The Internet-Telecom Mutual Feedback Loop

The telecommunications industry is changing rapidly — as is the Internet — and they’re creating a mutual feedback loop. This feedback loop is virtuous if you’re a consumer of such services, but it’s terrifying if you’re a supplier in these industries.

Telecom is changing the Internet. The Internet is changing telecom. Let’s start with the latter assertion.

Skype: Freeware Comes to the Telephone

The freeware model for software delivery is a proven method for quickly creating a large user base for a product. In the software space, WinZip and Journyx Timesheet are software products that quickly garnered huge market share due to their zero-dollar entry prices. LinkedIn, Yahoo mail and Gmail have taken off similarly in the software-as-a-service (SaaS) space.

Similarly, Skype — an internet-based PC-to-PC voice communications application — has irrevocably altered the market by proving that many users will accept inferior levels of call quality in return for free or extremely low pricing. This is causing other voice communications firms, including some long-established providers, to drop their prices.

However, far more important than the commoditization price “race to the bottom” that Skype started is the fact that Skype convinces people to accept that the PC is a voice terminal. Skype has demonstrated that voice over the Internet, especially when combined with instant messaging and chat technologies, offers some advantages that are easiest to provide when using your PC as a voice terminal.

There is nothing particularly unique about Skype; any competitor could offer the same service. However, its first-mover advantage — which resulted in a large, established Skype community — limits the likelihood of users switching to another service. This means that the race to the bottom will just quicken as new entrants — such as Google, which now offers voice-enabled chat on its Gmail service — enter the market with similar free offerings.

Dick Tracy Has Finally Arrived

Forty years ago, people dreamed of video phones. Now that they’re here and available in online Web meetings via services such as Webex, it’s surprising they’re not used more than they are. As availability and usage of these Internet-native applications rise, people will inevitably begin to view their telephone differently. Traditional telecommunications companies have no choice but to innovate or end up a relic.

The result will be that they will ultimately only provide the network access. The pace of innovation in the software world is so much faster than it is in the network-provider world that incumbent telcos, which are used to longer product lifecycles, will find it impossible to match a company like Skype, which releases new software every quarter.

Cell Phone Pricing

Not long ago, a company such as Tivoli or Vignette was able to sell software at high prices to desperate CIOs at cash-rich companies. Those days are very over.

SaaS providers such (provider of Zimbra-hosted mail services) have adopted a pricing model lifted from cell phone service providers.

If you had to prepay for five years of cell phone service when you bought the phone, you would examine your options much more carefully than if you were just handed a free phone and a low monthly fee. Every software maker has seen the writing on the wall by now — it was originally written by cell phone companies, and what it says is “SaaS.”

Other telecom technologies, such as speech recognition, are starting to show up in integrated Web-based applications, so you will be able to — for example — fill out your time sheet by talking into your cell phone while you’re stuck in traffic.

Future Commoditization

When Uncle Sam broke apart AT&T, long distance prices began a plunge from 25 cents-per-minute to the current pricing of zero. This took about 30 years. Software makers are finding that the twin gravitational forces of SaaS and open source are moving prices similarly for undifferentiated software applications — except software makers will not be given 30 years.

Try three years — maybe. The world is flatter now, and things are moving dramatically faster.

Network providers will slowly but surely give up on providing applications to end users, as software makers run away with that prize. Wimax and more prevalent and higher-quality video chat capabilities will make us all more able to work from home when the freeways are locked up — and it will all happen much more quickly than anyone thinks.

Twenty years ago, who expected 10-year-olds to be running around with cell phones? “Bet on the innovators” is better advice today than it’s ever been.

Curt Finch is the CEO of Austin, Texas-basedJournyx, a provider of Web-based software that tracks time and project accounting solutions to guide customers to per-person, per-project profitability. In 1997, he created the world’s first Internet-based timesheet application — the foundation for the current Journyx product offering.

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