Wednesday, May 18, 2005

VoIP - Plan A vs Plan B

I just read an excellent article at on the state and future of VoIP in the US from both a consumer and business perspective. Very insightful stuff. Rather than just link to it (which I also did) I'm sharing the whole thing here because I think it's that good. Although it was written for the 2003-2004 timeframe the premise still holds true today....

VoIP - Plan A vs Plan B

2003 was a remarkable year in the US for voice over the internet (VoIP). If you needed a label for the events of the year, "Collapse of Denial" would be a good one -- after a long period of relative inaction, the FCC and the state regulators are suddenly pushing hard for a regulatory framework. The question is no longer whether voice is going to become an internet application, but when.

"When" could still be a very long time, however. The incumbent local phone companies -- Verizon, SBC, BellSouth and Qwest -- have various degrees of interest in VoIP, but are loathe to embrace it quickly or completely, because doing so means admitting to everyone -- shareholders, regulators, customers -- that both monopoly control and artificially high voice revenues are going away. (The fact that this is true does not much lessen the pain of saying so.) As a result, they will likely try to convince regulatory agencies, both the FCC and the states', to burden competitive VoIP firms like Vonage with additional costs and rules, while delaying their own offerings.

Complicating this de facto Plan A, however, is the fact that VoIP isn't a service, it's just a set of protocols, meaning that competitors don't have to set themselves up as upstart phone companies to deploy VoIP. If Plan A is "Replace the phone system slowly and from within," Plan B is far more radical: "Replace the phone system. Period."

Where Vonage and a number of the other VoIP startups present themselves to the customer as phone companies, emulating the incumbents they are challenging, you can think of Plan B as the Skype plan. Skype isn't taking on the trappings of a phone company; instead, it offers free two-way voice conversations over the internet (they aren't phone calls, for the obvious reason) between users who have downloaded and installed software onto their computer. (Other versions of Plan B include instant messaging clients that let users talk, not just type, and software like shtoom, a set of VoIP tools for the Python programming language.)

The Plan B strategy is simple: "Familiarity is the enemy of progress. Forget backwards compatibility, and concentrate on offering services the traditional phone companies can't touch." For example, Skype recently added user-defined conference calling, a kind of cross between call waiting and conference calling, so that when someone calls while you're on the phone, you can simply turn it into a three-way call, a pattern more like joining a conversation at a party than today's cumbersome conference calling.

Where Plan A is a fight between incumbent and upstart phone companies, Plan B says that we no more need a phone company than we need a text company. Email and weblogs and IM all use text -- why not use voice in a similar variety of applications, and with a similar lack of commercial bottleneck?

Plan A and Plan B are caricatures, of course. Vonage is experimenting with un-phone-like features like mailing out voicemail messages as audio file attachments, while Skype is talking about ways of interfacing with the traditional phone network. Nevertheless, the tension between the two plans is real: modification or replacement of the current phone system. The litmus test is emphasis -- Plan A emphasizes for-fee calls to ordinary telephones, with free computer-to-computer calls presented as a bonus, while Plan B emphasizes free calls as the main event. And much of how VoIP unfolds will have to do with regulations written in 2004.

The End of the Three-Part Deal

The official tradeoff in current telecom regulation is service guarantees in return for monopoly control. Over the decades, though, a third part of the bargain has arisen. Phone companies tolerated high taxation as well, in part because it guaranteed continued freedom from competition. As a result, telephony is treated as a vice instead of an essential service -- the taxes and surcharges on a phone bill are more in line with the markup on alcohol and tobacco than with gas or air travel.

However, monopoly control, essential for the current bargain, is ending. The cumulative threats of competitive local phone companies, the decrease of second lines due to DSL and cellphone use, and now VoIP have made the old deal unsustainable. The rise of a competitive market seems conceptually simple, but most parts of the US have had a phone monopoly for longer than they've had indoor plumbing, so the possibility of phone service without the incumbent phone company is hard for many observers to understand.

Even now, 20 years after the breakup of Ma Bell, some commentators have criticized VoIP by noting that the phone company often provides the high-speed DSL service that carries the VoIP traffic. "Isn't VoIP simply a parasite technology?" goes this line of thought, on the assumption that by undermining inflated voice revenues, VoIP will destroy the DSL business as well.

This question makes no sense in a market economy. With railroad bankruptcies in the 1940s, no one thought that the tracks would be ripped up and sold for scrap. Similarly, the question of whether the incumbent phone companies can survive if VoIP pops the bubble of voice revenues is separate from the question of whether the wires in the ground will continue to exist. Someone will sell data transmission over copper wires, but there's no reason it has to be the existing phone companies, in the same way that someone still runs trains from St. Louis to Chicago, but it isn't the B&O Railroad anymore.

Plan B: Saving Plan A?

With their monopoly ending, incumbents have no choice but to embrace VoIP someday, because of the cost savings and the superior flexibility. However, they may succeed in significantly delaying that someday with the strategy of attacking their competitors through the regulatory system, while slowing their own deployment of the technology.

Plan B, however, is resistant to this strategy, because while it creates the same value as a phone call, it does so without any of the mechanics that regulation attaches to. No dialing, no phone numbers, no phones even, and, most ominously for the incumbents, no charge to the end user. Vonage may be competition, but they don't undermine the idea of charging the user the way Skype or Yahoo Instant Messenger do.

If you had to bet on the impulses of the phone companies and state regulators, your bookie wouldn't raise an eyebrow if you put everything on their trying to kill every Plan A company in sight. We've seen this story before, as when the music industry, unable to grasp the profundity of a technological change, killed Napster rather than trying to bargain. This in turn sent the users to Kazaa and Gnutella. The RIAA has now spent far more time, energy and money going after these services than they ever did on Napster, with distinctly less decisive results.

Similarly, the phone companies are overestimating the threat of Vonage (which also wants to charge users to talk to one another) and underestimating the threat of Skype (which doesn't.) And yet if they succeed in killing off their Plan A competitors, they will strengthen the far more radical challenge from Plan B.

This is the big wild card of 2004. It's clear what the consumers want -- the maximum amount of experimentation with all sorts of models, and not being forced to choose between new features and backwards compatibility. However, telephony regulation is notoriously resistant to user demands -- neither the FCC nor state regulators are elected, and neither group is very responsive to citizen action.

The only thing that might save Plan A from death by delay is evidence that users are adopting Plan B in large numbers, using the internet for voice applications completely outside the framework of telephony as we've known it for more than a century. We should all hope that happens, because if wide adoption of Plan B convinces the regulators and incumbents to acclerate their VoIP offerings, the users benefit. And if it doesn't, Plan B will be all we get, so we may as well start experimenting with it now.

First published February 26, 2004 by Clay Shirky


Blogger Terry Johnson said...

Great article Michael. One point that I have not heard much about in the VoIP debate is how the infrastructure will be maintained when (not if) the traditional communications providers loose traditional revenues. This is especially uncertain with "plan B".

There is copper, and now fiber, in the ground. There are CO's that handle not only call switching, but internet functions as well. Until we replace those critical communications components, they have to be maintained and upgraded.

On another note, Plan B gained a little momentum today with Yahoo's announcement that they will offer enhanced voice via thier IM service.

1:02 AM  

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