Broadband disrupts business models

The spread of fast Internet is bad news for the business models of traditional phone and media companies around the world.

Even with slow ADSL I make Skype calls internationally for a fraction of what I would pay phone companies for the same talk time. Skype is free software, downloadable from the Internet, which lets people phone anyone else with Skype for free. In April last year (2007) Skype passed the 100 million user mark. On any given day in early 2007 about 8 to 10 million Skypers were online.

If the Internet connection is relatively fast Skype provides good voice quality. If the other person does not have Skype, it is still possible to phone them cheaply by depositing money into an account via credit card. Calls from Australia to non-Skype users in most developed countries cost about three cents a minute. The $16 I deposited last July has allowed me several hours of talk time all around  the world.

The technology behind Skype is voice over internet protocol, or VOIP. US broadband management company Sandvine  reports that Skype accounts for  almost half of the VOIP  calls in North America. Skype also has call forwarding. So when I’m travelling I can still receive calls on my mobile even in areas with no Internet access. Skype is currently working on video phone calls, voice-to-text and voicemail-to-email  translation.

Around the world, private companies and groups are setting up free wireless networks in cities or parts of cities. Google has offered to provide a free wireless network over the 49 acres of San Francisco at download speeds of 300 kilobits a second. That’s faster than the 256 ADSL Telstra sells me for $60 a month. In reality for rural folk like me, the 256 kilobits a second is usually 120-140. My American and European friends always phone me via Skype because it is free. Imagine the telephony possibilities when you have wireless Internet.

Meanwhile, media companies are investigating television delivered via the Internet, known as internet protocol television, or IPTV. Last month (subs: Dec 05) Rupert Murdoch swapped his shares in DirecTV, John Malone’s satellite TV company, for more of his own News Corp shares. It was the clearest sign yet of how much Murdoch thinks high-speed Internet will change the television business. IPTV lets people view high-quality video online. Murdoch acquired his interest in DirecTV in 2003 after years of bitter wrangling. Satellite distribution helped fuel the popularity of News Corp’s television and cable content, such as the Fox News Channel. But satellites are expensive. It costs about $US 300 million to build and launch each new one. NDS, a News Corp subsidiary, is developing IPTV technology. It already produces technologies for securing transactions over wireless networks.

Technology also changes the business model for free-to-air commercial TV. Personal or digital video recorders (TiVO is the best-known PVR in the US; Foxtel’s iQ in Australia) allow people to record programs on a giant hard disk. PVRs let audiences skip advertisements as they play back programs. Given that commercial TV and radio get their revenue from ads, the arrival of IPTV or Internet radio makes the traditional business model look ill over time. Late last year channels 7 and 9 in Australia refused to air commercials for a model of LG plasma television screen with a built-in digital video recorder. The Multi Channel Network, which represents the major pay-TV providers, also tried to censor the commercials. When the advertisements were eventually aired, the offending line “And when you replay, you can skip the ads” was replaced with “And when you replay, you can skip straight back to the action.” Colin Segelov, executive director of the Australian Association of National Advertisers, told industry magazine B&T that the ban was “understandable”. But he said censorhsip was contrary to the long-term interests of the advertising community. The industry would learn to live with commercial-skipping technology the way it had learned to live with the remote control, Segelov said.

The business model for music-format commercial radio is also in trouble. Why would a teenager endure advertisements on their FM radio while waiting for a favorite song when they can download music to their iPod? Whither the companies that spent millions for licences a few years ago?

The key unknown is the time frame for the disintegration of these business models. In 1992 Paul Saffo, director of the Institute for the Future in Palo Alto, California, proposed his 30-year rule, suggesting it takes a generation for a new idea  to fully permeate a  society. It took the Internet, which started in 1964, about a generation to become a part of our lives. But we are living in an age where technology is shortening the time frame.

* Published in The Age January 2008

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