Here Comes Trouble: Infocom Voice

During the spring of 1995, I participated in a series of meetings at AT&T Bell Laboratories, at which management lamented the impending doom of the telephone business model. The looming threat, however, was neither MCI (which had instigated the breakup of AT&T) nor the Bell companies (which did eventually undermine and absorb AT&T). No, the once-dominant telco feared a $50 software product released by two 20-year-olds at a startup in Israel: Vocaltec Internet Phone, which made voice communication an application of the Internet.

The death of the telecom business remains a standard prediction, but telephone bills continue to arrive 12 years after Vocaltec introduced VoIP to the masses. ITXC (now a part of VSNL) used VoIP to help cut international calling rates to an average of 10 cents a minute currently from 99 cents a minute in 1995. Vonage gets credit as the first to offer flat-rate, unlimited usage plans, erasing the distinction between local and long-distance calling. But aside from price, the telecom business remains largely unchanged by VoIP.

Consider the improvement of infotech platforms since 1995. Intel et al remained true to Moore’s Law by expanding processor performance 100-fold, while the price performance improvements of storage, memory and many other components exceeded this pace. But although improved performance and falling costs usually combine to produce new applications, this does not seem to be the case for VoIP and the voice business.

Reducing the price of a telephone call does not erase all the frustrations associated with communication. Humans can detect sounds of up to 20kHz, yet the frequency response of the traditional telephone call has remained stuck at 3.3kHz since the 1930s. The audio quality of a telephone call compares unfavorably even to the 5.6kHz frequency response of AM radio; we still revert to military radio protocols ( “A” as in alpha and “T” as in tango) when spelling a word.

Miscommunication remains a significant source of daily frustration. CallerID seems to be the best telecom has to offer. (Imagine paying extra for the privilege of knowing who sent you an email.)

The differences in the pace of innovation between telecom and infotech can be traced to differences in their respective business models. Telecom companies chase profit growth through margin expansion, which requires controlling costs and resisting the potential for competition to reduce price (e.g. controlling supply).

Conversely, competition forces infotech companies to chase profit growth through revenue growth. This requires investment in the innovations necessary to create demand. The pace of innovation in communication promises to accelerate as the search for revenue growth leads infotech companies to pursue communication business more aggressively.

Developments in communication shape human history. The Renaissance followed the printing press because less expensive books produced educated citizens that demanded more representative government. The telephone offered more than simply a better telegraph. If the infocom sector can move beyond cheap telephone calls, it might finally represent the threat to the status quo imagined by my AT&T colleagues.