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April 20, 2005

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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