September 25, 2005

From text to Skype, we are all part of the mobile revolution

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Gordana’s lifeline is a pre-paid mobile phone. It is the one thing she trusts.

It is her link with the outside world, her banking system, it allows her to map her route into Ireland and it is the only way of circumventing the endemic corruption that blights her homeland.

It allows her to time travel, to dream, to plan and to develop. More than anything, it allows her to communicate with her mates in Cork, checkout the job situation and see whether there is a spare room in the Ballincollig flat.

We underestimate the enormous impact that prepaid mobile phones have had on the world. Initially, prepaid was developed by T-mobile of Italy to allow Italian teenagers to be in constant contact with their overprotective parents.

However, the innovation’s major impact has been felt by the mobile, expectant young workers of central Europe’s poorer countries. For over 100 million people, prepaid mobiles have contributed more to individual autonomy than the effect of joining the EU or any other big political initiative.

In countries where the fixed-line system is inefficient and expensive, where the upfront costs of getting a post-paid phone are exorbitant, where the credit system does not exist, where cash is king and where the banking system will not entertain extending credit to individuals at rates under 20 per cent, the prepaid phone is irreplaceable.

At the beep of a text, expectant emigrants can pack their bags and leave or head home. Migration by text is something that we have to get used to, and it has been made possible by the prepaid mobile.

Assessing the real-life impact of innovations like the prepaid mobile is fraught with danger, not least because there is a natural tendency for humans to overestimate the changes that technology affords.

For example, when I was a kid, everyone in our street wanted to be an astronaut. This was driven by the early 1970s fascination with travelling to the moon inspired by the lunar landings. Magazines, David Bowie albums and Stanley Kubrick movies were full of references to men living on the moon by 2001. This miscalculation is an example of how we can get carried away by the �white heat of technology’. So let’s be careful.

However, as a concrete example of how communication technology is affecting everything, just look at the impact the prepaid mobile and the internet have had on the Irish rental market.

It is now a well-accepted fact that the rental market in Ireland is dependent on at least 30,000 to 40,000 immigrants arriving each year. It is dependent on these immigrants talking to each other, sharing rooms and keeping rents firm.

To get an idea of how this works, I write this article from a city centre internet cafe. If you want to see the future for the rental market, and particularly the foreign component that will drive it, spend a few hours in one of these internet cafes.

A Polish couple and a South African bloke beside me are looking for a flat. A few minutes ago, they were on the net – on the wonderful www.daft.ie website.

They were looking for a two-bed, but couldn’t find value. The Polish girl suggested that she had a mate in Krakow who was considering moving to Dublin.

She texted her. Within three minutes the answer had come back. Yes.

They logged on again, took the three-bed flat, topped up their credit and left.

Instantaneous transaction driven by prepaid mobiles.

Now think about this transaction 10 years ago. It would have taken ages.

There would have been an estate agent in the middle taking his cut. But most importantly, the decision to move from Poland to here would have been framed in the slower world of fixed lines or no real communication at all.

When you can text someone in Poland as you text someone in Wicklow, distance dies – or at least the perception of distance dies. As a consequence, the idea of popping over to Ireland on a discount airline at an unpopular time of day, just to check things out, becomes the norm.

The reduced cost of communication has in itself accelerated the process and in so doing has kept a floor on Irish rents.

Now let’s look at the next big thing in communications – Skype. Last weekend, a friend advised me to log onto www.skype.com. He was rhapsodising about this technology that allows you to call anywhere in the world for free from your computer. And indeed it is true!

Within five minutes I had downloaded a package that – for the McWilliams household at least – spells the end of Eircom.

Yes I will use Eircom to make local calls, but for anything else, Skype will get my business. As you can also call people who do not have computers for half nothing using Skype, it is flexible. For this service you have to pay a small amount, �10 for 10 hours of foreign calls.

This is where Skype makes its money.

For the business market, Skype enables a company to hold conference calls with foreign suppliers for nothing, and allows the entire network of a multinational to be hooked up for free.

The technology behind Skype – a Luxembourg company with only $60-odd million in revenues and 54 million customers � is VoIP, or voice over internet protocol. VoIP’s self-evident potential persuaded eBay to pay $2.1 billion for it, with an additional $1.5 billion if certain targets were met.

The question is whether we are back in the silly world of the late 1990s, where internet mania caused billions to be spent on ultimately underwhelming technology.

This time it does seem different. Skype’s crucial selling point is that it does not matter where you call or for how long – it is all free. This means that the entire pricing model of the old telecoms world has been torn up.

How can Eircom survive in this market? As the Economist magazine contended last week, Eircom, like other telecom giants, has a choice. It can ignore it, disrupt it and hope that it goes away. Or it can embrace the technology and find new ways of harnessing its potential – even if that means cannibalising its existing revenue model.

It also means, as VoIP is, or will be, also available on mobiles, that the mobile operators – who are hugely dependent on expensive and soon-to-be-redundant voice technology – will want to be thinking about new angles.

For consumers it is a fantastic innovation. But for it to be available to all, broadband needs to be properly rolled out either as fixed line or wireless broadband. Not to do so would leave Irish business at a great disadvantage.

We are a trading nation that depends heavily on contacts with the rest of the world. Anything that might retard this will be bad for the country in general.

As for lifestyle changes, prepaid VoIP credit for mobiles will become the norm, and, at �10 for 10 hours, it will further cut the cost of communication. For starters, expect texting to disappear as quickly as it appeared, as free calls over your Skype-driven new mobile become the cheapest way to communicate.


  1. Tom Farrell

    Hi David,

    Glad that you highlighted the eBay/Skype deal – noteworthy
    for a number of reasons so allow me to build further on
    your article.

    First, the technology disruption at work here is ‘IP’ which
    stands for ‘Internet Protocol’. Internet Protocol (IP) is
    the method or protocol by which data is sent from one
    machine (computer, phone, etc.) to another on the Internet –
    think of it as the underlying communications ‘plumbing’.
    It has been defined and specified by the World Wide Web
    Consortium (W3C), i.e. a universally accepted de facto
    standard that is not going away. Once a machine has an
    IP ‘address’, in theory, it has the potential to transmit
    and receive application data from any other machine on the
    internet (hence, the usual guff about intelligent fridges,
    cars, heart pacemakers, etc having IP addresses leading to
    universal ‘connectivity’).

    Second, since IP is the underlying ‘transport mechanism’ on
    the internet, it is quite trivial (heresy to the techies
    out there I know) to run any type of application traffic
    over it. One such application is basic ‘voice’ itself,
    hence the term ‘Voice over IP’ or VoIP. The technology
    achievements of Skype are not significant (another heresy
    to the techies) but the business model is clearly
    disruptive, i.e. VoIP traffic on the internet is free of
    charge. They could have charged for it (just like
    newspapers can charge for online access to their content)
    but decided not to apart from traffic that requires
    transfer from the internet to the traditional telephone
    networks (e.g. calling someone’s Eircom number from your
    Skype account) – this is the revenue generating portion of
    the business as you point out. Why does Skype provide
    internet calls free of charge? At first glance, one needs
    to look no further than the founders, Niklas Zenströmm (age
    39) and Janus Friis (age 29), to understand why. These are
    the same individuals who built the infamous Kazaa free
    music filesharing website which was shut down
    controversially when the music industry unleashed its legal
    fury. Zenströmm has been quoted as saying that ‘the idea of
    charging for calls belongs to the last century’. The Skype
    voice business model disruption is a replica of the Kazaa
    music business model disruption.

    Third, the rationale for the eBay/Skype deal is indeed
    dubious. There are limited synergies (using voice for
    auctions, increasing geographic reach), the price is very
    high (at €2.1bn the company is valuing Skype’s 54 million
    users at roughly €39 per subscriber), and the competition
    is increasing (Google, MSN, and Yahoo! have added VoIP
    functionality to their messaging products). Personally, I
    think the price tag was outrageous but Meg Whitman (CEO of
    eBay) received similar criticism for the PayPal acquisition
    (online payment system) and that has turned out to be a
    raging success ($700m revenues in 2004) nonetheless. Time
    will tell.

    Fourth, I also believe that the traditional
    telecommunications industry (approx. $1trillion) will be
    wiped out within 10 years due to technology (IP) and
    business model disruption. However, I also believe that
    some of the ‘traditional’ telecom companies could be
    surprise winners in the new world.

    To understand why, let’s stand back and look at this from a
    customer perspective. Ideally, one wants to maximise
    the ‘free’ traffic portion (i.e. IP traffic) of one’s
    overall telecom needs (TV, voice, music, surfing the
    internet, radio, etc.). In a lot of cases of course, you
    need to rely on someone’s private network (e.g. wireless
    internet access unlikely for a long time outside
    metropolitan areas) so you will have to pay something for
    this access – but after that you will utilise ‘free’
    services. For most people this means having seamless
    broadband internet access from the home to the street to
    the office as we go about our daily lives. This
    requires ‘wireless’ local access wherever you are located
    during your day (e.g. in a café, in the office, at home)
    through which you can access the ‘wired’ internet so you
    can communicate with anyone/anything anywhere in the world.
    So who is best positioned to offer this? Clearly, it is
    those telecom providers who have a ‘wireless’ (e.g. mobile)
    capability and a large ‘wired’ geographic presence (in
    order to move traffic from one machine to another and
    access the global internet).

    Maybe this is one angle explaining why Telecom Italia have
    reversed their decision to flog off their mobile arm (TIM),
    why BT have aggressively launched BT Mobile
    and ‘Bluephone’, why every telecom executive in the US is
    shaking in his/her shoes because cable companies who
    already offer broadband internet, TV, radio, telephone in
    the home ($29.99 per month) are now looking to
    acquiring ‘wireless’ capabilities, why the rise of mobile
    virtual network operators (MVNO’s) gathers pace, and why
    the market puts such a premium on VoIP providers such as
    Skype – it is a land grab game driven by ferocious network
    effects. Finally, let’s not forget our friends in Stephen’s
    Green…if they have enough courage and vision (and the
    Meteor acquisition, while not justified for these reasons,
    is ironically a step in the right direction), then dear old
    Eircom could surprise us after all. So the ruthless purging
    of ‘boring and traditional’ fixed line telecom assets
    during the 90’s (granted, de-regulation driven too) may not
    be so wise after all. Irony indeed.

    Paul,
    To your point about Skype being available in the US…if you
    have internet access, you have Skype access…that’s the
    universal beauty about it. You have it so happy free
    calling!

    Sorry for the overly lengthy thoughts but I think this was
    a very significant event for the ‘digital convergence’
    phenomenon.

    Rgds,
    Tom

  2. Garry Kelly

    Hi David,

    Interesting article, hadnt thought about it in that way
    before.

    Just a few more comments on skype and where the industry is
    heading.

    First thing which is interesting about Skype is where it
    was developed … Estonia… thats probably worth an
    article or 2 in itself :)

    I would agree with Tom’s comments but Skype have really
    innovated both technically and with the business model.
    Skype have developed an excellent product… it works
    flawlessly, no bugs that u get in ‘free’ software, its
    simple to use, in short its as easy to use and as reliable
    as a phone, and its free.

    Theres been technology to do this for a few years now but
    Skype developed a great piece of software and built up a
    user base in a very short time.
    Theres loads of other outfits selling similar stuff (or
    trying to give it away) but yet one company is worth
    billions and has won. Some of the also rans are startups
    and will struggle, some are big outfits e.g.; Microsoft’s
    MSN messenger has had VoIP capability for I think a year or
    so. But yet a startup won. Why?

    The gap between being the best (or being first) and being
    just another vendor is huge and seems to be getting bigger.
    The difference may not be that big in terms of quality, it
    may be just perception, but its huge in terms of reward..

    Particularly in software/internet services … the winners
    are Skype are on VoIP, eBay for auctions, Google on
    advertising via search/email, Microsoft on Office software,
    and Apple on music via iPod/iTunes.

    It’s winner take all and the game is global, it doesnt
    matter whether you live in Ballymun or Bangkok, you’ll
    still download the same software …

  3. Paul Rux, Ph.D.

    David, I plan to find out if Skype is availabe here in the
    U.S.A. From your description and analysis of it, Skype
    seems like the next step.

  4. Davey Ahern

    Hi Guys

    A couple of good points raised there, particularly with
    regard to Eircom’s position. I feel the short-term
    benefit they are receiving from dragging their heels on
    the unbundling will come back to haunt them. In this
    small island we already have two wireless broadband
    providers established, as opposed to zero in the UK (A
    market where there is an economy of scale which actually
    justifies the start up costs).

    The reason? Eircom have made it viable by squeezing every
    last Euro out of the broadband market, they’ve even forced
    local operators to lay fibre around Dublin, is this in
    their long term advantage? I think not.

    The long and short of it, is that Eircom will end up with
    competition in the bandwidth provisioning market than they
    need. So what’s left? Services?

    Eircom have squeezed that one dry too, they’ll still
    charge you 9 Euro a month for renting a phone which costs
    5 if you let them, they’ll still charge you unheard of
    (outside this fair isle) line rental charges, and to top
    it all off, they’ll cream off what’s left in your pocket
    on local /mobile /international calls.

    The result? You have operators such as http://www.freespeech.ie
    offering free VOIP calls ( using SIP network switching as
    opposed to the poor service provided by application layer
    calls provided by Skype) . You have triple play operators
    like http://www.magnet.ie offering phone / broadband / tv.

    Bad enough, but when you consider that technical
    developments mean that you can buy hardware for 100 Euro
    which gives you a small office soft switch, you have the
    bandwidth, you have the services, you have all the
    hardware you need, what will Eircom’s lucrative SME sector
    do? Save money, first off.

    So the incumbent loses it’s advantage in data transport,
    and then loses it’s edge in service provision, there is no
    longer any technical requirement for their
    installation/expertise, what do you get?

    Well, we might just get some competition.

    Hallelujah!

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