The Market

by Carlo Longino




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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  • identicon
    dorpus, 7 Oct 2005 @ 4:03pm

    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?

    http://www.excite.co.jp/News/odd/00081128598243.html

    reply to this | link to this | view in chronology ]

  • identicon
    Mousky, 7 Oct 2005 @ 5:12pm

    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.

    reply to this | link to this | view in chronology ]

    • identicon
      Nate, 7 Oct 2005 @ 6:03pm

      Re: Incorrect Terminology

      Actually Mousky, economies of scale refers to the reduction in the cost per unit as a company increases production, not decreases production as you said. That little mixup on your part kind of makes your argument about people using incorrect terminology not hold much water.

      reply to this | link to this | view in chronology ]

    • identicon
      J 2the A, 8 Oct 2005 @ 7:38am

      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.

      reply to this | link to this | view in chronology ]

    • identicon
      J Surdilla, 8 Oct 2005 @ 12:48pm

      Re: Incorrect Terminology

      Negative economies of scale or diseconomies of scale are both used quite often so your argument holds not much merit on that. Besides that, I agree with what you said, for the most part.

      reply to this | link to this | view in chronology ]

      • identicon
        Let it out, 10 Oct 2005 @ 12:13am

        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!

        reply to this | link to this | view in chronology ]

  • identicon
    TheJesusGod, 7 Oct 2005 @ 5:27pm

    doesn't matter

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

    reply to this | link to this | view in chronology ]

    • identicon
      Scott, 7 Oct 2005 @ 11:09pm

      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.
      http://www.vonage.com/wifi/
      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)
      http://www.wimaxforum.org/news/downloads/WiMAX-The_Business_Case-Rev3.pdf
      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).
      http://surfzone.sagonet.com/map.html

      reply to this | link to this | view in chronology ]

      • identicon
        Scott, 7 Oct 2005 @ 11:55pm

        Re: doesn't matter

        My bad. Vonage has the WiFi phone out in Beta testing. I remember reading about it a few months ago, however, and thought it was on the market already. Sorry....

        reply to this | link to this | view in chronology ]

    • identicon
      Anonymous Coward, 8 Oct 2005 @ 8:23am

      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.

      reply to this | link to this | view in chronology ]

  • identicon
    Brian Connelly, 8 Oct 2005 @ 5:00pm

    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.

    Brian@loser.com.

    reply to this | link to this | view in chronology ]

  • identicon
    Sonya, 8 Oct 2005 @ 10:28pm

    flawed premise

    Do your homework: With Vonage ALL calls are free, not just to other subscribers.

    reply to this | link to this | view in chronology ]

  • identicon
    soccersmith10, 9 Oct 2005 @ 12:30pm

    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.

    reply to this | link to this | view in chronology ]

  • identicon
    Jon, 9 Oct 2005 @ 3:23pm

    negative economies of scale

    Free VoIP providers will run into the same problems that free ISPs ran into-the more users, the more resources are needed, and they have to be paid for by something. It's a sad but true problem-someone's gotta pay for hardware, maintenance, and infrastructure support.

    reply to this | link to this | view in chronology ]

  • identicon
    ants, 9 Oct 2005 @ 9:58pm

    skype

    I thought that ebay just bought skype, would you expect that this service will be free forever?

    reply to this | link to this | view in chronology ]

  • identicon
    VoIP, 10 Oct 2005 @ 8:10am

    VoIP

    I dont think VoIP will suffer from traffic problems, since VoIP is not providing a real new technology.

    VoIP still uses IP and width band, and compression algoritms: technologies that now are over 10 years old and are improving more and more

    reply to this | link to this | view in chronology ]

  • identicon
    Randy Alexander, 16 Oct 2005 @ 8:15pm

    VOIP...Vonage

    REmember, Vonage is the VOIP provider who uses.used Aurora Adware/spyware to advertise their services. Untold thousands of XP users have had to use Win recovery or format and reinstall to get rid of that one, just Google for Aurora and feel the angst!

    reply to this | link to this | view in chronology ]


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