The ultimate disruptive technology

FRAMINGHAM (10/29/2003) - If I send you a fax, is it a data call or a voice call? If I send you a voice message over the Internet, is it a data call or a voice call? If it's a data call, then there are no access fees involved. If it's a voice call, fees are involved.

A fax is obviously a data message, but historically it traveled over the voice network. A voice message that travels over the IP network is obviously a data call. Do you tax the technology or the application?

Comcast Corp. is going national next year with its consumer voice-over-IP (VoIP) service. If that is successful, then Comcast will go after small businesses next. The cost of developing VoIP is half that of circuit-switched technology - and, for now, there is no access fee. The cable industry will argue that because this is a data technology, no tax should apply. The telco industry will argue that because the technology is being used for a voice application, it should be taxed. (If it looks like a duck and quacks like a duck . . .)

It's been possible for the past five years to have absolutely free calling - if you wanted to send the call over your PC using a high-speed line and both you and the person you were calling had the right software. Kind of kludgy, but it worked. What if you put that same type of technology on steroids and stick it at the head end of a cable carrier? The carrier then can offer unlimited long-distance and local calling for peanuts per month.

But there is a whole other "pony in this pile." Want to do videoconferencing from home to home? How about video e-mail? Want to check your voice mail from your Internet connection? With VoIP technology, which ultimately will offer more features and customization options than circuit-switched technology, you can.

The push to cable modems and high speed will help the movement to VoIP. SBC found that its alliance with Yahoo spurred users to upgrade to high speed. Trust me, once a household goes high speed, it ain't ever going back. Furthermore, these high-speed users are going to discover quickly that they don't really need their telco or cable company - they will be able to make free calls just using these carriers for their high-speed connections.

The best single venture-capital investment I ever made is a company called Sonus Networks Inc., which pioneered VoIP. I bought the stock when the company was just starting up at a price of something like 80 cents; I sold it three years later for $80. It was obvious to most venture capitalists that the telcos were going to adopt this technology, and that it was inevitable that this type of vendor would have the upper hand.

Clay Christensen of Harvard Business School writes elegantly about so-called disruptive technologies. He says they don't start out as much of a threat and are rarely used by Fortune 500 companies close to the home office, although they're sometimes used in remote-office boondocks. Major vendors too often ignore these "toy" technologies because adopting them would cannibalize their cash cow products. But as these "toys" get better, they find their way into the mainstream. VoIP is exactly this type of technology. It was a pain in the butt; it didn't work all that well; it had some limitations - but it kept getting more vigorous. That's about where we are now.

Five years from now, you still might have a circuit-switched telephone in your house, one that does not need external electricity - a "life line" phone that you keep in the closet and for which you'll pay $9 per month but hardly ever will use. So in the short term, the cable guys win - but then they start to lose, too. The telcos adopt the same VoIP technology as the cable guys, but they do it too late and lose even faster. And the consumer begins to implement a free calling solution on the infrastructures that both the cable companies and telcos provide, and uses both carriers for their bodies (cheap high speed) and not their brains (switching). Ya gotta love it.

Anderson is senior managing director of YankeeTek Ventures, a Cambridge, Mass., venture capital fund for early-stage technology companies. He can be reached at handerson@yankeetek.com.

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