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The May 14, 2003 Issue Provided by System Dynamics Inc.
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Disruptive Technology in Action

Clayton M. Christensen's book "The Innovators Dilemma" introduced the concept of disruptive technologies and has been a frequent topic in these columns (see BBHR 10/26/2000 ). We're living in a world where every day we see the disruptive effects of IP communications on incumbent companies. For telephone companies, it increasingly means the end of metered telephone service.

Vonage Web ad: "$39.99 - Use your broadband internet connection for great savings every month" --> Click for larger pictureWe've previously written about Vonage providing unlimited calls to anywhere in the US and Canada for a flat fee of $39.99/month for broadband internet users. Now ILECs like SBC are fighting back by introducing an unlimited calling bundle called ALL DISTANCE, which provides unlimited local and long distance calls, plus additional features, for $48.95-$52.95 a month, depending on the state. Verizon has announced a similar plan for small business.

In Europe, we see IP companies like FastWeb bundling flat-rate telephone service to all fixed-line phones in Italy. In Japan, we see Softbank's Yahoo Broadband rapidly adding DSL subscribers and broadband phone users; their VoIP service called "BB Phone" for Yahoo! BB subscribers costs only 7.5 yen per 3 minutes to call from Tokyo to New York, and is free if both sides are using BB Phone. In April they added 184,000 ADSL subs to reach 2,547,000; users of their IP telephone service increased 188,000 from the end of March to a total of 2,162,000. NTT is now responding.

International calls are increasingly impacted by IP. Historically, they have been very expensive, but new services like telcoBlue's Internet Voice Network (IVN) service is using IP to offer savings for broadband users calling Spain, Portugal and Italy from anywhere in the world. Subscribers use a Cisco ATA 186 supplied by telcoBlue which is shipped pre-configured and plugs into an existing cable or DSL modem. This is only one example in a growing area of international IP services.

With telco voice revenue eroding, data has been one potential answer for other sources of revenue. Across the world, DSL dominates broadband service, with cable modems representing less than 40% of all subscribers. US telephone companies' early ambivalence about DSL allowed cable modems to get nearly 2/3 of broadband subscribers. Until recently, those telephone companies--focusing on near-term financial returns rather than market share--were raising the price for DSL services. Now the competitive pressures are finally being felt as ILECs are creating tiered services, cutting prices, increasing speeds and adding differentiated services. In March, SBC with its partner Yahoo! launched a 1.5 Mbps, $35/month service, and offers bundled prices that are even lower; it is said to be planning to introduce a $25 "semi-fast" DSL service in several markets soon. Verizon has also lowered DSL prices dramatically to $35/month ($30 when part of a bundle with other Verizon services) and announced a trial in Manhattan providing free access to Wi-Fi hotspots around New York City.

What's the moral of the story? The hobbyist voice technology that originated with VocalTec is fundamentally altering the traditional telecommunications world. New players and competitors have emerged and the old ones are struggling. Watching it unfold is an amazing process!

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