Telephone Is Just an App
In January 2009, Verizon (VZ) announced that they would be routing all calls through the Internet by 2015. There's your starting point.
You could say they've done it to themselves. That is, the major telecoms by choosing to send all of their traffic through the Internet have made their own networks obsolete, and they have turned themselves into pipes, to use the current lingo. By pipes, I mean specifically, they have turned themselves principally into Internet providers. Telephone then becomes just an app on top of the Internet.
Skype has done the app on top of the Internet as well as anyone, and telephone with video on top of the Internet better than anyone. And they have mind-boggling numbers of users. Of course, free helps, but their service was not always so great, but over time it has become more reliable and of better quality.
The big risk for the telecom majors is their telephone app on top of the Internet, which in the case of AT&T (T) is called wireline voice (in a few years this might be called Internet voice). It is fully 25% of their business.
This part of their business is totally up for grabs. Legacy billing systems include minimum monthly charges for lower domestic long distance, another charge for lower international long distance, and they are saddled with taxes that, depending on the locality, can be almost another 50%. Certainly, it is hard to compete with free, especially for friends and family (to borrow an old MCI slogan) who all subscribe to Skype.
But the majors have not even begun to compete with Skype on video: they have no video telephony products. Neither AT&T nor Sprint (S) nor Verizon has a video product offering. Look for Skype to continue to eat up this friends and family video space.
Microsoft Strategy
There is an argument for the defensive strategy. Even if Microsoft (MSFT) does not make out on Skype immediately, it will keep them in the game. Microsoft may need to rewrite the whole thing in the open systems SIP standard to communicate with all the other players, but Microsoft is a software company, after all, that shouldn't be such a big thing.
And it does remove Skype from acquisition by Facebook, but even more important to Microsoft, it keeps it from the Google (GOOG) monster.
Probably Microsoft keeps Skype free for a while, but it can do the usual thing that comes with the "free" model, it can charge a minimum annual MagicJack type of charge, which will not generate so much resistance, and then later increase the charge.
There Are Many Elements Yet To Play Out
1. What will the Facebook telephone (or chat) strategy ultimately look like? One possibility is icons for all the telecoms at the bottom of an entry, with Facebook getting a referral for each call. This has the advantage of serving all the networks, and prevents a possible deadly social network competitor.
2. Will the major telecoms continue to sleep while Paris burns? Or will they finally decide they must compete. Their model should be Andy Grove's at Intel (INTC) during the 1990s. They must cannibalize their legacy billing systems. A good strategy might be to move to a single monthly charge, but give customers new services, video, for example, to keep the charge reasonably high.
3. Will Microsoft start charging, and how will that affect their size of market?
4. Taxes. It's not a trivial item. If taxes are as much as 50% of a customer's bill, this gives Microsoft+Skype an incredible advantage. Probably the FCC does not want this to happen. And this may turn out to be the riskiest part of the Microsoft strategy. We have given the Internet start-ups a tremendous advantage. Certainly Amazon (AMZN) doesn't require this advantage anymore, and with governments at all levels requiring income, the Internet looks more and more like just another tax-free black market, and it may go away.
Microsoft Becomes a Blob
The problem with successful companies is continuing to be a success. It took a strong leader like an Eisenhower to allow America to enjoy its best decade ever without ending up in a war to show how big our war chest is. Kennedy-Johnson-Nixon couldn't avoid it. Neither could either of the Bushes. Often countries go to war simply because they can afford to. Or so it looks at the outset. But these wars can be expensive.
But see how this is like business: Ford (F) enjoys success and buys Jaguar, Land Rover, Aston Martin, but that's not enough. Then it buys Volvo. And what happens? Long, drawn-out cost and marketing wars, the Afganistan and Vietnam of the business wars. It took a leader like Mullaly to re-focus the business, and end the wars, selling off these subsidiaries. What does Mullaly talk about now? He talks about not being stupid in the face of success. He continues to focus on his business. Making the best possible product.
Microsoft has many challenges now. Google would like to undermine its main business, the operating system. And look how it has usurped Microsoft, the operating system king: it created Android, the most popular of all the mobile phone operating systems. Today Google announced it would offer its Chrome operating system on laptops this summer. That's Microsoft's home court.
But the real coup d'etat may come with the tablets. Apple's iPad does not require Windows. That may be the tip of the iceberg that Microsoft needs to deal with. Although Gates and Microsoft saw the importance of the tablet computer in the 1990s, it took a marketing wiz like Steve Jobs to make it take off. And again Google will not be left out. They already offers tablets using the Android system.
Sadly, Microsoft has become almost another large clunky American company like General Motors. General Motors did not fail overnight. It took decades. A little look into the future should have told Microsoft that to continue to be first in operating systems, you would need to be first in mobile systems – telephones and tablets, but they are not even in the running. In the cell phone space, Apple (iPhone), Google (Android), and RIM (Blackberry) are the main players. Windows Mobile 7 is not really in the running.
And the other parts of the empire? Bing, its search engine, is a distant second to Google. And Windows Office? Google wants you to do your apps on line and save your data in their cloud.
This kind of thing doesn't have to happen. Intel (INTC) has stayed with its main business throughout this time, it's still making chips. And in the 1990s, Gates although slow out of the gate, understood he needed to win the browser war.
With all of these threats outstanding and a caretaker's direction (Ballmer), you end up with a defensive strategy, and a defensive strategy is a defensive strategy, that's the Maginot line against Blitzkrieg. Page and Brin are young and aggressive. Gates and Balmer, older and defensive. You figure it out. Microsoft's stock will have a hard time making any progress. One is better off trying to find what those with the big treasuries plan to buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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