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May 11, 2005

As the Phone World Turns Part 9 – Do We Need Phone Companies?

Can you think of any e-mail “carriers”?  They used to exist.  There was MCI Mail which charged by the “MCI ounce” – a thousand characters if I remember correctly.  There was Western Union’s EasyLink, later purchased and operated by AT&T.  Today there are email services embedded in AOL, MSN, and almost every other ISP.  And there are email hosting services like Hotmail and Google Mail.  But there aren’t really any email “carriers”.

So what does this tell us about the need for phone carriers?  Like email, voice communication is now no more than a software application.  The client for that application runs on our PCs or on special purpose computers like cell phones or voice adapters (ATAs) manufactured by Cisco (Linksys), Motorola, and others. I think the history of email gives us a good way to predict the future of voice although I am wary of this kind of driving by looking in the rearview mirror since technology is changing so fast.

Service providers play a key role in personal email and NO role in corporate email.  Because it may be important in forecasting the evolution of the voice business, I’ll take much of the rest of this post to explain how Internet-based email works before jumping to conclusions at the end.

Let’s suppose you get your email service and address from your ISP.  You are thisisyou@yourisp.com.  And let’s further suppose that you use Outlook Express to compose your email.  While you are writing, all the action takes place on your PC.  When you Send the email to yourfriend@hotmail.com, the message goes over your Internet connection to yourisp and is stored there temporarily. Even though you see the message as “sent”, your friend hasn’t gotten it yet.  A server program, typically called SendMail, at yourisp now uses an Internet service called DNS (Domain Name Service) to find an IP address for the Hotmail server.  yourfriend isn’t listed in the DNS server; it is only used to look up what comes after the @ sign.

Once Hotmail has been located on the Internet, the SendMail program tries to communicate with the Hotmail server to set up the actual transfer of the message.  If Hotmail isn’t responding at the moment, SendMail will keep trying for hours.  If all goes well, the message is transferred from yourisp’s server to Hotmail where it is stored again.  The message is saved on Hotmail until yourfriend connects her computer to the Internet and starts her mail client.  Then her email client – probably Outlook or Outlook Express – retrieves the email from the Hotmail server and, to her great delight, there is a message from you in her inbox.

Note that at least three servers run by service providers are involved in this process – the SendMail server at yourisp, the DNS server(s) in the Internet cloud, and the server at Hotmail which stores mail for your friend and forwards it to her PC when she is ready to receive it.  You probably don’t pay a bill for email hosting but it is a part of the service you pay your ISP for.  yourfriend doesn’t pay Hotmail for her service (unless she has the upgraded version), but it is advertising supported.  Without these servers, email would look like instant messaging.  yourfriend and you would have to be online at the same time in order to communicate; you might have to use the same instant messaging provider like AOL or MSN.  Even instant messaging requires a server-based directory in order for your computer and yourfriend’s computer to find each other on the Internet.  Store this thought about directories away; it is relevant when we eventually get back to talking about the phone business.

But suppose you and your friend are corresponding from your work accounts (about business, of course): thisisyou@mycompany.com and yourfriend@hercompany.com.  Unless mycompany is very small, it operates its own email server.  It is this server which takes your email from your client and runs a SendMail process to use DNS to locate hercompany.com and transfer your message to the email server run by hercompany which will store it and eventually transfer it to her client.

Notice that most medium or larger size companies DO NOT use any outside servers other than DNS when doing email.

So three quick inferences for the phone world from the analogy with email:

  1. consumers and very small business will continue to need someone to operate “voice” servers for them but that service is likely to be bundled AT NO EXTRA COST with ISP service or be “free” and advertising supported.
  2. larger businesses will operate their own servers and will not require a service provider other than for DNS and basic connectivity to the Internet.
  3. There is no long term business model which supports charging by the minute for voice transport.

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

The second is about the cost of “free”.

The third explains Metcalfe’s Law of network value.

The fourth is about how Skype built huge network value.

The fifth is about Skype’s first paid service SkypeOut.

The sixth is about SkypeIn which makes Skype users callable from the outside world.

The seventh is a summary of Skype features.

The eighth is about Vonage’s strategy.

The tenth asserts that we won’t need traditional mobile carriers either.

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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