One of the most interesting areas in technology these days is telephony, with all its flavors: voice, video, and video conferencing. And, as far as we’ve come, we’re about to see another wave of innovation in the space.
Not only is cloud computing the mode by which these services are delivered, but also, the way they’re morphing gives us clues about what it going to happen to cloud computing itself.
Let me begin by sharing an experience that illustrates just how far we’ve come and how fast the journey has been. Ten years ago I was on the phone with AT&T sorting out something about our service, when the rep said “I notice you make a lot of calls overseas. If you signed up for our international calling plan, your per-minute costs would go from $1.50 to $.11.”
That’s when I knew a revolution was occurring. When a vendor offers a way for you to save 90% on the cost of its service to you, an enormous marketplace shift is underway.
First Skype, Now Google and Cisco
Today, I routinely make Skype video calls overseas at no charge beyond my basic Internet connectivity. By the way, the quality of the calls is far better than the landline equivalent. Imagine that: Great quality. Video. Delivered for free.
And, by the way, a few years ago, when I first started using Skype, I found a lot of people inside businesses were reluctant to use it; they seemed to regard it as “personal,” or “consumer-grade.” Today, that reluctance has disappeared. Indeed, over the past year I’ve noticed that people seem to prefer Skype to regular telephony, viewing the opportunity to do video calls as providing a superior communication mode.
So I was very interested in some developments over the past few weeks.
First, Google has integrated Google Voice into its e-mail client. Motley Fool discussed this at length and speculated on its effect upon Skype. Essentially, this boils down to “can Google Voice attract users away from Skype?”
Second, speculation mounted that Cisco might buy Skype before its upcoming IPO. Techcrunch discussed this possibility here.
And then Cisco launched its own personal videoconferencing service, Umi, designed to offer higher-quality video. Of course, many people noted that its $500+ equipment purchase price, along with a $25 per month fee, might make it more suitable for small businesses rather than individuals or families.
The Big Market Shift
To me, these developments dramatically illustrate the impact of digitization and monopoly markets.
To begin with, telephony and its video brethren are now digital offerings, completely moved away from their analog roots. The kings of analog, AT&T and its fellow telephone companies, are suffering losses in their traditional landline businesses as people shift to mobile telephony for local calls and Internet telephony for international calls. Phone companies make their real money today as mobile carriers and as dumb pipes that allow other companies digital content to flow through them. And even the mobile business has challenges as people want to use services like Google Voice and Skype on the device to talk cheaply. Of course, as I have observed before, being a dumb pipe is, perhaps, not an unenviable position to be in when the world wants to pour increasing amounts of fluid data through you.
The second interesting thing is the Google Voice vs. Skype relationship. There is no question that Skype is fantastic. But, it’s a standalone service. More crucially, it requires a separate handle (id) to use it. That means it’s cut off from all of one’s other online services. Google, on the other hand, has integrated its Voice product with its email, making it convenient to handle both with a single id. As the Fool article noted, Google can do this and give away its phone service because it helps Google sell more ads.
This point is far more profound than the Fool realizes. Digitized services tend to have marginal costs near zero. If a company has an existing successful service that can be reinforced by offering an additional digital service, it makes sense for the company to offer the additional service at its marginal cost — ie., zero. Given the very common pattern that digital offerings seem to trend toward monopoly, the motivation to add additional services to reinforce the existing, monopolistic one is irresistible, even if the move imposes collateral damage on other market players.
Even more irresistible, in fact, is to use one’s monopoly profits to damage a competitor and steal its profits. A historical example of this is Microsoft’s response to Netscape; Netscape’s browser threatened Microsoft’s dominance on the desktop. Netscape rather cheekily pronounced that its product would consign Microsoft’s cash cow, Windows, to an unimportant position as a bit player supporting the all-important browser. Microsoft, recognizing the threat, offered its browser for free, which it could easily afford due to its monopoly on the desktop. Netscape, which sold software for its revenue, quickly ran out of bullets and shortly thereafter faded into history.
Microsoft, having learned the playbook, has attempted to extend the pattern. Its online portal, MSN, was its attempt to damage Yahoo. That one hasn’t worked out so well, though. Yahoo makes its money in the same way as MSN; moreover, there is no natural tie between Windows and MSN, so there is no synergy in the link. In effect, Microsoft has had to fight on a level battlefield. One might observe, though, that having monopoly profits enables investment into a market long past “rational” levels — can anyone believe that any other company would have sustained the ongoing horrific losses of the Microsoft online division, except one that has a torrent of cash flowing out of another business unit?
Turning to Google Voice, Google’s plan to link it to Google mail fits the tie-in model. Indeed, the initiative is an extension to what is already a tie-in product, since Google’s monopoly cash cow is its advertising. Many people criticize Google as being a one-trick pony, because the place it makes *real* money is its advertising, with all the other offerings being money losers. As one might predict, I see the situation differently. Google may be a one-trick pony, but what a trick!
And, given the economics of digital offerings, anything Google can do to increase people’s interaction with its online services serves to cement and extend its monopoly profits. While its competitors suffer, its users benefit from services being provided for free or near-free.
Which brings me to Cisco’s Umi offering. This is likely to be a non-starter, and it reflects the uncomfortable position Cisco is in — which is described brilliantly in “The Innovator’s Dilemma”. Cisco has long prospered selling extremely high capability — and eyewateringly expensive — enterprise- and carrier-class gear. It predicts that video will be the huge driver of Internet traffic over the next ten years. It’s offered high end videoconferencing products that cost hundreds of thousands of dollars, providing startlingly detailed video. But that’s far too expensive for consumers.
According to Clayton Christensen, author of “The Innovator’s Dilemma,” companies that succeed in a high end market invariably assume that a lower end market should desire the same quality of products as the high end. Consequently, they end up delivering highly capable, very complex, expensive versions of the high end products to lower-end markets. This ignores the fact that lower-end markets don’t want complex products and are far more price-sensitive than high-end markets. Christensen characterizes this dynamic as incumbent vendors overserving lower end markets. As a result, their offerings invariably end up being rejected by customers, who turn to products that the incumbent views as cheap and shoddy. In other words, Skype.
Instead of Umi, Cisco would be better served recognizing that consumers are likely to stick with the inferior — but free — Skype, and working on tying Skype into its high-end video conferencing products, thereby using Skype as an onramp for at-home workers to participate in enterprise-class videoconferencing. Integrating Skype into corporate identity management systems would be one step. Another would be to sell a plug-in to Skype that improves its video quality to nearer Cisco’s enterprise-class product.
Turning to Google, I think the integration of Google Voice into Google mail is brilliant. The article reference earlier noted a huge swell of calls from the U.S. to other parts of the world on the launch day of the service.
What Google should do is carry more ambition than displacing Skype, which, given its installed base, will be hard work. A better approach would be to create a bigger vision for Google Voice that gives people more of a reason to displace Skype. In other words, make it better than Skype, not just a me-too Skype. Google is clearly aiming its products at businesses, so it should tune Google voice to be a business offering, rather than a product similar to Skype.
Google should extend Google voice into an online PBX product integrated into its other business offerings. There’s an enormous profit pool represented by PBX hardware and software that could be drained by Google. This shift, by the way, would increase engagement with Google and thereby support its monopoly offering. And, given the economics of digital offerings, Google could probably give away or charge extremely low fees to use the PBX, making its offering compelling to small businesses.
In terms of what this implies for cloud computing, it’s obvious that there is enormous money available substituting highly scalable digital offerings for their analog counterparts. Automated cloud computing can be delivered far more cheaply than traditional manually operated infrastructure, whether located in-house or at an outsourcer. Look for cloud providers to present enticing offers designed to entice companies to switch to less expensive computing methods — because the providers can make money at prices unsustainable for traditional methods.
Bernard Golden is CEO of consulting firm HyperStratus, which specializes in virtualization, cloud computing and related issues. He is also the author of “Virtualization for Dummies,” the best-selling book on virtualization to date.
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