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
- 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.
