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The Third Stage of the VoIP Rocket Never Fired

Ten years ago was the dawn of Voice over IP (VoIP). The pioneering Israeli company VocalTec had just released its VoIP software for PCs (it was named iPhone, BTW). Industry guru Jeff Pulver (whom I now partner with in FWD) had begun to hold his Voice on the Net (VON) shows. As the founder of VoIP startup ITXC, I was invited to give a keynote at VON in Boston.

The evolution of VoIP, I opined with the requisite PowerPoint slides, will be like a three stage rocket. I was right about the first two stages and dead wrong about the third.

The first stage will be fueled by arbitrage. VoIP provides a mechanism for avoiding the international toll booths of the telephony cartel. There is a huge amount of room to profit by providing cheaper service between countries since these services are now priced ludicrously above cost. We can turn what would have been international calls into domestic calls by routing the international portion over the Internet and resurfacing within the country being called.

This prediction was correct. VoIP was one of the major of the major contributors to the collapse of cartel pricing (called settlement rate agreements) for international calls. Over time (and with the help of deregulation), the wholesale cost of calls to places like India and China fell from dollars per minute to pennies. Easier communication played a major role in the economic rise of those two new economic giants.

The second stage, I predicted, will be fueled by technology. It no longer makes sense to have a separate network for the type of data called voice. Voice will be carried on the Internet like all other data. Routing will be much simpler when fixed connections between switches are replaced by the web of connections available on the Internet. Voice will both be more reliable (because the Internet as a whole is more reliable than a fixed network like the old telephone network) and much cheaper.

This, too, largely came to pass. Voice over the Internet WAS much cheaper than over leased phone lines even after the international settlement scheme collapsed. Even without an arbitrage advantage on many routes, the international portion of calls have moved increasingly to the Net. This trend was delayed some due to the overbuilding and collapse of communication networks of all kinds during the late bubble. Undersea phone cables weren’t as efficient as the Internet (actually often the same fiber but that’s complexity for another day) for carrying voice but they were priced down to near nothing after the bankruptcies of the companies that had financed and built them.

I concluded my prophecy by saying that the third stage would be fueled by innovative new phone services which VoIP would make possible. People would want a VoIP phone because it could do things that an ordinary phone couldn’t. The phone systems would become much better with VoIP at their core, not just cheaper but better.

I was wrong; the phone system hasn’t become better. The fixed handsets we use today and the services we get over them haven’t improved at all. VoIP services like Vonage (which I use) only make small improvements in things like voicemail and don’t change the way we make calls at all. It’s incredible, come to think of it, that we’re still dialing (or at least pushing) phone numbers and we have to know where a person is to reach him or her on a fixed line phone (not quite true with Vonage where you CAN move the phone).

Cellphones are somewhat better. At least they have directories on them and, when you call them, you are calling a person and not a place. You can chat on them, too, and send pictures.

With hindsight, I was wrong because the old phone paradigm can’t be incrementally improved in any significant way. Any major improvement is stymied by the need to keep compatible with the rest of the unimproved system. I also underestimated the ability of the entrenched phone companies to fight a legislative and regulatory battle against upstarts – they’re really good at that.

So what’ll happen? Are we stuck with the old calling model forever?

No way! There is no third stage of VoIP as an incremental improvement on POTS (Plain Old Telephone Service). Instead there is a whole new way to communicate. POTS won’t be improved; it’ll just be replaced. The rearguard action fought by traditional phone companies will eventually result in their over-priced and underperforming voice services being replaced and abandoned since they aren’t being improved (unless those companies can control the Internet – that’s a big unless).

In the new communication world – which is already forming inside social networks – live voice and voice mail are just two on a continuum of choices people have for communicating with each other. Video’s a choice; so is text and email and still pictures. Communication can be live and real-time; it can be slightly async like texting; or seriously async like email. The modes of communication mix freely. Two or more people using different devices communicate at the highest common denominator rather than the lowest.

And there are no more phone numbers, just names and handles (made up names). There’s no more great directory in the sky; there’s the union of the directories of the social networks we use and our personal directories. We’ll know who’s “calling” us as surely as we know whom we’re calling (callerID today tells you where a call is made from, not who is making it).

Location will be largely irrelevant (as it is with email) except in special circumstances when we want to make it relevant – “everybody in the flood plan of such and such a river should seek higher ground ; “the emergency call is coming from this location”. Location is cyberspace will be equally as relevant or irrelevant as geographic location. “I’m in the such-and-such network on FaceBook or I’m a fellow online Rotarian” are relevant uses of cybergeography. But friends lists won’t stay restricted to single social networks like FaceBook or MySpace for long.

Oh yeah, the rocket that’s come in from left field to replace the dud on top of the VoIP-as-POTS-replacement three-stager doesn’t know anything about charging by the mile or by the minute or even by the “call”. It’s sort of like email that way.

It’s been an interesting ten years. And it’s only the beginning.

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Listed below are links to weblogs that reference The Third Stage of the VoIP Rocket Never Fired:

» (Never Fired) Third Stage from Aswath Weblog
A week back Tom Evslin wrote a post recalling a keynote he gave about 10 years back at VON in Boston. As he recounts it, he predicted at that time that the progress of VoIP could be compared to a... [Read More]

» What ever happened to those exciting VoIP applications? from Christopher Herot's Weblog
I was catching up on my blog reading and came across a post by Tom Evslin that's especially appropriate on the eve of the VON conference here in Boston. He recalls that at an earlier VON he opined how VoIP [Read More]

Comments

Lawrence

This is an excellent topic. I really think that VoiP Services will replace most phone companies here http://www.1-satellite-tv-facts.com/VoIP.html

Wayne

I have found that the most useful portion of VoIP I use is a little mentioned standard feature in AT&T's CallVantage system which allows me to nominate 5 distinct phone numbers to be rung when a caller dials my CallVantage number. It will either call all 5 numbers in parallel or serially. If in parallel, the first phone to pick up grabs the call.

The way I use it is to have it simultaneously call my cell, office, and home office numbers. If I fail to pick up the call, it is delivered as a wav file to my email.

How more flexible can you expect VoIP to be? Failing Mike Armstrong's view of each individual having a dedicated phone number at birth (too Orwellian for my desire)I think this just about covers it.

Patrizia Broghammer

You underestimate (or overestimate depending on the point of view) what goes under the name of "Internet Time".
We all believe that the Internet has brought more speed in our life.
It is true, a letter takes a few seconds to arrive to the other side of the Globe, but one thing is a computer and another is our way of thinking and behaving.
Does it take less to change a habit since the dawn of the Internet?
I do not think it takes less.
People have their own rhythm and that doesn't change dramatically.
If the average guy is used to dial to make a call, he will want to go on dialing.
"I do not care what's behind" and "I do not want to care", I just care that it works and that I can do it easily. The average guy doesn't like to change his habits, unless they bring something really new. (or something really cheaper)
VoIP means saving mostly in International calls.
But How many are the ones who do International calls?
VoIP also means in many cases lower quality, less availability, more concern, the need of a software, of a computer, of being at easy with installing and configuring, time to be lost, while isn't it much easier the old, nice, easy to dial phone?
And I do not know about USA, but in Italy, like in most countries, the DSL is not always available, not always efficient.
And if you need to make an International call, in that precise moment when the Internet is down, or the voice suddenly is so bad you do not understand anything, or you are not close to a computer or an Internet line?
Let me say so: it is not a matter of chasm, it is a matter of quality and efficiency.
Let's be honest, we have come a long way, but not long enough...

NotShort

I wrote a related piece last month on why we don't need a phone company (drawing on your FWD/Facebook post).

It's here: http://www.notshort.net/2007/09/who-needs-phone-company.html

Bruce

I think you've hit it right on the head. Far too much of the "VoIP" market is focused on PSTN arbitrage, using clever schemes to bypass unreasonable charges by legacy telcos. (First, the focus was on international calling, but this has shifted to mobile more recently.)

All of these have value (or save value), but remain dependent on the existing infrastructure and can only survive as long as the incumbents have an incentive to maintain artificially high prices. The risk for all these firms is that (as the IXCs discovered) they have nothing to fall back on when the price gap goes away. (The incumbents can always choose to kill the new entrants because their cost structure will always have an advantage carrying traditional voice calls.)

Note: the cablecos are a special case of this, because they are using IP across their own infrastructure to duplicate local telephony. Unlike the arbitrage players, they are offering a duplicate service, but built on a more efficient infrastructure. (The incremental cost of telephony is relatively small once other services -- television and Internet -- have covered the fixed costs.)

The future of VoIP has to be in replacement, rather than enhancement, because the moment a call touches the PSTN, it gets tainted by it -- it becomes dependent on phone numbers, the limits of narrow band codecs, and the settlement/ regulatory problems. Skype can deliver a service much better than a telco as long as the entire connection (includes voice, video, chat) stays off the legacy infrastructure. (The same is true for Gizmo, GTalk, etc.)

However, as you said. These will succeed by providing a service that is essentially free. (As Skype has demonstrated, it is really software, not a service in the traditional sense.) They may piggy-back on social networking, or evolve from IM and e-mail. They will eventually migrate to wireless (which will be the last bastion of the old business model after helping to wipe out traditional wireline telephony). How this evolution takes place remains a little unclear, but the end point isn't.

The PSTN is dead. It just doesn't know it yet.

Bill

I can't believe its been several years, and I'm still the only person I can video chat with. How our communications services converge will be intersting. It will probably involve the 'new thing' carrying the old things (ie, POTS) along in as a small tote until it can be discarded. All things in harmony. Here's to wishful thinking!

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