Distilling market noise into market sense

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The need to unbundle voice – challenging century-old assumptions about telephony

[Telephony is up for a big shake-up, as Internet telephony companies like Skype and voice application platforms like Twilio are challenging century-old assumptions about how people speak with each other remotely. VisionMobile analyst Stijn Schuermans sheds light on this new wave of voice innovation and why telcos need to unbundle voice from their network if they want to be able to compete with their OTT counterparts.]

Back in February, we published a blog post Paul Golding, heralding the end of the golden era for telcos due to the increasing competition from OTT voice solutions. At around the same time, we published a Mobile Insider paper, “The Future of Voice”, in which we added to Paul’s “notes from the field”, as he called them, with systematic economic analysis. Voice innovation and the disruption of telcos is indeed as relevant now as it was then. Voice could become as important to ecosystem differentiation as location is.

Two classes of voice companies

The basic concepts of telephony haven’t changed in 200 years, despite technological advances like software routing, mobile phones and digitization. But now that telecom has entered the Internet age, Skype and Twilio represent two classes of companies that are pushing voice to a big shake-up.

Skype remains the leader in Internet Telephony, i.e. voice over public data networks. The well-known VoIP company claims over 200M monthly connected users, which would put it among the top 10 mobile operators worldwide. In 2011, Skype served an estimated 145 billion international minutes, just under a quarter of all international phone traffic.  Roughly half of all Skype-to-Skype minutes cross national borders. Skype was bought in October 2011 by Microsoft for $8.5B to integrate into its enterprise offering.

Twilio heads the pack in the Voice Application Platform market, providing software components and cloud-based services for building novel voice applications such as voice messaging, click-to-call, person-to-multiperson, voice search and more.

The company generated significant developer attention in 2011, growing its customer base by 400% to 75,000 developers. This put it in the same order of magnitude as platforms like Windows Phone 7 in terms of developer reach. Twilio’s voice API is as popular as the Facebook API in the mashup marketplace programmableweb.com. In 2011, the San Francisco based company expanded to the UK and in December it raised a $17M series C funding round to expand to 20 more countries. At the Appsworld conference last week, Twilio had the brightest and largest stand on the floor.

How voice is being disrupted

In our view, telephony has overshot customer needs. It can no longer be improved in a way that is meaningful to customers, i.e. they are not willing to pay for improvements. Non-optimized data networks like the Internet are still considered unsuitable for mainstream telephony, but the success of VoIP companies like Skype indicates that performance has become good enough for a growing number of customers. This sets the stage for a classic market disruption. In this environment, the basis of competition will shift from voice quality (sound quality, call drop rate) to flexibility of communication (multitude of use cases beyond telephony). This opens up two opportunities for disruption: low-cost alternatives and creation of new voice markets.

Internet telephony is low-end disruption to the telco business model. Less demanding customers accept lower quality (as traditionally understood) for a lower price, often free. The mindshare and market share leader here is Skype.

The reconstruction of voice enables new markets. With telephony becoming a commodity, old assumptions about voice such as initiating device (telephone), synchronicity (continuous call versus one-off voice message), termination (phone number), scope (one-to-one versus one-to-many) and calling parties (persons versus machines) will be decomposed and reconstructed into new applications that are no longer recognizable as phone calls. Customers will evaluate applications based on flexibility, i.e. the breadth of use cases available, not on traditional quality metrics. Companies like Twilio target new markets (non-consumption), mostly on voice-second connected devices like tablets or PCs. In addition, voice will become the new “killer API”, targeting primarily developers (B2B) rather than consumers (B2C). Eventually the likes of Twilio will usurp the existing market as well: telephony will become “just another app”. Such innovation will grow voice usage (but not telephony) tremendously beyond its current level.

The success of Skype, Twilio and many others is strong evidence that this disruption is taking place now, and not in some theoretical future.

Telcos’ best shot: unbundling voice

Telcos will struggle to compete. The disruptees are the traditional telephone operators. Their business model is no longer sustainable, for multiple reasons. First, they can’t achieve the cost structure of the modular VOIP over data networks with a proprietary, integrated network. Second, their company DNA (in particular their budget prioritization processes) will not allow them to innovate at the same pace nor in the same direction as the voice API innovators, for fear of cannibalizing their existing business. Twilio on the other hand has an explicit disruptive DNA, is set up for flexibility and openness to external innovation (with a developer-centric platform). Twilio even pushes such innovation explicitly with an investment fund for their developer-customers.

Unbundling of voice is inevitable. This post-disruption value system requires that the voice service needs to be unbundled from the network on which it travels, e.g. get your connection from a telco and voice through Skype (with a SkypeIn number). This major industry structure overhaul is inevitable for four reasons.

1. In a world where the basis of competition is flexibility and choice, the modular system of unbundled voice serves customers much better than an integrated telephony network, and therefore will win the market.
2. For telcos to survive in the new situation, they need to break radically with their existing company DNA. This can only be done in spin-offs, which requires unbundling voice from their other operations. Voice innovation cannot survive when embedded in the old telco paradigms.
3.Unbundled voice (made feasible by the use of APIs) unlocks external investments. The money invested in unbundled voice will be much bigger than what telcos can invest on their own, making it impossible for “bundled” telcos to compete.
4. Voice is a social construct. The experience from other social networks like Facebook shows that social connections are not bounded by regional boundaries. In a border-less world, voice innovation must be global and therefore over the top, unbounded by the regional limits of today’s carrier networks.


As we speak, the voice market is being disrupted in a classic case of Christensen’s Innovator’s Dilemma. The basis of competition is changing, allowing new entrants like Skype and Twilio (flexibility) to win over old-school telcos (quality).

Novel voice applications like voice-based appointment reminders and voice search are opening up new markets beyond telephony. This will grow the total pie tremendously. As a result of this disruption, it is inevitable that voice will become unbundled from the networks on which it travels. Those who choose to lock voice within their networks will become challenged.

AT&T recently partnered with Twilio to offer the Advanced Communications Suite (ACS), a suite of cloud-based voice and SMS-enabled apps aimed at enterprise customers. Even the oldest and largest of operators have understood that voice innovation is imperative for future success. How about your operator?

– Stijn (@stijnschuermans)

  • Tsahi Levent-Levi

    The value of voice comes down to 0.
    In such a case, would you care if you use a carrier's network or an OTT's to make your calls?
    If you could call me internationally for the same data cost that you do on Skype, but using my phone number – which one will you choose?
    Not an easy question to answer.

    The fact that carriers can unbundle themselves from voice and let it go doesn't mean that they should – by doing that, they lose an important asset – being the facilitator of our interactions. Not sure they want to do that just yet.
    Wouldn't a better option be to open up – partner with Twilio, offer infrastructure for WebRTC (http://slidesha.re/W71zKq) of their own to enable such interactions, start rolling out VoLTE?

    • Stijn

      Good questions!

      I'm not sure that the value of voice is zero. If you would take away the ability to speak to others remotely, would you miss it? People are if anything speaking more, not less, to each other than ever. However, standard "kitchen-variety" telephony has become a commodity indeed.

      Unbundling does not mean that telcos have to reject voice from their offering, on the contrary. What we propose is that telcos disconnect voice from their network infrastructure, giving free reign to innovation and experimentation, no longer bound by the historical assumptions on which the current technology was based.

      Offering WebRTC infrastructure might be one such experiment. It's not about the technology though, but about providing better solutions for the user's voice needs (web telephony, anonymous calling, permission based calls, group calling, voice messaging, and more). If VoLTE is only about improving commoditized telephony, then it's unlikely to make telcos more competitive or profitable.

  • Stijn – unbundling voice from the network (and essentially seeing telcos become dreaded OTT players themselves) implies a huge change in telco-think. So instead of developing next gen voice around IMS and RCS in a federated fashion, the logical outcome would be for telcos to compete with EACH OTHER at the service level by propagating their voice services via native apps or Web apps in the same way that Skype or Rebtel does. Suddenly, for the telcos that take this route, some sort of net neutrality becomes a very attractive objective since you'd want to stop your outraged peer competitor (another telco) from degrading your traffic… so what we have at the moment (to invoke Christensen again) is a classic prisoner's dilemma for telco strategy. Which telco will seek to gain advantage by adopting this 'go it alone' non-federated strategy first and aim at offering voice services to his competitor's customers. How do you see that panning out… ?


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