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« As the Phone World Turns Part 1 – Legacy Access Charges | Main | VON Canada »

As the Phone World Turns Part 2 – The Meaning of Free

Yesterday I blogged that we can predict the future business model of voice calling by observing the past of email.  One implication of this analogy is that voice will be free regardless of where in the world the parties to the call are located, how far apart they are from each other, and how long they talk. In fact with Skype or Vonage or a number of other services, calls between VoIP users are free today.  But what does “free” mean?

“Free” is a great marketing word but it’s not completely accurate when applied to either email or phone calls.  If email were free, there’d be no such thing as the digital divide because poor people would be able to afford it.

In order for you to use free email, you or someone else needs to pay for:

  1. Internet access
  2. Hardware
  3. Email software to run on the hardware
  4. A host service which is willing to let you use its mail server to send and its storage to receive and save

Each of these four elements costs somebody something.  Yahoo or Google or MSN/hotmail will host your email “free”, for example, but they expect something from the relationship.  They know you are a qualified prospect because you have a computer and an Internet connection.

What is important is that there is no incremental cost for sending (or receiving) a second email once you have the capability of sending the first message.  And, if you already have a computer and Internet connection for other purposes (or because your employer provides them), there may be no incremental cost at all for email.  So, not surprisingly, email usage has gone though the roof and become a mainstay of communication on the wealthy side of the digital divide.  There is a downside to “no incremental cost”: the same economics apply to spammers as to the rest of us. A torrent of email can be supported by an infinitesimal rate of return.

Now what do you need to make “free” Internet phone calls?

  1. BROADBAND Internet access
  2. Hardware
  3. VoIP software to run on the hardware
  4. A host which is willing to let you use its VoIP server to locate the people you want to talk to and perhaps provide other services

Again, if this were “free”, we could abolish the Universal Service Fund in the US and the equivalents around the world and be comfortable that vital communications services are available to everyone regardless of income.

As with free email, what really mean when we talk about “free” phone calls between VoIP users are calls that are free of any incremental cost once the initial investment has been made.

But I’m going to keep writing “free” rather than “at no identifiable incremental cost given certain prerequisites” because my blog would be unreadable otherwise.  Besides, we act as if email were free and soon we’ll be able to act as if phone calling were free.

The first post in this series was everything you ever wanted to know about legacy access charges.

The third is about Metcalfe’s Law.

The fourth is about Skype’s success in building a closed network.

The fifth is monetizing Skype’s network value with SkypeOut.

The sixth is about Skype reproducing the OLD telephony business model with SkypeIn.

The seventh is a summary of Skype features.

The eighth begins coverage of Vonage’s strategy.

A related post contains a very short abstract of what Skype founder Niklas Zennstrom said at VON (Voice On the Net) Canada and a way to download the slides of my talk there.

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Comments

carol

its true that we do not get anything free in todays world and the word "free" is good for marketing…so looking at todays costly lifestyle everyone wants something economical with quality (atleast)if its not free..and these is what skype provides u..I m a skype user and not only i can make free skype to skype calls but also other international calls are very cheap with a godd quality service..so SKYPE is doing a good JOB..can visit www.skype.com

Manish Keswani

I think I'm a bit late to the party, but here are my thoughts on the subject. I grew up believing that nothing in this world is free. If someone is offering you something free, then there is a catch to it.

The catch in free email and telephony is advertising. There was no advertising in calls made over POTS and hence the end user had to pay the full cost. VOIP and free email are sustained through advertising. And as long as marketers believe that the medium is good way to reach their target audience, these things will continue to be free.

But again, there is a catch to advertising supported services also. They increase the cost of the goods advertised, though only marginally. You may not feel the effect of the cost increase now because advertising on the Internet is relatively cheap. But once the cost of advertising on these services goes up, you will feel the pinch. In fact the service providers themselves will be under pressure to get more advertisers or charge the customer.

Someone has to pay for the equipment needed to transfer and store all the data. Right now that someone is the advertiser, who ultimately passes on the cost to you. Once the cost of advertising becomes prohibitive, the cost will be borne directly by the end consumer.

Another reason why IP based services are cheaper is because of the way they use the available capacity. With POTS, an entire wire from the caller to the other party was blocked for each call. This meant massive investments for increasing capacity. But IP based networks don't have that problem as calls can be combined and sent through a single wire, thus making optimal use of capacity.

jacqueline yeboah

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GHANA

Patrizia

"btw email vs. VoIP:

The battle of the PSTN mindset vs. the VoIP mindset reminds me a lot of the battle between the X.400 and the SMTP email standard of the late 80's. There is a lot to be learned from that one."


This is partially incorrect.
The comparison should be email against snail mail.

But there was and there is no fight.
It would be the same if the Telephone Voice business would be in the hands of the Government.
That is, if they feared to loose revenues from emailing.
This is not the case.
On the contrary the Mail system's employees welcome emailing since it means less traffic and instead of meaning less revenues, it just means less work to do.
Let's imagine a scenario in which the Telecom's were in the hands of our government and the service didn't bring revenues, but mostly losses.
A service which should be paid by the tax payers independently from the fact that it works or not.

Well in this case, VoIP would be very much welcome!

Patrizia

Patrizia

Your analysis is correct but for one point.
You need:

Broadband Internet access at a FLAT FEE.

Sometimes we take for granted what we have and forget there are also connections where you still pay per minutes.

And THIS is exactly the big mistake that signed the death sentence for the OLD MONOPOLISTIC TELECOMS.

Because with a (cheap) FLAT fee you can use the data line for voice as long as you like, while with the VOICE line you still pay per minutes (at least in most parts of this world) and that is exactly what makes VoIP so precious also for local and National calls which in principle are 85% of the calls.
If it was just for low cost international calls, VoIP would take longer to be popular.

Patrizia

otmar

btw email vs. VoIP:

The battle of the PSTN mindset vs. the VoIP mindset reminds me a lot of the battle between the X.400 and the SMTP email standard of the late 80's. There is a lot to be learned from that one.

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