Ruminations on Telecom and the Economy

Remember MCI Friends and Family?

Does anyone remember the powerful ad campaign by MCI entitled: MCI Friends and Family. It was essentially a loyalty program, designed as a way to draw consumers into the MCI long distance network. Customers of the Friends and Family plan would get discounted long distance for calls to up to 20 other MCI customers in their "Friends and Family" circle. The program was designed to keep customers on the MCI network in the face of growing competition in the consumer long distance market. The thought was that once customers were a part of the friends and family network, they would be reluctant to switch carriers. It worked form a while, until the competitive dynamics in LD made the "everyday low price' strategy the basis of price competition. Competitive markets always drive margin out of commodity services.

So lets think about cable and the VoIP market. What if cable operators think about voice as less of a stand-alone service and more of a churn reducing loyalty program. What happens if the cable companies get together and offer a "Friends and Family" program for broadband customers. We can imagine the program might go like this" Sign up for voice service with (name your cable company) and you will get free calling to any one of your "Friends and Family" on the nationwide cable broadband network. So say you have family served by Comcast and you are on Cablevision in New York. Now both of you have a stronger reason to sign up for cable broadband than you might have otherwise. "Hey mom, guess what, if you sign up for the cable high speed data service all your calls to me and the rest of your kids are free." Sounds like a winner.

What happens if basic voice services (the ones referred to as a commodity by the CEO of Qwest below)becomes a tool for customer loyalty and retention, rather than as a revenue stream, for the cable operators? If voice services are commodities, and there are multiple providers (cable companies, RBOC's DSL operators) should anyone be able to maintain a 40% + EBITDA margin? Let the race for value-add in voice services begin!

Voice is a feature; not an application

Over the last several years, there has been a discussion in the technology community about whether voice should really be viewed as merely an application (like email) that should ride over ubiquitous broadband pipes. This has been a part of the rationale put forth by folks in the VoIP market (players such as Vonage) who would like to take the voice service and separate it from the network provider and sell it as a stand-alone service.

In the spirit of eating ones own dog food, this is exactly what I have done at home. I subscribe to Covad for my DSL service and have a second line from Vonage. In this instance, Verizon is totally out of the loop as a consumer service provider. Vonage essentially offers a copy-cat voice service package at a lower price point than Verizon. Sure there is a web interface for billing and messages, but the feature set is essentially identcal to the one I can buy form an RBOC. So the basis of competition is price alone. Nice start, but clearly version 1.0 stuff. Nothing revolutionary.

I am still waiting for the innovators who will begin to realize that voice is not an application, but merely a feature. This would signal the beginning of the real battleground for the voice market. Rather than packaging the same old local, long distance and advanced features together, why not create something completely different. Why not integrate voice as a feature in another application. Let me provide a simple example: I like my Real Player and love compiling playlists and burning CD's. Wouldn't it be interesting if I could play music in the background on a voice connection and compile a playlist with my friends in Chicago. In this instance, voice is merely a feature in a collaboration application from Real Networks.

There are encouraging signs that the RBOC's are starting to get it. From Today's NY Times "People are starting to recognize that in the consumer and small business markets, we are a commodity," Richard C. Notebaert, Qwest's chairman and chief executive, said. "Dial tone and basic features are a commodity, and we have to manage our business differently than we did in the past."

That's right, dial tone and basic features are a commodity. Lets stop thinking of voice as an application and start unbundling those commodity features and building them into some useful applications.

AOL, IM and VoIP

Call me crazy, but I always thought that AOL was really better positioned as a communications company, rather than a media company. Afterall, the primary value AOL users derive from the service are Instant Messaging (IM), email and chat -- all essentially communications applications. Now that the AOL service is deep inside a major media comapny, one can imagine that most of the strategic thinking about the company is how to leverage the media assets of the parent to create value for the online service. Conversely, the online service is thought to be a good source of new subscriptions for the Time Warner media properties, as well as providing an alternative channel for ad delivery. Not quite the highest and best use for a major communications network.

So, what if AOL decided it wanted to become a communications company (or some bright buy-out group decides to acquire AOL and use it as a platform to enter the consumer voice market.) Now, these fellows then decide to buy Vonage (or partner with a service provider such as Level 3) to offer all you can eat voice service with all the advanced calling features and web interfaces. Hey, throw in the acquisition of Covad, to provide a nationwide DSL platform to provide an nationally branded broadband/VoIP service and you get one interesting opportunity. I would hazard to guess that the market value of an AOL as communications company, offering a broadband/VoIP service would be substantially higher than the current depressed valuation currently attributed to the AOL as media play. Food for thought.

Another voice in the choir

After spending the better part of the last few years, reading various online and offline publications, anlayst reports and Blogs I decided that it was time to add my own voice to the discussion. This Blog will serve as an outlet of sorts, through which I will share thoughts, business ideas, interesting readings and other observations on the telecommunications markets and the economy. Of course, there may be the occasional political side-track. But I will try to keep this as clear of random thoughts as possible. Here we go!