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Thursday, November 10, 2005

Who makes money when consumers demand 'Free! Free!' (as in beer, not freedom) ?

VoIP is one kid who just does not give up. For those of us in the VoIP industry, you would have experience the 'irrational exuberance' between 1999-2001 and the huge bubble burst right after.

Well, with the market up again, VoIP is back with vengeance. I read the other day that Microsoft acquired media-streams to strengthen its foray into VoIP. Google started late with google talk and Yahoo with its yahoo! messenger with VoIP support. And ofcourse there is Skype and many others.

VoIP to customers imply 2 main things:
  • Better Services
  • Cheaper than traditional telephones
It is important to understand which part is more important to which target segment. If you are selling to corporations, 'Better Services' may be key because corporates don't mind a penny here and there for core communication cost. Therefore, for enterprise sales, VoIP is attractive even if it is just slightly cheaper or the same cost as traditional PSTN lines.

When it comes to end consumer scale, whether you like it or not, 'cheaper' is a great motivation, unless your 'Better Service' brings in something so revolutionary that people are willing to spend more (for example, mobility - cell phones did that). Incidentally, even if you did bring in a 'Better Service', by the time your consumer market really picks up on it, the cost for the 'Better Service' will need to drive down to within 10%-15% of the cost consumers are already paying before the service kicked in (cell phones charges today are comparable to PSTN line charges and is a reason why many consumers are disconnecting PSTN lines for Wireless, since it adds mobility at a nominal markup price)

So let's focus on Cheap for a while. Skype came out with a great VoIP client and boasts of several million customers. Their soft-phone and PC-PC based calling is free but if you need to call outside (PSTN, wireless) or receive calls from outside the Skype network, there are services called 'SkypeIn' and 'SkypeOut' that cost you money.

So the question to ask, is, out of the several million Skype customers, who are actually paying for SkypeIn and SkypeOut ? And how much revenue is Skype really earning out of this charging ? (I guess it doesn't matter now, since Skype sold to E-Bay for a whopping $4b). The people who would pay for this service would likely be those who:

  • are on the move travel professional who like the concept of 'carrying their skype phone' whereever they are and the rates are attractive, compared to say, calling from a hotel
  • Home users who never used calling cards in the first place and compare Skype's rates to their phone provider rates
A concrete example: To call India from US, Reliance charges $0.13c per minute while Skype charges $0.14c t0 $0.15c. What then, is the incentive for a home user to use Skype (and go through the inconvenience of calling via a PC or buying skype enabled hardware) for international calls ? The same holds true for long distance calls. Skype is cheaper for folks who never explored calling cards too well. Again, I get it that Skype offers better services, there is mobility and all-things-nice. My point is, that the importance differs when you move between different segments (business vs. home use)

But I understand that they need to make money. That is the basic tenet of good business. At the end of the day, you need to make money to survive.

Then the other day, I read a new article that Microsoft plans to go one step forward and make PC-Phone calling free ! Not a single cent. That got me thinking:
  • Before VoIP, we had the monopoly of RBOCs and their phone rates
  • After VoIP came in, we had services like Vonage and CallVantage that offer you a flat rate for inbound/outbound calling (no per minute rates, but flat rates)
Now, if companies like Microsoft make worldwide calling free, how on earth will people make money offering this service ? One way (actually two0 -value added services & advertising.

To Microsoft, VoIP is just a tool that helps them be the 'one-stop-shop' for us. Google wants that too. The difference is that Google is working from 'outside-in' (best search engine in the world, great web based apps, trying to convince you that your desktop is less important - embrace the web), while Microsoft is working from 'inside-out' (stranglehold on desktop applications, sees the threat of google, migrating some apps to what they call 'Microsoft Live' - an ASP hosted application model and convincing you that since almost everyone uses MS for desktop, it makes sense to hold their hand as they expand 'out' into harnessing the power of the Internet for you)

But back to making money. If Microsoft manages to make PC-phone calling free they will effectively manage to run several pure VoIP business out of money, who solely depend on some charging mechanism to remain in the market. To google and microsoft, making money out of VoIP is less important. They make money from different channels.

As an example, microsoft can incorprate a free voip client into their office software. People are paying to buy microsoft office and hey, guess what they get free calling as a 'productivity enhancement'. If VoIP helps them sell more licenses, great !

But back to the pure VoIP providers. What will become of Vonage and similar services (assuming they too do not get acquired). How do they make money ?

There are a few ways:
  • Target corporations and provide value added services that they will be willing to pay for. As an example, we just installed a VoIP Mitel CX-200 PBX here - all IP - they have a solution called 'TeleWorks' - I can plug off my phone from office, take it home, and plug it in to my home DSL- and it automatically connects to my office - so I can work from home if need be and my customers would not know the difference.
  • If they are targetting end-consumers, bring down rates to match and/or beat the good calling card services in the market. Work with OEMs to bundle your software in cheap $20 phones people can buy off Wal-Mart. If your solution needs a PC or consumers need to buy $70 phones, you will not make enough revenue in this market segment.
  • Advertising - more on this below
Advertising - to make money, give money away

A friend of mine recently said 'It is not that Google is the first with great innovation. They are the first in doing innovative things the right way'. How true.

Google first came out with a program called 'AdWords'. The logic was simple
and well tried before. Advertisers would buy 'words' and have their ads displayed when 'potential customers' did a google search with words similar to those bought.

However, they soon hit a roadblock that many others faced before
'Was it worth the Advertiser's money to pay for the words ? Did they get enough of people clicking on their ads ?'

It was a question of visibility. To beat, this Google came up with an innovative idea of 'AdSense'
This complementary program was targetted towards normal users, like you and me, who host internet sites. The message to them was simple, should you choose to display google ads in your own site, and people clicked the advertiser's site via your site, you get money !

What did this do ?
  • Increased the visibility of the advertisers manifold - millons of websites now hosted advertisements for them
  • Gave the impetus to millions not involved in advertising buying/selling to make money from their website with ZERO marketing. (Remember, google takes care of the internet marking in a way that the more people read your site, the more indexed it becomes, and the more people discover it with searches)
Ofcourse, you as an 'ad hoster' made just a few fractions of a cent with each click-thru, while Google charged magnitudes more from the advertisers. If enough people clicked on the adds, and a fraction bought, it makes sense for the advertiser too.

An efficient eco-system. I've tried google adsense, and it works well. I get a nice paycheck each month. But is it enough to be enough for mainstream revenue for a company ? I don't know. Time will tell.

So Anyway, how does advertising tie into VoIP and free Calling for the consumer market ?

  • VoIP providers can considering replacing standard dial-tones with advertisements, carefully balancing irritation factor for users (don't have someone screaming an ad, maybe some soft music, with some key words such as 'visit' for the greatest book selections)
  • Provide value added services at a nominal cost or free with advertising. For example, even if basic calling were made free, provide a hosted voicemail solution with the caveat that there is 5 seconds of advertisement before you can access your VM, or , pay $3 a month to take it off for ever. Or for example, free conferencing with a '5 second jingle each time you conference or pay to remove it'
  • Tie up with popular Content providers to list your service (harness the power of the Internet - it is the cheapest and most powerful marketing tool). Offer special deals (for value added services) to both the content-provider and the consumer

1 comment:

  1. Don't forget that an RBOC could choose to make all PSTN calls free and charge you an optional fee for life line services.

    They could lobby congress for regulatory relief on taxes. Examine your local phone bill. Close to half your payment is going to Uncle Sam. It's a cozy relationship.