VOIP 101 - On Skype, KaZaA, Napster and How We Deal With Change

Back to the The world will change now inevitably prediction. There is still the matter of connecting a call made on a computer to a telephone on a switched network, or vice versa, which has probably blunted much of the impact that Skype could have had to date. There is no getting around incumbent telecom companies if Skype is to be truly competitive as a telecom alternative and not just a voice IM service. And this is where it starts to resemble dragging a parachute behind a sail boat - in nautical circles, they call that a sea anchor, but I digress. So what about the impact on troubled telecoms - well this competitive shot across their bow in August 2003 caused them to gird their loins and prepare for battle with their own VOIP offer, which they had already had under development for many years, given that they are the reigning dominant force in telecom. Oh wait, there I go with my fantasies again! In fact, the telecoms were using VOIP to lower their costs and increase their margins and support their old business model. Under competitive pressure, they turned to Congress and state legislatures for regulatory relief.

Changes in technology necessitate that we update these rules if America is going to be competitive in the face of global competition. Foreign companies like Skype out of the Netherlands did not exist a few short years ago. Skype has signed up 40 million customers - 10 million in the U.S. alone. This is significant because this is a service that is siphoning traffic away from our own domestic carriers. This is a service that we cannot tax, cannot regulate, and cannot control. Make no mistake about it - even if you tried to regulate it - others would pop up to fill the void. This is the same thing that happened to the music industry when Napster was shut down. A half a dozen other peer-to-peer providers jumped up in its place. Skype was created by the founders of Napster. This underscores the need for us to update our laws so our domestic carriers that employ U.S. workers can compete in this world of global telecommunications. The investment in broadband this bill will bring is critical to our competitiveness.

From yesterday's 3-page statement of Sen. Ensign, concerning his new telecom dereg bill, alternately dubbed the Free Market Telecommunications Framework Act of 2005, or in his summary, The Broadband Investment and Consumer Choice Act. Take your pick.

So, is it an outdated regulatory framework that keeps telecom companies down? Or is it the failure to recognize and incorporate new technologies to increase the value offer to their customers? Regulations did not keep telecom companies from making a VOIP offer and scooping Skype, culture and institutional inertia did. Sure, there's no doubt that telecom reform is part of the picture. But another part of the picture is the structural change that Michael Powell alluded to, and which I highlight in my Whitepaper on Structural Change.

For the record, as impassioned as Sen. Ensign's plea is for regulatory reform to protect the multi-billion dollar telecom Goliaths from start up peer-to-peer Davids, I would be remiss if I were to fail to point out that it was the founders of KaZaA, not Napster, that founded Skype. You see, here in our market-based economy, we managed to nip the start up Napster in the bud to protect the threatened multi-billion dollar recording industry. Roxio, the CD burning software specialist, acquired Napster's assets for $5 million after the peer-to-peer pioneer declared itself bankrupt in the face of hostile regulatory and legal treatment. For an historical footnote on Napster and a description of Peer-to-Peer (P2P) file sharing, the technological leap that started us on this path, see the Testimony of Shawn Fanning from October 2000.

After Napster was, for all intents and purposes, shut down by the government, Kazaa sprang up, but this time, the file sharing entity was outside the US and beyond the reach of US regulatory and legal authorities. Call it P2P II, as described in this article, Origins of Kazaa.

Utlimately, the libertine file swapping of Kazaa evolved and made room for the organized, reasonable market-based approach of Apple's iPod and iMusic, which has already spun off the new phenomenom of Podcasting. Vive le Market!

From Napster to Kazaa, to iMusic to Skype, to Who Knows What's Next? This odyssey is the story of the inevitable change that Michael Powell described 18 months ago. The question for all those who would benefit from such innovation is how our political leaders deal with such dramatic change. A Fear orientation exagerates the downside of change (creative destruction), and leaders try to clap a lid back on Pandora's box. Faith in the wisdom of markets and innovation will move leaders to feed innovators and reward them for their pioneering work, provide stimulus to incumbents to change or fade away, and starve inefficient market behavior.

My vote is that Faith in Competition will inevitably conquer Fear of Competition - indeed, as Sen. Ensign says in his summary, "This is a service that we cannot tax, cannot regulate, and cannot control. Make no mistake about it - even if you tried to regulate it - others would pop up to fill the void." Here's hoping that our leaders draw some lessons learned from the evolution of Napster to iMusic and apply them to the telecom reform effort, so our future has more of the innovation of Skype and less of the resistance to change that we see from entrenched incumbents protecting their turf.