.5% of e-commerce sites estimate sales growth of 15-35% this year (35.5% estimate growth of 35% or more) (Internet Retailer)

·         60% of chain retailers estimate web sales growth of 25-200% (21.7% expect growth of at least 100-200%) (Internet Retailer)

·         Time spent online by adult Canadians has increased 50% since 2002 and Internet use is ready to overtake watching television (Ipsos-Reid)

The power is present, significant and growing. For those that seek to further harness their this power there are a number of marketing practices worth noting. In the first of a three part series, I will examine one of the most important Internet marketing disciplines, search engine optimization (SEO) – a requisite for maximizing the value of your website.

SEO

A new report from Nielsen/NetRatings adds to the quantifiable impact of blogging, in this case the ancilliary benefits generated by blogs. The organization reports that traffic to image hosting Web sites has skyrocketed due to the massive rise in blogging activity this year.

• As a category, image hosting sites have grown 406 percent to more than 14.7 million unique users since January 2005, accounting for nearly 10 percent of active U.S. Internet users.
• In July 2005, 20 percent of active Web users, or 29.3 million people, accessed blogging or blog-related Web sites, growing 31 percent since the beginning of the year.

While no business people (especially ones who derive revenue from digital images) would ignore these stats, they might question the applicability to business strategy when they learn that female teens between the ages of 12 to 17 years indexed the highest out of the age groups broken down by gender.

There’s an easy explanation for this demographic trend—social circles have moved on-line, web journals provide a great means for getting to know someone and teenage girls like to meet people—but companies that look beyond those demographic fine points will see the inherent power of the Internet as a social media and refine their Internet strategy appropriately.

The same social impulse that draws teenage girls to blogs sparks the mass collaboration that is capturing business interest and rewarding companies that learn to harness its power.

In a comprehensive article on the topic, Business Week, provides a number of statistics on how on-line collaboration impacts various industries, including:

• Telecom: More than 41 million people use Skype software to share processing power and bandwidth, allowing them to call each other for free over the Internet. Partly as a result, combined 2005 revenues of AT&T and MCI are expected to fall by $7.4 billion, or 15%.
• Media: Reversing the traditional broadcast model, more than 53 million Americans have contributed material to the Net, such as product reviews and blog postings. At least 10 million blogs, some drawing more visitors than mainstream news sites, are now read by 32 million Americans.
• Advertising: Search engine Google instantly polls millions of people and businesses whose Web sites link to each other, producing an entirely new ad venue that grossed $3.2 billion last year, up 118%. That compares with an 8% increase in TV ad spending and 5% in newspapers and magazines.

Mass collaboration challenges numerous business principles, notably the command-and-control structure instituted by most corporations. Not surprisingly, then, the early winners have been upstarts rather than established businesses.

Nonetheless, companies like Hewlett-Packard and Proctor & Gamble have tapped into the power of mass collaboration, learned to manage the social impulses of their customers and employees and generated solid business results through their efforts.

It’s a trend that all organizations will need to watch. Just like  teenage girls are discovering that image-intensive web journals are a great way to meet people, organizations that harness the power of mass collaboration are becoming very popular in their own social scene.