VoIP's Negative Economies of Scale

from the what-goes-up-must-come-down dept

The Stalwart has an interesting take on VoIP players like Vonage and Skype: their plans that allow free calls to other subscribers are “negative economies of scale” that will limit the companies’ success. The thinking is that if everybody gets on Skype, or everybody gets on Vonage (granted, that’s a big if), all calls will be free. It’s less of a problem for a service like Vonage that has a monthly charge, but it’s a real problem for free services, like Skype. Maybe that’s why Skype is pursuing other revenue streams, like, um, ringtones.

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Comments on “VoIP's Negative Economies of Scale”

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dorpus says:

Think Small Miss Small

Over in Canada, there is a big “scandal” because the Immigration Minister had pizza dinners for C$138 and C$207, with inadequate explanations for why he spent these vast sums of taxpayer money. Opposing politicians have complained of “causing indigestion” among the citizenry, or of “digging his own grave”.

What the hell? Somehow I can’t imagine Americans getting worked up about some politician’s night out to a pizza parlor — if anything, the scandal would be that he ate at such a cheap place. Well I don’t know, maybe in Hawaii or somewhere? Some sumo-ish Hawaiian politician ordering a huge stack of pizzas for his extended family?


Mousky (user link) says:

Incorrect Terminology

It bugs me when people use incorrect terminology. The correct term is ‘diseconomies of scale’. The term ‘economies of scale’ refers to the reduction in the cost per unit as production of a unit or the provision of a service decreases. Diseconomies of scale is the opposite: the cost per unit increases.

By using the term “negative economies of scale”, The Stalwart is saying that the cost of providing Skype or Vonage increases as more people use the service. That is not necessarily true and that is not really what The Stalwart means. They are really saying that since Vonage and Skype make money when their users connect to non-Vonage and non-Skype systems, should all phone users be on Skype (or Vonage) that Skype (or Vonage) will make no money. This is a revenue issue, not a cost issue, therefore, using the term economies or diseconomies of scale is, well, wrong.

J 2the A says:

Re: Incorrect Terminology

Actually the term makes perfect sense to me. Just as Verizon has the “In” plan where all calls to other verizon phones are free (other have been doing it for a long time too) There is an enormous cost savings when staying within network, switching fees, taxes, POTS to VoIP fees, network fees, all of these go away when you call within same carrier, it simply becomes data on your own network. Quite honestly it’s about time they offered something like this, when a Vonage customer calls another Vonage customer, Vonage reaps enourmous profits right now since their cost is close to nothing compared to transfering a POTS call from another network. So yes, the term fits, and yes there is a negitive revenue impact but obviously they belive the reduced cost of being all network will offest that for a greater Net.

Let it out says:

Re: Re: Incorrect Terminology

I agree that I’ve heard both — and only recently with such frequency — but both nonetheless.

Overall, the story seems like yet another of the increasingly common and frustratingly useless wastes of media bandwidth where the writer does nothing more than demonstrate a thorough lack of knowledge or understanding of the subject matter.

The VOIP providers are in “land grab” mode, just as the cellular providers of the late 90’s. They’re trying to get subscribers to encourage new subscribers to join, to “save” money in calls. Two to five years from now, the VOIP providers will suffer the same churn problem as conventional telecoms, then they’ll embark on a crusade of conquest customers, then loyalty programs and finally they’ll resort to the worst of all possible worlds for a technology service provider … gasp … quality of service … oh hell of hells!

Scott says:

Re: doesn't matter

This will never happen though, as people will always have cell phones (non-landlines).
I’m not so sure. Vonage has a WiFi phone for sale already, and has had this phone for purchase for at least a few months.
And with the increase of WiFi whole city coverage (i.e. WiMax, or whatever WiFi innovations that come along), this may actually become a real concern for both cell phone companies and local landline phone providers (POTS). Why pay long distance and roaming charges when you can talk for “free” with Vonage? (well a nominal monthly fixed fee, for now, until they have that coveted ogopoly)
Tampa and a few other cities already have free city-wide WiFi coverage (I’ve never seen it or used it in Tampa, but they say it exists, but probably just in the downtown districts for now).

Anonymous Coward says:

Re: doesn't matter

This will never happen though, as people will always have cell phones (non-landlines).

Yeah, but the technology supplying wireless mobile communications may not always be GSM/CDMA etc. Can you say WiMax? Or even wireless technologies that haven’t even been invented yet?

Mobile access to the internet may become extremely cheap or even free in the future. WiMax + VOIP = alot of cheap or free calls.

Brian Connelly (user link) says:

It's all Free if you are smart enough to read !

Man people when will you start looking around you. Skype is B.S. it’s all smoke and mirrors the fact is any geek worth their weight in salt or whatever pound conversion you use for geekdom….
Has had free calling for years ! If you look at the opensource package of asterisk the power is in your hands! There are many other great programs but asterisk is the one I use. With it companies/individuals are hooking up every day routing calls over the net bypassing the local currupt tax systems and even more providing better services than what can be purchased from the best fortune rip you off 500.
Do your research people linux and opensource have opened up the cottage industries that can and are taking down the big dogs every day !

If you don’t believe it then you are be paid to be stupid.


soccersmith10 says:

Skype rules!

Anyone who has had the chance to use Skype, instantly sees it value. If you already have high-speed internet, which the majority of people do now adays (and actually even if you use dial-up) you should be using Skype. WHY NOT! Free is free. You cant argue with that. The service works great and you dont HAVE to add any of the other service which cost money, Skype could make plenty of money by adding in a little ad at the top and selling the space. These guys aren’t necessarily money hungry anyways. Lets not forget they are the same people who created Kazaa, which you can still use to share files. Even though it maybe a long shot to think that “everyone” will be using Skype, Im sure that when Alexander Bell invented the phone most people thought they would never have a daily use for that and shrugged it off for a while. Time will tell, regardless of the diseconomies or economies of scale that the service provides.

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