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    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers LAURENCE CUA KETKI GADGIL MAHESH JADHAV MARCELO MASSARENTE RICCARDO VOLPATI November 21, 2005 Professor Greenstein MGMT 463 – Management of Technology
    • Table of Contents
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT Executive Summary The following report will analyze the diffusion of VoIP technology and to examine how the emergence of VoIP is redefining the telecommunications industry in the United States. The report introduces VoIP technology, describes key characteristics of the VoIP market, forecasts trends with each different business models (software providers, indirect providers, cable operators, and incum- bent fixed line operators), analyzes the threats and opportunities facing incumbent telephone opera- tors, and finally provides strategic recommendations for incumbents to maintain their market leader- ship in the near future. As incumbent fixed line operators face the rapid adoption of lower-cost VoIP and the influx of new competitors, they must simultaneously embrace this technology while keeping new competitors at bay. Most importantly, incumbents must quickly develop and introduce value-added services to compete with the bundled offerings of cable companies (video, voice and broadband) while leverag- ing on their large PSTN customer base. The report focuses on businesses competing with fixed-line operations. The scope of this report excludes mobile carriers and wireless-related technologies (e.g. WiMax). Introduction to VoIP Technology VoIP stands for Voice over Internet Protocol, and refers to the routing of voice communication over an IP network, including the Internet. Voice data is transferred across a “general-purpose packet-switched network, instead of traditional dedicated, circuit-switched voice transmission lines.”1 Although there exists several categories of VoIP services, VoIP technology generally holds three key advantages over traditional Public Switched Telephone Networks (PSTN): 1
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT • Cost. Because VoIP uses general-purpose networks meant for both voice and data, cost is spread across more services, i.e. a single pipe provides cable TV, Internet, and voice. Simi- larly, some VoIP providers utilize existing network capacity and do not charge any fee for use of their basic services. • Mobility. All incoming calls are routed directly to a VoIP phone, regardless where that VoIP phone is connected to the network. A VoIP phone with a US number can therefore be plugged in overseas and still receive calls. This is particularly helpful for frequent travel- ers and mobile workers. • Added services. Several VoIP providers offer additional services over the Internet, includ- ing file transfers, instant messaging, and video and audio conferencing. However, VoIP has limitations that are still being addressed by VoIP providers: • Reliability. Unlike traditional phones, most VoIP services rely on some sort of broadband modem powered by household electricity, making them vulnerable to power outages. Cur- rently, the only way around this is by using an uninterruptible power supply or generator. • Quality. If a network is highly congested, quality over a VoIP system suffers, usually result- ing in delayed or lost sound. Quality also suffers in long-distance connections. • Emergency calls. Not all VoIP providers offer e911 service, primarily because of the tech- nical challenge in locating a VoIP phone’s geographic location. • Compatibility. Since there is no global standard that VoIP services share, not all VoIP phones can communicate with each other. VoIP Market Overview Market Size 2
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT According to the research firm, TeleGeography, by the end 2005, 4 million households in the US market will be subscribed to VoIP providers. This figure does not include people who use PC or software-based VoIP services like Skype. Analysts estimate that this figure will grow to 17 million American subscribers by 20102. TeleGeography predicts that revenues generated from VoIP ser- vices will rapidly climb from today’s level of $220 million to $3 billion in just two years. 2 Has VoIP Crossed the Chasm? In the US market, VoIP technology has held a long history. Early adopters have typically used PC and software-based VoIP technology. Recently, several factors have accelerated the adoption of VoIP as a mainstream technology which we believe will eventually lead to mass market adoption: • Rise in broadband Internet connection penetration. • New products replicate traditional calling experience. Services such as Vonage, allows consumers to make calls with a user friendly handset, and offer typical features such as voicemail, and call waiting. • Aggressive price competition. Independent VoIP providers, such as Vonage, are using ag- gressive pricing packages to attract mainstream customers • Quality of service improvements. Perception of improved quality of service, comparable to PSTN based calls, has improved adoption of technology • Increased awareness by mainstream public of VoIP technology. Mass market advertis- ing campaigns by Vonage, significant media coverage of eBay’s acquisition of Skype, and mainstream press on the technology has improved awareness around VoIP technology • Skype, Yahoo, MSN encouraging trial with the early majority. Growing popularity of instant messaging (IM) services such as Skype, Yahoo Instant Messenger, Google Talk which 3
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT bundle voice services with their IM platforms, are increasing trial of VoIP and establishing the value of VoIP and quality of the voice services • Established brands, such as AT&T and Verizon entering the market. Recent introduc- tions of VoIP services by established players, such as AT&T CallVantage and Verizon VoiceWing lend credibility of VoIP technology to the mainstream. In 2005, a number of es- tablished telecommunications providers plan to enter the VoIP market including: SBC, Bell- South, Qwest, MCI and Comcast. A clear example of the rapid adoption of VoIP is the phenomenal growth of Vonage’s US sub- scriber base, tripling to 750,000 subscribers from last year3. The real question is not if VoIP will cross the chasm, but how quickly it will diffuse into the mainstream market and which VoIP service providers consumers will choose. The speed of this diffusion will be highly dependent on over- coming key barriers to adoption beyond the technical limitations that are already being addressed. The Security Problem: a key barrier to adoption “The development of enterprise VoIP or IP Telephony is accelerating rapidly, but security isn’t necessarily keeping up”4. The PSTN is largely perceived as being a secure network; the Internet is not. Well known web- sites and service providers are frequently affected by security breaches. In this context, current im- plementations of VoIP are also vulnerable and service and network operators will need to undertake more work to assure the wider consumer market that replacement VoIP offerings are at least as safe as traditional voice services. The presence of malicious agents and software code on the Internet give rise to concern over the wider resilience of VoIP services. For this reason, in its transition from the early adopters to the early majority stage of the adoption cycle, VoIP must prove itself to be im- mune to such threats. As of today, the isolation and robustness of the PSTN is still a major strength 4
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT and one not to be overlooked when projecting a broad technology switch. These VoIP security threats include: • Service availability attacks. DoS (Denial of Service) attacks, spam and viruses. DoS attacks are intended to flood a target call manager, phone or VoIP infrastructure with an over- whelming amount of fictitious requests or information. Voice spam is expected to emerge in the same way as it did with email services, filling up users’ voicemail boxes. Viruses exploit weaknesses in operating systems and applications leading to network instability. • Eavesdropping. It is very easy to find on the Internet free applications that allow users to listen to phone calls on VoIP networks. This way, attackers can have access to confidential conversations. For example in July 2005 a flaw was identified in Cisco’s Call Manager that could have allowed intruders to listen to calls routed through it5. • Impersonation. A hijacker can impersonate a user profile to commit fraud, access confi- dential information or disrupt business in organizations. • Theft of service. Call tracking tools can be used in order to capture users’ authentication in- formation with the objective of placing calls on the user’s expense. Regulatory and other organizations are trying to provide solutions to help address the need for security. In January 2005, the U.S. National Institute of Standards and Technology published a strategic report on VoIP security, urging organizations to proceed with caution and outlined recom- mendations for deployment. Furthermore, VoIP technology and security product providers have founded VoIP Security Alliance (VoIPSA), in February 2005. VoIPSA’s main activity is to “help de- fine the many potential security threats to VoIP deployments, services, and end users”6. Recently, VoIPSA developed and released a formal framework for VoIP security and privacy risk assessment. 5
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT “Unlike data communication, VoIP is a real-time service and requires security infrastructure to provide automated, real time security responses to preserve the very high availability expected by telephone users”4. Organizations need to recognize the uniqueness of VoIP networks, with new types of attacks and challenges that require a different approach to proactive security. With well adapted policies and specific technology in place, VoIP services can be made as secure, or even more so, than traditional telephone networks. Regulatory Issues The fast growth of broadband Internet and new service offerings, including VoIP, represent a big challenge for regulators. “The problem is that the current philosophies of most regulators are predicated on three assumptions that no longer hold true. First, that telecommunications mainly concerns voice calls. Second, that Telecoms networks are in effect natural monopolies. And third, that in most cases the firm that owns the network also provides the service”7. In actual facts, the ad- vent and mass adoption of broadband technology is proving all three assumptions to be no longer valid. Everywhere in the world networks are being built or upgraded in order to carry voice, video and data and to provide customers with a choice of ways to get on to the network. Telecom monopoly is no longer the norm and there is an increasing decoupling of firms providing the service and those owning the networks. In this era of change, regulations can make a big difference in shaping competition and growth in the VoIP industry. Regulators must be cautious not to suffocate such a fledgling business, ensur- ing at the same time that no unfair discrimination is made between telephone service providers based merely on the technology used. Furthermore, regulators have to guarantee that VoIP offers the same social safeguards that the public expects from any critical infrastructure. 6
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT An example of this regulatory effort was the recent vote of the FCC to require Internet phone companies to offer a 911 emergency call service. With this move, the FCC made a significant change from its previous hands-off approach, making a big step towards imposing traditional telecoms rules on the Internet. According to the FCC, VoIP providers will have to either implement the 911 capa- bility, or disconnect users who do not explicitly confirm being aware that the service does not allow emergency calls. Providing access to 911 systems can be complex, costly and perhaps not feasible for many small VoIP providers. However, “This alone won’t kill the VoIP industry but will tighten it up a little bit. The danger is that companies that have done a lot of innovating to bring these prod- ucts and services to the market are now looking at a higher cost of entry”8. Based on the above, the players that are likely to be the most impacted by the 911 regulation are indirect access providers, particularly the small ones. The new rule introduces barriers in a sector whose previous cost of entry was low, and makes operation more costly for existing competitors. Key Players in the VoIP Industry and Their Business Models Sandvine, a telecom-equipment firm, estimates that there are 1,100 VoIP providers in America.9 The multitude of VoIP providers can be classified into four main categories. Software This most basic form of VoIP, also commonly referred to as PC-based VoIP, has been in existence for over ten years. This form of VoIP only requires users to install software on their computers, and have a microphone and speaker/headset connected to their PC. Prominent players in this category include AOL, Yahoo, MSN and the eBay-owned Skype. These providers offer integrated VoIP services with their instant messaging platforms, allowing users to make calls to other users of the service over the Internet for free. Both Yahoo and Skype have added capabilities to offer landling calling and voicemail for additional fees. The main objective of these providers is 7
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT to integrate voice communications with other Internet activities. For example, eBay shoppers can ”Skype” a vendor to get more information about a product to aid the completion of a transaction. With the big three Internet portals sharing a quarter billion instant messaging users between them, this form of VoIP is the most popular amongst consumers. However there are several drawbacks to PC-based VoIP that prevent it from being a real threat to the mainstream communications business. First, the form factor and usability of PC-based communications prevent it from being a real threat. Second, the fragmented nature of messaging networks limit consumers from being able to communicate with all their contacts for free. Third, since calls are carried over the public Internet, these providers have limited control over quality of service or security. With significant limitations, we expect that PC-based VoIP services will co-exist with traditional telephone service. However, these services will primarily be used for free net calling as it will be difficult for software VoIP providers to generate revenues from off-net calling. Indirect Providers Indirect providers offer consumers voice services most closely resembling standard phone ser- vice. Customers with high speed Internet connections plug an adapter into a regular telephone or an IP based handset and get service that is quite identical to standard phone service, except that it runs over an Internet connection. Vonage, with the largest US subscriber base, is the dominant player in this category. Indirect operators are positioning themselves as a low cost replacement to traditional phone services as they are able to offer deep discounts over traditional fixed line operators because of significant cost advantages. These VoIP providers do not have to pay call origination charges in same way as PSTN-based alternative operators, because their calls are carried over a broadband line. Furthermore, these firms do not have the expense of maintaining their own communications net- works. Indirect providers do not own the access infrastructure and most of the calls are routed 8
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT through the mostly public Internet. Steep competition in this market and the entry of traditional players such as AT&T and Verizon is causing a downward spiraling pressure on pricing of voice ser- vices. Since Vonage began offering its services it has reduced prices twice and has gone from offer- ing services at $35 down to $25 by September 2005. While Vonage and others have alleviated some of this pressure by offering different tiers of packages, the downward pricing will ultimately be harmful to all players. Indirect players may not be able to sustain lower prices in the long term. Es- tablished players will see considerable erosion of the traditional PSTN revenue base and low margins in VoIP services. Indirect players have also tried to differentiate on the basis of features. However, as more players enter the VoIP market, these features are becoming standard and no longer consti- tute as competitive differentiators. While most indirect players have had the first mover advantage to fuel the initial growth of the VoIP market, we believe that many can be squeezed out as competi- tion increases. Additionally, because indirect providers do not maintain their own network, they are constrained in ensuring consistent quality and security. Cable Operators Cable Operators are rapidly entering the VoIP market by offering voice services over their own local access networks. These companies hope to entice customers with a “triple-play” package of voice, video and high speed Internet services. US cable companies believe that VoIP services will drive growth. According to one estimate, Comcast, the largest US cable operator, plans to add 250,000 subscribers of Internet telephony by the fourth quarter of 2005 and 1 million by 200610. Incumbent Fixed Line Telephone Operators Pressured by indirect providers and cable operators that offer VoIP, Incumbent telephone service providers, such as SBC, Verizon, and AT&T, have recently entered the consumer US VoIP market. Like cable operators, incumbent telephone operators will bundle VoIP with other services. 9
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT By offering lower price and lower margin VoIP services, these operators risk cannibalizing revenues from their traditional phone service. Who will capture Share of revenues? We believe that largest share can be captured by traditional fixed line operators and cable operators, as they have direct control over their networks and they have the ability to bundle VoIP with other services. Second share would go to a few indirect providers such as Vonage, with smaller indirect providers getting squeezed out. Finally, we foresee software client providers to co-exist as an alternate means of communication that is tied more closely to complementary internet activities. The success of traditional fixed line operators, however, can only be realized if they are able to address key threats from VoIP and cable operators while leveraging opportunities offered by VoIP. Threats for Incumbent Telecom Companies Market share erosion and revenue shrinkage in the voice business The first impact that VoIP will cause on the incumbent telecom companies is to erode their market share on the voice market and put pressure on prices and revenues. Because VoIP is not capital intensive, it greatly increases the number of alternative voice service providers. Furthermore, VoIP providers can be much more competitive in pricing and drive drastic revenue losses for the in- cumbents. “Factors such as the distance between the callers or the duration of a call, the key deter- minants of cost today, are simply irrelevant with VoIP” 9. Over IP, the concept of distance means nothing. As described earlier, one can simply plug a VoIP phone to any broadband connection in the world and still use the same phone number and rates. Interconnection issues deserve a paper per se, but let’s try to summarize the main points. Even when calling from a VoIP phone to a regular phone, VoIP can avoid interconnecting fees in the ori- gin, cutting its costs and the revenues of the network owner at the same time. When one VoIP 10
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT phone calls another, the impact can be even higher; if both VoIP phone belong to the same provider, there are no connecting fees at all. However, when the originating and receiving VoIP phones are in different providers, they still need to be connected through the PSTN. But this is like- ly to change, as VoIP connecting standards (ex: ENUM) are created and global VoIP carrying ser- vices emerge, i.e. the one UK’s Cable & Wireless launched on October 200511. Finally, the regulatory environment adds to VoIP’s competitiveness. By considering VoIP as a data service rather than a voice service, VoIP is exempted from the lots of taxes that correspond to over 40%-50% of a regular phone bill12. As a result, Verizon for example was not only forced to reduce its prices in most of the East Coast, but also lost 518,000 traditional lines in the second quarter of 200513. SBC also reported a 5.1% decline in its lines in the third quarter14. Incumbents are also launching flat fee plans for the traditional phone lines and offering their own VoIP services to prevent market shares losses. How- ever, net revenues from a VoIP client are at least $10/month less than the traditional offering15. Impact on incumbents’ broadband business Many telecom companies are counting on the increased revenues in providing DSL broadband services to offset part of the losses in voice. However, even this is threatened by VoIP. First, “parasite” VoIP providers, like Vonage, can drive higher utilization and traffic on the in- cumbent’s network, forcing the incumbents to invest even more, without bringing them any rev- enues (actually, using their assets to steal revenues from their voice services). In fact, some DSL providers are studying legal ways to prioritize any data traffic on their networks over VoIP packages not routed through their providers16. Second, VoIP can open the way to “naked broadband” services. So far, because consumers need to have a phone line anyway, the incumbents can easily sell a bundle of voice and broadband 11
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT services with limited competition17. When consumers have the option to contract VoIP services from another provider, the attractiveness of a “naked broadband” offering increases and incumbents might see themselves without both voice and data markets. Indeed, many phone companies today refuse to sell DSL without a phone subscription, but regulations may eventually force them to do so. Third, VoIP is a great opportunity for cable operators to gain a head start in the upcoming "bat- tle for convergence”. It has been long discussed that the future is to provide “triple-play”18 services (TV, Internet, voice) and to control the flow of digital content into consumers’ homes. Cable opera- tors actually see VoIP from the opposite direction of incumbents. Because cable companies don’t depend on voice for their revenues today, and VoIP uses very little bandwidth compared to video, cable providers can offer cheap VoIP as a competitive weapon against incumbents9. Cable compa- nies are taking this seriously. All the major operators in the US are already offering VoIP services. Time Warner had already 220,000 VoIP subscribers by the end of 2004, adding 10,000 per week, and Cablevision had over 350,000 VoIP clients by mid-March19. Phone companies are responding. An SBC executive recently said that “we’re not a telephone company anymore; I sort of resent that”16, in a reference to their “lightspeed” project of offering IPTV in the future. Opportunities for Incumbent Telecom Companies Geographical expansion Because offering VoIP services doesn’t require the deployment of one’s own network, incum- bents can take the chance to expand themselves into other markets, both domestic and abroad. SBC has already announced that after it completes the acquisition of AT&T, it will aggressively market its VoIP services in states beyond the 13 where they currently offer traditional telephone services20. This is a risky move, as it will pit incumbents against one another more fiercely than ever before. Rebuild their own networks 12
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT Phone companies have the chance to rebuild their entire networks around VoIP, which is inher- ently more efficient than traditional PSTN. In doing so, they can capture the cost savings that come with VoIP and build the capability to offer other VoIP-related services in the future. This may also be necessary in anticipation of the “battle for convergence” with cable operators, which already have most of their networks in IP format. Some people estimate that in the near future, even if some consumers continue to use traditional phone lines, the entire network behind their handsets will in- deed be VoIP-based. Verizon has estimated that to run one single IP network for voice, TV and data would cost 40% less than 3 traditional ones20, while BT has already started to work on its 21CN network, which should replace the PSTN network by the end of the decade10. Lessons Learned in Other Countries In Japan, incumbent NTT has lost significant voice revenues as a result of customers switching to VoIP. NTT lost 35% of its revenue over 2 years and even after launching its own VoIP service, has not been able to recoup its lost revenue. Yahoo! Broadband Japan, on the other hand, has al- ready recruited 4 million customers. Similarly, Fastweb in Italy has gained 400,000 customers. With these as archetypal examples, key lessons learned from other countries are: • It’s not a question of “if” VoIP will have an impact, it’s a question of “when”. • Strong network externalities suggest that being first to market with a new service is much more advantageous to get market share Recommendations – Status Quo is not an Option Our analysis shows that while fixed line operators are foreseen to retain a large revenue share of voice communications, their present business model is under serious threat from the disruptiveness of VoIP technology and the velocity of its adoption. Given that first movers have an advantage and that cable operators are getting into VoIP aggressively, incumbents should embrace VoIP. Knowing 13
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT that they do not yet have a distinct competitive advantage against cable operators’ “triple play” of- fering—mainly because they lack the content that cable operators have—incumbents must balance the tradeoffs between the inevitability of VoIP and their strength in PSTN. As such, incumbents must simultaneously migrate their main product offerings to VoIP while slowing down competition. We recommend a four pronged strategy to succeed in this rapidly evolving phenomenon: Survive, Adapt, Defend, Attack 1. Surviving in Chaos: worst case scenario and the need for organizational paranoia Fixed line operators need to act with urgency and create a sense of paranoia within their organi- zations – without creating panic of course. A good strategy would be for the CEO to prepare a memo like Bill Gates did in 1995 to address the Internet threat. We believe that this technology change is disruptive in nature and incumbent fixed line operators should consider changing their business model over a period of time. 2. Adapting to Change: go-to-market strategies VoIP is disruptive technology that needs a different business model. Incumbents need to lead change instead of being led by change. We recommend that incumbents invest heavily over next 2 to 3 years to build a value proposition based on VoIP and entertainment to counter the threat of ca- ble operators. Incumbents should also consider their positioning – merely giving a low cost VoIP will not win customers. IP based services should be positioned as a value-add. Although Clayton Christensen’s framework may not apply directly, we believe that incumbents need a different culture and different organization to succeed in this endeavor to create a new business model. We recom- mend that incumbents form a separate subsidiary with different organization, compensation than current structures to launch VoIP and value added services. To overcome the total company inertia, 14
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT this subsidiary should not be completely separated from regular operations. In fact, development in VoIP and related value-added services should be highlighted in all cycle meetings. The biggest advantage the incumbents have is the sheer size of its customer base and the infor- mation available about their spending habits. As VoIP moves into early adopter stage of the tech- nology-adoption life-cycle, incumbents should leverage this strength and build go-to-market strate- gies that address customer needs based on demographics, geographies, income levels, etc. Special emphasis should be paid to people making long-distance and international calls. The biggest cost savings for customers will arise in these two categories and if the right VoIP service is provided. Lower revenue due to lower prices may be partially made up for by an increase in minutes-volume. 3. Defensive Strategies – lobbying regulators for a level play field Indirect VoIP providers today enjoy an unfair advantage over incumbents in the sense that they pay no taxes (as they technically provide information services) which result a price advantage of 30-50%. Incumbents, with their clout and large contributions to campaigns, should lobby with reg- ulators to reduce their tax incidence and bring it in line with the indirect providers or, conversely, lobby for a VoIP origination fee to reduce price-competitiveness of other VoIP provider offerings. Incumbents should also deploy their R&D resources to generate intellectual property and a se- ries of patents that will require indirect firms to pay royalty for their usage. As they develop their VoIP capabilities and IP-related value-added services, incumbents should attempt to raise FUD about the security and quality of service of indirect providers and cable opera- tors to further slow down their momentum. 4. Offensive Strategies 15
    • The Diffusion of VoIP & Strategies for Incumbent Telecommunications Providers MANAGEMENT 463 – MANAGEMENT OF TECHNOLOGY KELLOGG SCHOOL OF MANAGEMENT a. Thriving together - partnering with content providers: We believe that the battle for the customer of 21st century will be won by firms that provide a one-stop solution: connectivity, collabora- tion and content. Incumbents provide connectivity but they need to partner with Yahoo, Google and other community builders to provide customers the ability to collaborate with each other and also partner with content providers like Disney, MGM and TV networks to provide a pay-per-view and on demand video b. Differentiating yourself – competing with cable, indirect, software vendors: Incumbents in the voice mar- ket need to review how they delight their customer. They should view themselves as serving the information, communication and entertainment needs of the customer. This requires a completely different business and customer model and a drastic change to the current orga- nization structures. Incumbents will be able to better target their customers as they have su- perior IT infrastructure compared to cable firms. In short, incumbents can have better in- sight of their customers and do not have any cannibalization in their video services. If they can deliver high quality and reliable voice and video services then customers would retain in- cumbents for voice and also switch their prime time TV service away from cable operators. Indirect firms do not have access to large amounts of funds for R&D and they are mere consolidators. So, incumbents can use their R&D and IT capability to provide better value add services and block indirect firms by using blocking patents. Furthermore, incumbents will want to partner with software firms and content providers. 16
    • 1 “Voice over IP”, www.wikipedia.org (http://en.wikipedia.org/wiki/Voip), retrieved on November 20, 2005 2 “The war of the wires – Telecoms, TV, and the Internet”, The Economist, July 30, 2005 3 “Number of Internet-phone consumers soars”, USA Today, August 17, 2005 4 Paul Slaby, “The Dangers of VoIP”, Globeandmail.com, November 4, 2005 5 Riva Richmond, “Flaws Are Found in Cisco’s Web-Calling Software”, The Wall Street Journal, July 14, 2005 6 VoIP Security Alliance, www.voipsa.org, retrieved on November 20, 2005 7 “Why a Light Touch is Best – Internet regulation”, The Economist, May 28, 2005 8 Schwartz, A. and Young, S. “FCC Wants Web Phones to Have Access to 911 Within Four Months”, The Wall Street Journal, May 20, 2005 9 “The meaning of free speech – Telecoms and the Internet”, The Economist, September 17, 2005 1 10 “Why VoIP telephony is quickly coming of age”, Financial Times, September 8, 2005 1 11 “Cable & Wireless launches global VoIP interconnect”, Internet Business News, October 12, 2005 1 12 “Tax Questions Confront VoIP Services”, Mondaq Business Briefing, February 23, 2005 1 13 “Why VoIP is telephony is coming of age”, Financial Times (www.ft.com), September 8, 2005 1 14 “SBC's CFO Takes on Its Rivals; The telecom giant's Richard Lindner outlines plans for combating price pressure -- and a growing threat from cable and VoIP providers”, BusinessWeek Online, November 14, 2005 1 15 “The phone call is dead; long live the phone call”, The Economist, December 4, 2004 1 16 “The war of the wires – Telecoms, television and the internet”, The Economist, July 30, 2005 1 17 “Naked Come the Callers? Skype and its internet calling service are getting lots of attention, but “naked broadband” may be the real threat to traditional phone outfits”, BusinessWeek Online, September 12, 2005 1 18 “VoIP providers beat a path to consumer’s doorways.”, Financial Times, January 10, 2005 1 19 “Cable groups see VoIP services take off”, Financial Times, April 12, 2005 2 20 “Cheap talk: Market for Internet calling, Once tiny, gets crowd fast- Better technology, few rules spur flood of competition; pace of change is Dizzying- Vonage takes on ‘Von-a-bess”, The Wall Street Journal, August 26, 2005