For those of you who haven't heard of Skype, the latest white-hot Internet technology and new social phenomenon, here's what you need to know: It's a free piece of software (of course!) that you can download to your PC; suitably armed with speakers and a microphone, you'll then be able to "call" and talk to anyone else in the world who's on Skype. In the less than two months it's been available, 1.6 million people have downloaded the software, setting a world record for this kind of thing. As a crude measure of buzz, after six weeks of life the word "Skype" generates more than 2.8 million pages on Google. As a point of comparison "KaZaA," which is Skype's progenitor (the two Swedes who invented KaZaA invented Skype), appears nearly 4.4 million times.
Much as KaZaA (and its predecessor, Napster) sent the music business into a psychological and financial tailspin, Skype threatens to similarly unsettle the phone business. But unlike KaZaA—which, to be clear, is about stealing music—Skype is engaging in a fair fight. It's not stealing phone calls. It's just turning the Internet into a cheap and effective phone system that anyone can access. (And the sound is amazing: In full stereo, it's FM to your telephone's AM.) The biggest potential losers in all this are the descendants of Ma Bell—those regional local telephone companies that were spun off some two decades ago.
And the most vulnerable of the Baby Bells is Verizon. Seeking temporary refuge behind technological Maginot Lines (also known as regulatory stays), Verizon is stuck with an increasingly anachronistic legacy. In four key communications sectors of the future, Verizon is on the defensive. Here is an autopsy of the corporate equivalent of the walking dead.
Problem No. 1: Broadband Internet. When it comes to broadband, Verizon offers DSL, a technology that is inferior to cable. It's slower and less scalable in terms of bringing on more bandwidth. DSL is harder to install, troubleshoot (forgot your password? You'll get a new one in the mail—paper mail that is—three days later), and use. Consequently, the cable companies are eating Verizon's lunch. (This Slate article has more on why DSL sucks.)
About 22 million people subscribe to either DSL or cable broadband Internet access, and of those, cable has twice the penetration of DSL. That ratio will only get worse, as DSL is the older, established technology (DSL originated as a kludge to get better data speeds out of old copper wires). Consequently, DSL providers like Verizon are trying to attract customers by slashing prices, a short-term fix with dangerous long-term consequences. At some point DSL could become unprofitable, generating insufficient cash flow to finance investment in upgrades.
Problem No. 2: Broadband Wi-Fi. Then there's the nascent broadband Wi-Fi market, which is turning high-speed wired connections into superfast wireless connections. Time Warner Cable has rolled out a broadband Wi-Fi modem, allowing its Internet users to upgrade their broadband Internet connection into a wireless connection for $3.95 a month. Verizon's response to broadband Wi-Fi? Instead of building a supercheap, superfast nationwide Wi-Fi network, Verizon has decided to put wireless "hot spots" in the casements of public telephone booths in Manhattan.
The idea is that Verizon's DSL subscribers, as a reward for their loyalty, can go online wirelessly for free through Verizon whenever they find themselves near a Wi-Fi-enabled pay phone. A "killer app" this is not. Manhattan is unlike any other American city. It's hard to imagine people on the freeway in St. Louis going online while zipping by pay phones at 65 miles an hour. In the cable world, Wi-Fi base stations are seamlessly integrated within the cable modem, which happens to sit where it's most effective: in your house.
Problem No. 3: Wireless portability. The wireless telephone business is a savage industry, where acquiring a new customer can cost $300 per person once you factor in the subsidy for the phone, which is usually sold well below cost, and the marketing and promotion efforts that got you to walk into the store. And things are about to get worse. After years of prevarications, appeals, and foot-dragging by cell phone companies, on Nov. 24 the carriers are being forced to let you change your cell phone provider while keeping the same phone number, and they're supposed to complete your request within 2 1/2 hours.
Who wants to switch? Some analysts estimate that 9 million people will switch carriers on the first day of number portability. As the nation's biggest wireless carrier, with 32 million subscribers, Verizon could suffer the most losses. Inevitably, number portability is going to trigger a price war. Consumers who shop around should expect dramatic drops in their wireless bills, possibly down to what's common in Europe: 10 cents a minute, anytime, with no contract. But what's good for consumers is potentially disastrous for Verizon, which has spent billions of dollars building its wireless network—the nation's largest—at a cost it has yet to recoup.
Problem No. 4: Internet telephony. And finally, there's Skype and its ilk, going straight to the heart of the Verizon empire: the local phone call. By regulatory fiat, Verizon has to let competing companies provide local phone service over Verizon's network infrastructure. So far, few have bothered, because the money in the local-calling business isn't so great. But with broadband Internet, the economics dramatically change in favor of new entrants.
With customers surfing at blistering speeds via their cable modems, the cable companies have backed into a de facto phone system that parallels Verizon's and, like Verizon's, terminates right in the home. On one extreme you have consumers using free applications like Skype (including me: Skype users can ring—or is it Skype?—me at my username, dbennahum). On the other, you have consumers who want to be able to use their plain old telephones (rather than computer-equipped headsets) to make and receive calls over the Internet, and they're willing to pay for the service. Verizon's nemesis, Time Warner Cable, offers unlimited local and long-distance calling over the Internet for $39.95 a month. Some of Howard Dean's presidential campaign offices use Vonage, which offers the same deal for $34.95. (Read this Slate article for more on Vonage.)
Verizon's stock, understandably, is flirting with a 12-month low. The picture is unlikely to get better soon for Verizon stockholders, who have taken a bath this past year. For Verizon customers, it's another story. Whether the phone companies like it or not, the cost of making calls—wired and wireless—is going to collapse in the coming year. And there's little anyone can do to stop it.