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September 18, 2006

The Beginning of the End for Traditional Cellular Wireless

Martin Geddes, a smart telecom strategist (that’s not necessarily an oxymoron), has an important post about disruptive UK newcomer Truphone.  The company’s service and free software take much of the cost out of cellular calling  - especially international roaming.  Needless to say, taking the cost out for the consumer takes the profit out for the traditional provider.  This is a BFD.

In disruptive potential, Truphone is similar to Skype.  That doesn’t mean they’ll be the next Skype.  Skype reached network critical mass early by piggybacking on Kazaa (music-sharing) penetration and distribution knowledge.  Many companies offered PC-based calling before Skype and were a technical success but not a distribution success.  They didn’t get bought out for billions of dollars.

Truphone right now is only useful to owners of Nokia’s E-Series phones although they plan support for other programmable phones including Windows-based mobiles soon.  Initially, I don’t think there’s a huge market of people willing to load new calling software on their phone and Truphone says that their beta is “best suited to VoIP and tech community.”  I’ve signed up, of course, to be a beta tester as soon as they have software for my Treo.

However, the potential market for Truphone-like service is greater than the initial market for Skype.  Only a limited number of people are willing to make phone calls on their PCs.  But “everyone” is comfortable calling on a mobile handset.  But the new mobile handsets are all really PCs – they just don’t look that way.  Truphone is adding capabilities to these call-friendly PCs the way that Skype (and its less successful predecessors) added capability to traditional PCs.

If you have the software installed on your phone and are connected to a WiFi hotspot, all calls to other Truphone users are free.  This is of almost no INITIAL benefit.  However, much more interesting initially, calls to everywhere are based on very low VoIP rates – about what you would pay if you shopped well for a prepaid card in each country you went to and called from landlines.  And these rates hold so long as you are calling from a WiFi hotspot.  It doesn’t matter if that hotspot is at home in London or “roaming” in Timbuktu.

Moreover, if you’re a UK-based customer, calls to landline phones in 40 other countries are free through the end of 2006.  If you’re a US-customer, calls to the US and Canada are free for the same period.  Companies which want to create network effect as Skype has done so successfully have to offer an early inducement to get the customers they need to build to significant network size since these early adopters aren’t getting any network benefit by belonging to a small network.

Actually Truphone has, from its choice of handsets to support, apparently aimed at the corporate market.  Selling en masse to corporations is an old and successful strategy for building networks – worked for everything from teletype to fax machines.  If everyone in the company has a Truphone-enhanced cellphone, then the significant cost of intra-company mobile calls simply disappears.  When lots of companies adopt the technology for internal use, network effect starts to kick in for external use.

Martin says that Truphone’s business model is like Skype’s – they do make money on the off-network calls even though on-network calls and software are free.  In a comment to his own post, Martin adds that Truphone can tap the termination revenue stream.  He is talking about the exorbitant amount that mobile network operators outside of North America are able to charge for a call incoming to one of their phones.  This cost (again outside of North America) gets passed from phone company to phone company and is ultimately paid by the caller – not the callee.  Since Truphone is providing UK numbers to its UK users (in addition to whatever number they got with their phone). They should be able to get the termination revenue.  This ability to arbitrage huge termination revenue, however, depends on Truphone giving out cellular rather than landline numbers; I’m not sure they’ll be able to do this.  Landline termination also involves compensation but the amount is much smaller.

As I speculated in an earlier post, connection through WiFi hotspots shifts power from the cellular network operators to the handset manufacturers.  Here’s what Martin has to say on that:

“I’ve been consulting to anonymous handset vendors on this topic. The day of reckoning is coming for the operators. The handsets are creating the incremental value, not the networks. The value of subsidy in effecting lock-down is decreasing. The price of handsets is falling, the number of SIM-free unlocked handsets being sold is rising. The operators will resist these devices entering their channels. Bad luck, folk will just buy them tax-free in the airports as they go on holiday. You can’t compete against your customers.”

A good investment will be the first major handset manufacturer who takes Martin’s advice and breaks free from the shackles of locked handsets and goes directly after the consumer market making inexpensive calling and freedom from carrier-lockin a big deal selling point.  This will be a gutsy move since much of handset manufacturers’ current income is tied to their sales through the carriers.

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