Phil Wolff asked me via IM what I thought about this Booz Allen Strategy + Business article on ‘Format Invasions’, as it relates to Skype. I’ll post my thoughts here in public, though.
To save you the effort of actually reading the article, the essence is that industries are susceptiple to invasion by new entrants wielding a “new format” or value network that has lower intrinsic cost. Many examples are given, such as Southwest Airlines vs incumbents; Toyota and lean production vs incumbents; and so on. It parallels Clayton Christensen’s Innovator’s Dilemma, but has different dynamics as the innovation is not a technology one and isn’t protected by intellectual property. It is largely a matter of values and “delivery technology” — the art of executing a particular way of getting the same customer outcome with fewer resources.
Superficially Skype would appear to fit the pattern of the article, and telcos would be wise to follow the advice. The problem is this. Skype doesn’t have any new format revenue. So far, all the revenue comes from PSTN interconnect services, and services like voicemail which have been constructed with legacy centralised PSTN-alike cost functions. It’s a bit like Southwest Airlines running a network where they give all flights away for free — unless they happen to compete on a route where American or United have a service, in which case they charge.
So until there’s a “real Voice 2.0 company” with revenues from presence, transaction integration, social networking, or some other such innovation, the business gurus’ advice is somewhat hard to interpret in the context of Skype. Furthermore, we have a more complex situation. Traditional telephony bundles connectivity rental with voice service. In the new model people tend to buy all-you-can-eat connectivity and then run “free” voice service. So there isn’t an apples-to-oranges fit. You’re also seeing a split of a once unified industry into two at the same time.
All I can say really is you need to hire a really good consultant to navigate you through the strategic maze ;)
Posted by Martin Geddes at 10:07 PMTrackBack URL for this entry:
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Take a look at Barry Nalebuff's description of why Honest Tea is a beverage Coca Cola cannot compete with -- any low sugar drink must be made by another company. Some companies have very serious flaws in their business models.
Posted by: at December 19, 2005 05:20 AMBeside direct revenues from interconnect you seem to forget the other source that makes Microsoft the most successful company in earth...Sell software to Hardware makers...
It seems like Skype had already a revenue from selling to plantronics&co.
Actually, I think software product like Skype could be the Windows of Pocketable Nano-computers ; selling to all the HTC's of the world to morph Nano-computing devices as powerful communicator. The damn revolution of Skype is for me the Productization (as a Software Product on a PC) of a century-old pure service (as a Network Service with a dumb Terminal...)
Posted by: at December 19, 2005 07:40 AM
What I think is missing from your analysis is the second order disruptive nature of Skype. Skype unlike other VoIP providers (as low as other VoIP vendor marginal cost per incremental user may be) has essentially zero margninal cost per incremental user. Other VoIP providers (e.g SIP based) still have incremental directory server and server access costs per additional user so consequently have some scaling costs. Because Skype uses a distributed directory that relies on the distributed use of user resources for directory services, Skype has no real cost associated with base services growth. It's the Napster P2P model vs. the Kazaa P2P model.
Consequently, any revenue streams that Skype can generate per user are pure profit and not essential for survivability of the Skyposphere. They don't need to figure out how to monetize basic presence, transaction integration, social networking in order to be profitable. They just need to figure out what services people are easily willing to pay for. PSTN connectivity is one of those easy sell services; maybe some of the transaction integration and social networking services will be easy to sell also. The point is though that they don't need to figure out how to monetize basic services to survive. Nor do they have to rely on the standard Web 2.0 playbook for profitability: advertising support. So they don't need to be your "real Voice 2.0 company". They're well beyond that and that is profoundly disruptive.
Posted by: at December 20, 2005 08:10 AM