Recapturing Voice Value is Key to Avoiding Voice Commoditization

A key issue virtually everybody in the voice communications business faces is that value and retail price now are diverging. Nobody would argue that voice communications are less valuable. But the cost to any end user clearly is falling.

Likewise, nobody would argue that text communications are not equally valuable. Twitter use exploded in March 2009, for example. The number of visitors to Twitter.com jumped 131 percent in March to 9.3 million visitors, up from five million in February. And then there is email, text messaging and instant messaging, all of which are vital tools for most people. But, with the exception of SMS, few of these tools lend themselves to any traditional monetization method.

User-generated video and over-the-top music and content, likewise points to the same process in the content business.

That has most observers insisting that voice, communications and content are becoming commodity-style products that offer few opportunities for differentiation and profit margin. And it is hard to argue, at some level, with the observation.

The disappearance of AT&T and MCI Worldcom as independent entities provides evidence enough that, for most traditional service providers, "long distance is not a stand-alone business model."

That doesn't mean stand-alone long distance cannot be a viable business model, though, or that voice "inevitably" is a commodity. Consider Skype. It's current annual revenues are north of $550 million and executives think they can grow that to $1 billion by 2011 or so.

So the proper way to view matters is that stand-alone long distance is not an attractive or viable business for some contestants with high fixed costs. Given the right cost structure, it remains possible to operate as a stand-alone long distance provider.

But it is worth keeping in mind that when an executive says something cannot be done, what that really means is that "I cannot, with my cost structure, personnel or technology holdings, do that." Skype will be able to compete as a stand-alone long distance provider. To greater or lesser degrees, much the same can be said for calling card providers, conferencing services providers and others with an optimized cost structure.

Still, for facilities-based access providers, high fixed costs do mean that scope economies (multiple services, same pipe) are necessary to maintain an attractive business case. "Dumb pipe" (broadband access only) is unlikely to prove a viable long-term business model.

But it is a mistake to say that "nobody" can make a viable business case from voice, data communications, content or text. Over time, more applications will be created and provided by firms with lower fixed costs, different distribution channels (mostly using a Web browser interface) and use models.

Increasingly, the values voice and text communications provide are being disaggregated, creating numerous products that we used to associate with "phone service." Telephone numbers, devices, origination and termination, voice mail, speech-to-text, call distribution, dialing, conferencing and other features are "discrete" elements that can be packaged and sold in lots of different ways.

What remains to be seen are the ways a viable revenue ecosystem can be created and maintained under such circumstances. For most providers, reliance on any single feature or revenue stream (only voice, only long distance, only broadband access, only video) will prove relatively unattractive. So most of the attention has to shift to ways new partnerships can be leveraged to create lots of different revenue streams from lots of applications that have genuine value, even when it seems that value and "revenue model" are not direct.

Cablevision Systems offers its cable modem users "free" access to Wi-Fi hotspots in the New York metro area. But the revenue model is cable modem service. Email for many years was the "killer app" that drove Internet access subscriptions. Real-time services now provide the business driver for broadband access. Fleshing out broadband application models now is the next crucial test for access providers as "access" and "applications" increasingly are distinct business models.

In a real sense, the Apple iPhone has played that role for AT&T: Mobile Web applications and a compelling device experience have been the driver for connectivity subscriptions. So far, though, subscription activity has been driven to a large extent by user involvement with Facebook, Twitter and other social networking apps that are easier to use on an iPhone or other smart phones than on most other devices.

But that's just a start. At some point, access subscriptions will fail to drive continued revenue growth. Precisely what form all the new partnerships will take is at this point largely unknown. But they will happen.

At the same time, it bears noting: voice is not strictly speaking a "commodity." SIP trunking is a discrete voice app whose primary value is origination and termination. Conferencing is another discrete app. So are various other call management features. Different companies will leverage those features in different ways to create viable business models. The biggest mistake any firm can make is assuming IP-based voice is simply POTS sold at a lower price.

--Gary Kim