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TRANSCRIPT
The Diffusion of VoIP & Strategies for Incumbent Telecommunications
Providers
LAURENCE CUA
KETKI GADGIL MAHESH JADHAV
MARCELO MASSARENTE RICCARDO VOLPATI
November 21, 2005Professor Greenstein
MGMT 463 – Management of Technology
Table of Contents
Executive Summary......................................................................................1
Introduction to VoIP Technology..............................................................1
VoIP Market Overview.................................................................................2
Key Players in the VoIP Industry and Their Business Models..............7
Threats for Incumbent Telecom Companies..........................................10
Opportunities for Incumbent Telecom Companies...............................12
Lessons Learned in Other Countries.......................................................13
Recommendations – Status Quo is not an Option.................................13
The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers
MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY
KELLOGG SCHOOL OF MANAGEMENT
Executive Summary
The following report will analyze the diffusion of VoIP technology and to
examine how the emergence of VoIP is redefining the telecommunications
industry in the United States. The report introduces VoIP technology, de-
scribes key characteristics of the VoIP market, forecasts trends with each
different business models (software providers, indirect providers, cable op-
erators, and incumbent fixed line operators), analyzes the threats and op-
portunities facing incumbent telephone operators, and finally provides
strategic recommendations for incumbents to maintain their market leader-
ship in the near future.
As incumbent fixed line operators face the rapid adoption of lower-cost
VoIP and the influx of new competitors, they must simultaneously embrace
this technology while keeping new competitors at bay. Most importantly,
incumbents must quickly develop and introduce value-added services to
compete with the bundled offerings of cable companies (video, voice and
broadband) while leveraging on their large PSTN customer base.
The report focuses on businesses competing with fixed-line operations.
The scope of this report excludes mobile carriers and wireless-related tech-
nologies (e.g. WiMax).
Introduction to VoIP Technology
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VoIP stands for Voice over Internet Protocol, and refers to the routing of
voice communication over an IP network, including the Internet. Voice data
is transferred across a “general-purpose packet-switched network, instead
of traditional dedicated, circuit-switched voice transmission lines.”1
Although there exists several categories of VoIP services, VoIP technol-
ogy generally holds three key advantages over traditional Public Switched
Telephone Networks (PSTN):
Cost. Because VoIP uses general-purpose networks meant for both
voice and data, cost is spread across more services, i.e. a single pipe
provides cable TV, Internet, and voice. Similarly, some VoIP providers
utilize existing network capacity and do not charge any fee for use of
their basic services.
Mobility. All incoming calls are routed directly to a VoIP phone, re-
gardless where that VoIP phone is connected to the network. A VoIP
phone with a US number can therefore be plugged in overseas and
still receive calls. This is particularly helpful for frequent travelers
and mobile workers.
Added services. Several VoIP providers offer additional services over
the Internet, including file transfers, instant messaging, and video and
audio conferencing.
However, VoIP has limitations that are still being addressed by VoIP
providers:
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Reliability. Unlike traditional phones, most VoIP services rely on
some sort of broadband modem powered by household electricity,
making them vulnerable to power outages. Currently, the only way
around this is by using an uninterruptible power supply or generator.
Quality. If a network is highly congested, quality over a VoIP system
suffers, usually resulting in delayed or lost sound. Quality also suffers
in long-distance connections.
Emergency calls. Not all VoIP providers offer e911 service, primar-
ily because of the technical challenge in locating a VoIP phone’s geo-
graphic location.
Compatibility. Since there is no global standard that VoIP ser-
vices share, not all VoIP phones can communicate with each
other.
VoIP Market Overview
Market Size
According to the research firm, TeleGeography, by the end 2005, 4 mil-
lion households in the US market will be subscribed to VoIP providers. This
figure does not include people who use PC or software-based VoIP services
like Skype. Analysts estimate that this figure will grow to 17 million Ameri-
can subscribers by 20102. TeleGeography predicts that revenues generated
from VoIP services will rapidly climb from today’s level of $220 million to $3
billion in just two years. 2
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Has VoIP Crossed the Chasm?
In the US market, VoIP technology has held a long history. Early
adopters have typically used PC and software-based VoIP technology. Re-
cently, several factors have accelerated the adoption of VoIP as a main-
stream technology which we believe will eventually lead to mass market
adoption:
Rise in broadband Internet connection penetration.
New products replicate traditional calling experience. Services
such as Vonage, allows consumers to make calls with a user friendly
handset, and offer typical features such as voicemail, and call waiting.
Aggressive price competition. Independent VoIP providers, such as
Vonage, are using aggressive pricing packages to attract mainstream
customers
Quality of service improvements. Perception of improved quality of
service, comparable to PSTN based calls, has improved adoption of
technology
Increased awareness by mainstream public of VoIP technology.
Mass market advertising campaigns by Vonage, significant media cov-
erage of eBay’s acquisition of Skype, and mainstream press on the
technology has improved awareness around VoIP technology
Skype, Yahoo, MSN encouraging trial with the early majority.
Growing popularity of instant messaging (IM) services such as Skype,
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Yahoo Instant Messenger, Google Talk which bundle voice services
with their IM platforms, are increasing trial of VoIP and establishing
the value of VoIP and quality of the voice services
Established brands, such as AT&T and Verizon entering the
market. Recent introductions of VoIP services by established players,
such as AT&T CallVantage and Verizon VoiceWing lend credibility of
VoIP technology to the mainstream. In 2005, a number of established
telecommunications providers plan to enter the VoIP market includ-
ing: SBC, BellSouth, Qwest, MCI and Comcast.
A clear example of the rapid adoption of VoIP is the phenomenal growth of
Vonage’s US subscriber base, tripling to 750,000 subscribers from last
year3. The real question is not if VoIP will cross the chasm, but how quickly
it will diffuse into the mainstream market and which VoIP service providers
consumers will choose. The speed of this diffusion will be highly depen-
dent on overcoming key barriers to adoption beyond the technical limita-
tions that are already being addressed.
The Security Problem: a key barrier to adoption
“The development of enterprise VoIP or IP Telephony is accelerating
rapidly, but security isn’t necessarily keeping up”4.
1 “Voice over IP”, www.wikipedia.org (http://en.wikipedia.org/wiki/Voip), re-trieved on November 20, 2005 3
? “Number of Internet-phone consumers soars”, USA Today, August 17, 2005
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The PSTN is largely perceived as being a secure network; the Internet is
not. Well known websites and service providers are frequently affected by
security breaches. In this context, current implementations of VoIP are also
vulnerable and service and network operators will need to undertake more
work to assure the wider consumer market that replacement VoIP offerings
are at least as safe as traditional voice services. The presence of malicious
agents and software code on the Internet give rise to concern over the
wider resilience of VoIP services. For this reason, in its transition from the
early adopters to the early majority stage of the adoption cycle, VoIP must
prove itself to be immune to such threats. As of today, the isolation and ro-
bustness of the PSTN is still a major strength and one not to be overlooked
when projecting a broad technology switch. These VoIP security threats in-
clude:
Service availability attacks. DoS (Denial of Service) attacks, spam
and viruses. DoS attacks are intended to flood a target call manager,
phone or VoIP infrastructure with an overwhelming amount of ficti-
tious requests or information. Voice spam is expected to emerge in
the same way as it did with email services, filling up users’ voicemail
boxes. Viruses exploit weaknesses in operating systems and applica-
tions leading to network instability.
Eavesdropping. It is very easy to find on the Internet free applica-
tions that allow users to listen to phone calls on VoIP networks. This
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way, attackers can have access to confidential conversations. For ex-
ample in July 2005 a flaw was identified in Cisco’s Call Manager that
could have allowed intruders to listen to calls routed through it5.
Impersonation. A hijacker can impersonate a user profile to commit
fraud, access confidential information or disrupt business in organiza-
tions.
Theft of service. Call tracking tools can be used in order to capture
users’ authentication information with the objective of placing calls on
the user’s expense.
Regulatory and other organizations are trying to provide solutions to
help address the need for security. In January 2005, the U.S. National Insti-
tute of Standards and Technology published a strategic report on VoIP secu-
rity, urging organizations to proceed with caution and outlined recommen-
dations for deployment. Furthermore, VoIP technology and security prod-
uct providers have founded VoIP Security Alliance (VoIPSA), in February
2005. VoIPSA’s main activity is to “help define the many potential security
threats to VoIP deployments, services, and end users”6. Recently, VoIPSA
developed and released a formal framework for VoIP security and privacy
risk assessment.
“Unlike data communication, VoIP is a real-time service and requires se-
curity infrastructure to provide automated, real time security responses to
preserve the very high availability expected by telephone users”Error: Ref-
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erence source not found. Organizations need to recognize the uniqueness of
VoIP networks, with new types of attacks and challenges that require a dif-
ferent approach to proactive security. With well adapted policies and spe-
cific technology in place, VoIP services can be made as secure, or even
more so, than traditional telephone networks.
Regulatory Issues
The fast growth of broadband Internet and new service offerings, includ-
ing VoIP, represent a big challenge for regulators. “The problem is that the
current philosophies of most regulators are predicated on three assump-
tions that no longer hold true. First, that telecommunications mainly con-
cerns voice calls. Second, that Telecoms networks are in effect natural mo-
nopolies. And third, that in most cases the firm that owns the network also
provides the service”7. In actual facts, the advent and mass adoption of
broadband technology is proving all three assumptions to be no longer
valid. Everywhere in the world networks are being built or upgraded in or-
der to carry voice, video and data and to provide customers with a choice of
ways to get on to the network. Telecom monopoly is no longer the norm and
there is an increasing decoupling of firms providing the service and those
owning the networks.
In this era of change, regulations can make a big difference in shaping
competition and growth in the VoIP industry. Regulators must be cautious
not to suffocate such a fledgling business, ensuring at the same time that no
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unfair discrimination is made between telephone service providers based
merely on the technology used. Furthermore, regulators have to guarantee
that VoIP offers the same social safeguards that the public expects from any
critical infrastructure.
An example of this regulatory effort was the recent vote of the FCC to re-
quire Internet phone companies to offer a 911 emergency call service. With
this move, the FCC made a significant change from its previous hands-off
approach, making a big step towards imposing traditional telecoms rules on
the Internet. According to the FCC, VoIP providers will have to either im-
plement the 911 capability, or disconnect users who do not explicitly con-
firm being aware that the service does not allow emergency calls. Providing
access to 911 systems can be complex, costly and perhaps not feasible for
many small VoIP providers. However, “This alone won’t kill the VoIP indus-
try but will tighten it up a little bit. The danger is that companies that have
done a lot of innovating to bring these products and services to the market
are now looking at a higher cost of entry”8.
Based on the above, the players that are likely to be the most impacted
by the 911 regulation are indirect access providers, particularly the small
ones. The new rule introduces barriers in a sector whose previous cost of
entry was low, and makes operation more costly for existing competitors.
Key Players in the VoIP Industry and Their Business Models
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Sandvine, a telecom-equipment firm, estimates that there are 1,100 VoIP
providers in America.9 The multitude of VoIP providers can be classified
into four main categories.
Software
This most basic form of VoIP, also commonly referred to as PC-based
VoIP, has been in existence for over ten years. This form of VoIP only
requires users to install software on their computers, and have a
microphone and speaker/headset connected to their PC. Prominent players
in this category include AOL, Yahoo, MSN and the eBay-owned Skype.
These providers offer integrated VoIP services with their instant messaging
platforms, allowing users to make calls to other users of the service over the
Internet for free. Both Yahoo and Skype have added capabilities to offer
landling calling and voicemail for additional fees. The main objective of
2 “The war of the wires – Telecoms, TV, and the Internet”, The Economist, July 30, 20054
? Paul Slaby, “The Dangers of VoIP”, Globeandmail.com, November 4, 20055
? Riva Richmond, “Flaws Are Found in Cisco’s Web-Calling Software”, The Wall Street Journal, July 14, 20056
? VoIP Security Alliance, www.voipsa.org, retrieved on November 20, 20057
? “Why a Light Touch is Best – Internet regulation”, The Economist, May 28, 2005 8
? Schwartz, A. and Young, S. “FCC Wants Web Phones to Have Access to 911 Within Four Months”, The Wall Street Journal, May 20, 20059
? “The meaning of free speech – Telecoms and the Internet”, The Economist, September 17, 2005
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these providers is to integrate voice communications with other Internet
activities. For example, eBay shoppers can ”Skype” a vendor to get more
information about a product to aid the completion of a transaction.
With the big three Internet portals sharing a quarter billion instant
messaging users between them, this form of VoIP is the most popular
amongst consumers. However there are several drawbacks to PC-based
VoIP that prevent it from being a real threat to the mainstream
communications business. First, the form factor and usability of PC-based
communications prevent it from being a real threat. Second, the
fragmented nature of messaging networks limit consumers from being able
to communicate with all their contacts for free. Third, since calls are
carried over the public Internet, these providers have limited control over
quality of service or security. With significant limitations, we expect that
PC-based VoIP services will co-exist with traditional telephone service.
However, these services will primarily be used for free net calling as it will
be difficult for software VoIP providers to generate revenues from off-net
calling.
Indirect Providers
Indirect providers offer consumers voice services most closely resem-
bling standard phone service. Customers with high speed Internet connec-
tions plug an adapter into a regular telephone or an IP based handset and
get service that is quite identical to standard phone service, except that it
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runs over an Internet connection. Vonage, with the largest US subscriber
base, is the dominant player in this category. Indirect operators are posi-
tioning themselves as a low cost replacement to traditional phone services
as they are able to offer deep discounts over traditional fixed line operators
because of significant cost advantages. These VoIP providers do not have to
pay call origination charges in same way as PSTN-based alternative opera-
tors, because their calls are carried over a broadband line. Furthermore,
these firms do not have the expense of maintaining their own communica-
tions networks. Indirect providers do not own the access infrastructure and
most of the calls are routed through the mostly public Internet. Steep com-
petition in this market and the entry of traditional players such as AT&T
and Verizon is causing a downward spiraling pressure on pricing of voice
services. Since Vonage began offering its services it has reduced prices
twice and has gone from offering services at $35 down to $25 by September
2005. While Vonage and others have alleviated some of this pressure by of-
fering different tiers of packages, the downward pricing will ultimately be
harmful to all players. Indirect players may not be able to sustain lower
prices in the long term. Established players will see considerable erosion of
the traditional PSTN revenue base and low margins in VoIP services. Indi-
rect players have also tried to differentiate on the basis of features. How-
ever, as more players enter the VoIP market, these features are becoming
standard and no longer constitute as competitive differentiators. While
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most indirect players have had the first mover advantage to fuel the initial
growth of the VoIP market, we believe that many can be squeezed out as
competition increases. Additionally, because indirect providers do not
maintain their own network, they are constrained in ensuring consistent
quality and security.
Cable Operators
Cable Operators are rapidly entering the VoIP market by offering voice
services over their own local access networks. These companies hope to en-
tice customers with a “triple-play” package of voice, video and high speed
Internet services. US cable companies believe that VoIP services will drive
growth. According to one estimate, Comcast, the largest US cable operator,
plans to add 250,000 subscribers of Internet telephony by the fourth quar-
ter of 2005 and 1 million by 200610.
Incumbent Fixed Line Telephone Operators
Pressured by indirect providers and cable operators that offer VoIP,
Incumbent telephone service providers, such as SBC, Verizon, and AT&T,
have recently entered the consumer US VoIP market. Like cable operators,
incumbent telephone operators will bundle VoIP with other services. By
offering lower price and lower margin VoIP services, these operators risk
cannibalizing revenues from their traditional phone service.
10
? “Why VoIP telephony is quickly coming of age”, Financial Times, September 8, 2005
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Who will capture Share of revenues?
We believe that largest share can be captured by traditional fixed line
operators and cable operators, as they have direct control over their
networks and they have the ability to bundle VoIP with other services.
Second share would go to a few indirect providers such as Vonage, with
smaller indirect providers getting squeezed out. Finally, we foresee
software client providers to co-exist as an alternate means of
communication that is tied more closely to complementary internet
activities.
The success of traditional fixed line operators, however, can only be
realized if they are able to address key threats from VoIP and cable
operators while leveraging opportunities offered by VoIP.
Threats for Incumbent Telecom Companies
Market share erosion and revenue shrinkage in the voice business
The first impact that VoIP will cause on the incumbent telecom compa-
nies is to erode their market share on the voice market and put pressure on
prices and revenues. Because VoIP is not capital intensive, it greatly in-
creases the number of alternative voice service providers. Furthermore,
VoIP providers can be much more competitive in pricing and drive drastic
revenue losses for the incumbents. “Factors such as the distance between
the callers or the duration of a call, the key determinants of cost today, are
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simply irrelevant with VoIP” 9. Over IP, the concept of distance means noth-
ing. As described earlier, one can simply plug a VoIP phone to any broad-
band connection in the world and still use the same phone number and
rates.
Interconnection issues deserve a paper per se, but let’s try to summarize
the main points. Even when calling from a VoIP phone to a regular phone,
VoIP can avoid interconnecting fees in the origin, cutting its costs and the
revenues of the network owner at the same time. When one VoIP phone
calls another, the impact can be even higher; if both VoIP phone belong to
the same provider, there are no connecting fees at all. However, when the
originating and receiving VoIP phones are in different providers, they still
need to be connected through the PSTN. But this is likely to change, as
VoIP connecting standards (ex: ENUM) are created and global VoIP carry-
ing services emerge, i.e. the one UK’s Cable & Wireless launched on Octo-
ber 200511.
Finally, the regulatory environment adds to VoIP’s competitiveness. By
considering VoIP as a data service rather than a voice service, VoIP is ex-
empted from the lots of taxes that correspond to over 40%-50% of a regular
phone bill12.
11
? “Cable & Wireless launches global VoIP interconnect”, Internet Business News, October 12, 200512
? “Tax Questions Confront VoIP Services”, Mondaq Business Briefing, Febru-ary 23, 2005
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As a result, Verizon for example was not only forced to reduce its prices
in most of the East Coast, but also lost 518,000 traditional lines in the sec-
ond quarter of 200513. SBC also reported a 5.1% decline in its lines in the
third quarter14. Incumbents are also launching flat fee plans for the tradi-
tional phone lines and offering their own VoIP services to prevent market
shares losses. However, net revenues from a VoIP client are at least $10/
month less than the traditional offering15.
Impact on incumbents’ broadband business
Many telecom companies are counting on the increased revenues in pro-
viding DSL broadband services to offset part of the losses in voice. How-
ever, even this is threatened by VoIP.
First, “parasite” VoIP providers, like Vonage, can drive higher utilization
and traffic on the incumbent’s network, forcing the incumbents to invest
even more, without bringing them any revenues (actually, using their assets
to steal revenues from their voice services). In fact, some DSL providers
are studying legal ways to prioritize any data traffic on their networks over
VoIP packages not routed through their providers16.
13
? “Why VoIP is telephony is coming of age”, Financial Times (www.ft.com), September 8, 200514
? “SBC's CFO Takes on Its Rivals; The telecom giant's Richard Lindner out-lines plans for combating price pressure -- and a growing threat from cable and VoIP providers”, BusinessWeek Online, November 14, 200515
? “The phone call is dead; long live the phone call”, The Economist, Decem-ber 4, 2004
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Second, VoIP can open the way to “naked broadband” services. So far,
because consumers need to have a phone line anyway, the incumbents can
easily sell a bundle of voice and broadband services with limited competi-
tion17. When consumers have the option to contract VoIP services from an-
other provider, the attractiveness of a “naked broadband” offering increases
and incumbents might see themselves without both voice and data markets.
Indeed, many phone companies today refuse to sell DSL without a phone
subscription, but regulations may eventually force them to do so.
Third, VoIP is a great opportunity for cable operators to gain a head start
in the upcoming "battle for convergence”. It has been long discussed that
the future is to provide “triple-play”18 services (TV, Internet, voice) and to
control the flow of digital content into consumers’ homes. Cable operators
actually see VoIP from the opposite direction of incumbents. Because cable
companies don’t depend on voice for their revenues today, and VoIP uses
very little bandwidth compared to video, cable providers can offer cheap
VoIP as a competitive weapon against incumbents9. Cable companies are
taking this seriously. All the major operators in the US are already offering
16
? “The war of the wires – Telecoms, television and the internet”, The Econo-mist, July 30, 200517
? “Naked Come the Callers? Skype and its internet calling service are get-ting lots of attention, but “naked broadband” may be the real threat to tradi-tional phone outfits”, BusinessWeek Online, September 12, 200518
? “VoIP providers beat a path to consumer’s doorways.”, Financial Times, January 10, 2005
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VoIP services. Time Warner had already 220,000 VoIP subscribers by the
end of 2004, adding 10,000 per week, and Cablevision had over 350,000
VoIP clients by mid-March19. Phone companies are responding. An SBC ex-
ecutive recently said that “we’re not a telephone company anymore; I sort
of resent that”16, in a reference to their “lightspeed” project of offering IPTV
in the future.
Opportunities for Incumbent Telecom Companies
Geographical expansion
Because offering VoIP services doesn’t require the deployment of one’s
own network, incumbents can take the chance to expand themselves into
other markets, both domestic and abroad. SBC has already announced that
after it completes the acquisition of AT&T, it will aggressively market its
VoIP services in states beyond the 13 where they currently offer traditional
telephone services20. This is a risky move, as it will pit incumbents against
one another more fiercely than ever before.
Rebuild their own networks
Phone companies have the chance to rebuild their entire networks
around VoIP, which is inherently more efficient than traditional PSTN. In
doing so, they can capture the cost savings that come with VoIP and build
19
? “Cable groups see VoIP services take off”, Financial Times, April 12, 200520
? “Cheap talk: Market for Internet calling, Once tiny, gets crowd fast- Better technology, few rules spur flood of competition; pace of change is Dizzying- Vonage takes on ‘Von-a-bess”, The Wall Street Journal, August 26, 2005
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the capability to offer other VoIP-related services in the future. This may
also be necessary in anticipation of the “battle for convergence” with cable
operators, which already have most of their networks in IP format. Some
people estimate that in the near future, even if some consumers continue to
use traditional phone lines, the entire network behind their handsets will in-
deed be VoIP-based. Verizon has estimated that to run one single IP net-
work for voice, TV and data would cost 40% less than 3 traditional ones20,
while BT has already started to work on its 21CN network, which should re-
place the PSTN network by the end of the decade10.
Lessons Learned in Other Countries
In Japan, incumbent NTT has lost significant voice revenues as a result of
customers switching to VoIP. NTT lost 35% of its revenue over 2 years and
even after launching its own VoIP service, has not been able to recoup its
lost revenue. Yahoo! Broadband Japan, on the other hand, has already re-
cruited 4 million customers. Similarly, Fastweb in Italy has gained 400,000
customers. With these as archetypal examples, key lessons learned from
other countries are:
It’s not a question of “if” VoIP will have an impact, it’s a question of
“when”.
Strong network externalities suggest that being first to market with a
new service is much more advantageous to get market share
Recommendations – Status Quo is not an Option
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Our analysis shows that while fixed line operators are foreseen to retain
a large revenue share of voice communications, their present business
model is under serious threat from the disruptiveness of VoIP technology
and the velocity of its adoption. Given that first movers have an advantage
and that cable operators are getting into VoIP aggressively, incumbents
should embrace VoIP. Knowing that they do not yet have a distinct competi-
tive advantage against cable operators’ “triple play” offering—mainly be-
cause they lack the content that cable operators have—incumbents must
balance the tradeoffs between the inevitability of VoIP and their strength in
PSTN. As such, incumbents must simultaneously migrate their main prod-
uct offerings to VoIP while slowing down competition. We recommend a
four pronged strategy to succeed in this rapidly evolving phenomenon: Sur-
vive, Adapt, Defend, Attack
1. Surviving in Chaos: worst case scenario and the need for organizational
paranoia
Fixed line operators need to act with urgency and create a sense of para-
noia within their organizations – without creating panic of course. A good
strategy would be for the CEO to prepare a memo like Bill Gates did in 1995
to address the Internet threat. We believe that this technology change is
disruptive in nature and incumbent fixed line operators should consider
changing their business model over a period of time.
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2. Adapting to Change: go-to-market strategies
VoIP is disruptive technology that needs a different business model. In-
cumbents need to lead change instead of being led by change. We recom-
mend that incumbents invest heavily over next 2 to 3 years to build a value
proposition based on VoIP and entertainment to counter the threat of cable
operators. Incumbents should also consider their positioning – merely giv-
ing a low cost VoIP will not win customers. IP based services should be po-
sitioned as a value-add. Although Clayton Christensen’s framework may not
apply directly, we believe that incumbents need a different culture and dif-
ferent organization to succeed in this endeavor to create a new business
model. We recommend that incumbents form a separate subsidiary with
different organization, compensation than current structures to launch VoIP
and value added services. To overcome the total company inertia, this sub-
sidiary should not be completely separated from regular operations. In fact,
development in VoIP and related value-added services should be highlighted
in all cycle meetings.
The biggest advantage the incumbents have is the sheer size of its cus-
tomer base and the information available about their spending habits. As
VoIP moves into early adopter stage of the technology-adoption life-cycle,
incumbents should leverage this strength and build go-to-market strategies
that address customer needs based on demographics, geographies, income
levels, etc. Special emphasis should be paid to people making long-distance
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and international calls. The biggest cost savings for customers will arise in
these two categories and if the right VoIP service is provided. Lower rev-
enue due to lower prices may be partially made up for by an increase in
minutes-volume.
3. Defensive Strategies – lobbying regulators for a level play field
Indirect VoIP providers today enjoy an unfair advantage over incumbents
in the sense that they pay no taxes (as they technically provide information
services) which result a price advantage of 30-50%. Incumbents, with their
clout and large contributions to campaigns, should lobby with regulators to
reduce their tax incidence and bring it in line with the indirect providers or,
conversely, lobby for a VoIP origination fee to reduce price-competitiveness
of other VoIP provider offerings.
Incumbents should also deploy their R&D resources to generate intellec-
tual property and a series of patents that will require indirect firms to pay
royalty for their usage.
As they develop their VoIP capabilities and IP-related value-added ser-
vices, incumbents should attempt to raise FUD about the security and qual-
ity of service of indirect providers and cable operators to further slow down
their momentum.
4. Offensive Strategies
a. Thriving together - partnering with content providers: We believe
that the battle for the customer of 21st century will be won by firms
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that provide a one-stop solution: connectivity, collaboration and con-
tent. Incumbents provide connectivity but they need to partner with
Yahoo, Google and other community builders to provide customers the
ability to collaborate with each other and also partner with content
providers like Disney, MGM and TV networks to provide a pay-per-
view and on demand video
b. Differentiating yourself – competing with cable, indirect, software
vendors: Incumbents in the voice market need to review how they de-
light their customer. They should view themselves as serving the in-
formation, communication and entertainment needs of the customer.
This requires a completely different business and customer model and
a drastic change to the current organization structures. Incumbents
will be able to better target their customers as they have superior IT
infrastructure compared to cable firms. In short, incumbents can
have better insight of their customers and do not have any cannibal-
ization in their video services. If they can deliver high quality and re-
liable voice and video services then customers would retain incum-
bents for voice and also switch their prime time TV service away from
cable operators. Indirect firms do not have access to large amounts of
funds for R&D and they are mere consolidators. So, incumbents can
use their R&D and IT capability to provide better value add services
and block indirect firms by using blocking patents. Furthermore, in-
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cumbents will want to partner with software firms and content
providers.
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