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Chasing the Clouds, Part 2

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April 27, 2010

Chasing the Clouds, Part 2

By Jon Arnold, Principal, J Arnold & Associates

While researching and writing last week's column on cloud communications, I realized there were too many themes to explore in one write up, and even two is just scratching the surface. However, this will suffice for now, but I'll certainly return to this topic as things develop. In Part 1, I talked about how and why so many operators are offering cloud-based services now, and how the language to describe these is shifting to reflect the evolving nature of being a service provider.  I'm going to continue on the latter theme here, as the cloud is changing the value proposition of communications in some pretty fundamental ways.

At the heart of cloud communications lays the intersection of voice and the Web. This may seem obvious, but the history is quite recent. VoIP began in 1995 strictly as a PC-based form of telephony, but the technologies took years to mature to get beyond the hobby stage. In many ways, Skype (News - Alert) created the PC-based VoIP market, and is a great example of how being first has translated into true market dominance. Many others have since entered this space, and for most of us, making calls now on the PC is an everyday activity.

Of course, VoIP has also come a long way as a subscriber-based service that is not PC-based, and in my view, services like Skype simply make the pie larger. No doubt they have siphoned significant minutes and revenues from facilities-based carriers, but Skype has also enabled more people to talk more often, and essentially made voice more relevant than ever before.

In my view, there's something more important here than providing a great alternative to conventional telephony. Free or near-free will always be popular and that has allowed Skype to build up a massive user base in very little time. Aside from that, Skype has established the desktop as a viable option to the desk phone. Features may be more limited, but for a lot of basic communications, the desktop works just fine, especially when doing international business and avoiding costly long distance charges.

As discussed in the previous column, Google and Microsoft (News - Alert) have taken this trend a few steps further. Skype has far more penetration for PC-based voice, but Google and Microsoft's domain applies to a broader range of communications applications, which also integrate with the business software that we all use to our everyday work done. Now that VoIP is approaching carrier-grade quality, it blends easily in this environment, making the desktop more valuable and by extension reducing the relevance of voice-centric desk phones.

Of course the IP PBX (News - Alert) and its ilk still dominate, and will be with us for some time. However, there is an important shift occurring here that service providers need to understand. The value of voice is increasingly becoming defined by how it integrates with business software and other communications applications, all of which is desktop-driven. As voice transitions to the Web - and to the desktop - a lot of things change. Voice stops being telephony and starts being part of a rich communications palette, of which Unified Communications (News - Alert) is the most prominent example.

Another important change is with the service provider, who risks sliding down the value chain. In this world, voice is difficult to monetize. In Skype's world, transport costs are close to nil, and they can prosper with a minuscule ARPU. Google (News - Alert) can do the same with Google Voice, and since they have an advertising-based business model, they can compete with a zero voice ARPU. Most businesses are not ready to embrace this model for communications, but in today's difficult economy, all forms of cost reduction are being considered. Google Apps can be an attractive alternative to the expensive software licenses of Office or Lotus, and for some, accepting various forms of advertising is not too steep a price to pay. Once Google Apps is in place, adding Google Voice as well as Google Wave is not such a big leap.

For service providers, the underlying threat is the new reality that value creation is coming more from desktop-based applications than the physical transport network they are so heavily invested in. Google is the most advanced example of cloud-based communications, and with Microsoft recently adopting a cloud-based version of Office, there is a pretty strong validation taking place now.  The cloud has now arrived for voice services, and businesses are increasingly comfortable going this route and moving away from premise-based solutions. Web-based services are now ascendant and businesses are becoming even more desktop-centric, including voice.

With this shift in trust to the cloud, and the ease of adopting voice into this multimedia communications environment, it is not surprising to see so many operators talking about the cloud now. The cloud is becoming the home for all communications applications. When carriers talked about hosted services, it was mostly about VoIP. The value proposition has now expanded and has less to do with integrating VoIP with legacy voice systems and networks.

Today's value proposition revolves more around integrating VoIP with other cloud-based applications. In essence, these services are still hosted, but now everything is off-premise except the desk phones and monitors. This is a very different environment and has little to do anymore with telephony. The good news is that any service provider has options to stay competitive, but keeping the status quo isn't one of them. To move forward, I believe these fundamental shifts must be understood - otherwise, carriers will just be chasing the clouds instead of harnessing them.

Jon Arnold, Principal at J Arnold & Associates, writes the Service Provider Views column for TMCnet. To read more of Jon's articles, please visit his columnist page.

Edited by Alice Straight

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