Andy’s been theming some of his talks Me Too, Me Also, Me Different for some time, and now PhoneBoy has picked up on the same theme. The point both are making is that VoIP and innovation don’t seem to be going hand-in-hand. Much of what’s being done is just replicating PSTN functionality, which is a mugs game. VoIP is a classic Innovators Dilemma scenario. A cheaper technology, which is good enough, is used to attack an incumbent provider forcing a change in the basis of competition. This diagram (linked to a full size image if you click on it) illustrates the way this works very neatly.
All markets go through these phases, or something like them, anyway. Competition based on arbitrage, which is where the VoIP market started, is a Phase 4 market. There’s really no place to go except to cheaper… What we’re all trying to do is to reset the basis of competition to functionality, recognizing that ever cheaper phone calls, while great for the consumer, are a lousy basis on which to build a business. The incumbents, however, would like the basis for competition to remain price. They’ve amortized their plants, they’ve got government regulated monopolies, and can continue to drop price as long as required.
So, why can’t the market just stay the same as it always has? Two reasons:
Starting in 1996, regulatory oversight demanded that there be a "competitive" market. Those regulated monopolies had to provide access to their pipes on a cost-plus basis to anyone who wanted to use them. Overnight there was an explosion of CLECs, and IXC’s. Fortunes were made and lost as these companies built out, up, over anything possible. Most focused on the business customer, but even so, well over 90% of the competitive carriers that were started no longer exist. Why? It was expensive to get into the business, and demand for competitive providers for basic telephony service wasn’t really there.
Moore’s Law has caught up with the telecom equipment manufacturers. When I first started in this industry, in the 1980′s, Nortel built their own CPU’s, chassis, line cards, disks, operating systems, programming languages, and applications. One of my jobs as a student was at the Toronto Labs debugging the code that lit the message waiting lamps on telephones attached to the SL1 PBX. The SL1 CPU was a card the size of a 3 ring binder. The OS was a Nortel invention. We wrote our code in BNR Pascal, a multi-tasking variant of Pascal (like C with forks). It was a completely vertically integrated system, delivering high value to customers, and able to command a high price. Today, Intel, Motorola, IBM and many others build switches based on PICMG 3 – a standardized chassis, and bus architecture – using Carrier Grade Linux, GNU tools, and off the shelf CPU’s, memory, and disks. There has been a 100x reduction in the price of telecom equipment.
So, anyone can enter the market (federal law), and advances in technology (moore’s law) have made it cost effective for… anyone to enter the market.
The third element of this heady brew is simply this — just as hardware has moved from vertically integrated architectures to horizontal architectures, SIP is driving services to do the same. The vertically integrated hardware / software combination Nortel et al used to sell has become a horizontal package of components, and distributed software and services. As I wrote about in my Voice 2.0 essay, the services market is going to decompose into directory, access, and applications. This is the evolution of the services market into a horizontal market, and it’s an important evolution because horizontal strategies allow vendors to focus on becoming domain experts, and encourage powerful ecosystems to develop. Those that cling to vertically integrated strategies will fail.
Moving back to the Innovators Dilemma diagram, it’s clear that today’s VoIP upstarts are successfully using the shift to horizontal market strategies as a means to reset the basis of competition to Phase 1. They’ve duplicated, or nearly duplicated the PSTN, and added some new features. Some are now starting to focus on Phase 2: Reliability. Smart VoIP vendors are going to stay focused on functionality for some time, using their ability to deliver inexpensive basic services as a spring board to get beyond that into value added services that consumers will pay real money for. Those that don’t are going to go the way of the majority of the CLECs.
Me too, me also? Yup. And until the market moves beyond access and directory, that’s all we’re going to get. The applications market is the Me Different market. It will take time, but it’s coming.