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Skype and Vonage 14 February 05
Vonage was one of my innovations to watch in 2004. It performed spectacularly during the year. By early November, 2004, the company had 280,000 subscribers to its voice over internet (VOIP) telephone service, ahead of its goal of 250,000 for the year.
The Vonage service is designed to duplicate the telephone experience that has been with us for more than a century. The difference between Vonage and “plain old telephone service” (POTS) comes in the technology that links the callers – VOIP rather than digital switching. The activity of talking on the phone remains essentially the same – recipients of a Vonage call don’t notice the difference between a Vonage call and those made using a conventional telephone network.
"[Skype] has changed the whole way we work"
Claudia Waitman, of Eriksen Translations, in Business Week
Skype’s service transforms the telephone experience for the user. Rather than using a telephone handset, Skype users plug a headset and microphone into their computer. Like instant messaging services, each user has a buddy list of other Skype subscribers, and they can see when one of their buddies is online. A Skype user must be at some kind of computer in order to make calls, so the service is not as flexible as other phone services.
What it lacks in flexibility it makes up for in quality. Skype provides an astounding demonstration of what’s possible in voice sound quality. There is no background noise. The classic telephone problems, such as distinguishing certain sounds (“S” as in Sam, “F” as in Frank), are gone. Once you try Skype, regular phone service seems a little deficient – adequate, but second rate.
As a result of this improvement in sound quality, the nature of Skype conversations differs dramatically from those using POTS. For example, a Brazilian woman in the US uses Skype to talk to her mother in Brazil for several hours a day, something that would be very difficult and expensive using POTS.
Did I mention that Skype was free? Once you download the free software and plug in your microphone and headset, you can call other Skype subscribers anywhere in the world for no charge. In September, 2004, Skype launched a service, SkypeOut, that allows you to call regular telephone numbers for a very small fee, although the sound quality of those calls is similar to regular phone service.
Eventually, Skype intends to make a lot of money by selling add-on services like voicemail. The company’s European founders, Niklas Zennström and Janus Friis, created the popular KaZaA music-downloading service in 2000. Skype uses similar peer-to-peer technology for its calls.
The company has raised $20 million in venture financing from such blue chip venture funds as Draper Fisher Jurvetson, the firm that funded the free e-mail service Hotmail and then sold it to Microsoft for $395 million. There are currently more than 13 mm registered subscribers, and more than 28 mm people have downloaded the Skype software.
"There's no question in my mind that Skype will become a $1 billion company."
Steven Draper, of Draper Fisher Jurvetson, in Business Week I can see why Steve Draper is so sure of Skype’s success. The service has already demonstrated its power. At any point in time, there are roughly 2 million Skype users online, and the number of people who have installed the software is around 13 million. Many of these users would pay for a service that is now free.
At the same time, I doubt that Skype will emerge as a mass market product – it’s too different. Since becoming an enthusiastic Skype user earlier this year, I’ve been talking it up among my colleagues and business associates. I’ve suggested it to some of the teams with whom I work. There’s been some interest, but no one has signed up. I still have the same embarassingly small number of people in my Skype buddy list as I did when I started using the service.
Looking at Skype’s service on the four factor model of innovation success highlights a big problem for Skype -- in stark contrast to Vonage, the Skype service is not transparent to users.
Skype: high benefits, high barriers
The extent of Skype’s success provides a great test for the importance of ease-of-use in the four factor model.
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“Build a better mousetrap and the world will beat a path to your door”
Ralph Waldo Emerson, 1803 - 1882
Skype’s service is undoubtedly a better mousetrap – much higher sound quality at no cost to subscribers is pretty hard to beat. For Skype to succeed as a mass market product, however, a very large number of users would have to develop new habits and attitudes around telephone usage. This has been a difficult proposition in many other industries – in fact, a recent survey of US consumers by Schneider Associates found that more than 50 percent “only buy new products if they absolutely have to.”
As the Skype story unfolds, it will provide a great test of Emerson’s famous “better mousetrap” proposition. My suspicion is that, in 2005, even a better mousetrap will not achieve mass market success if it’s too different from existing approaches.
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