Negative Economies of Scale: VOIP Edition

I know the window for talking about Skype and Vonage closed, um, like 3 weeks ago, but it just occurred to me:  These companies have some seriously negative economies of scale.  See for both companies, in-network calls, are free.  Well, for Vonage, there's still a monthly fee, but calls to other Vonage subscribers don't count against your minutes.  Skype only collects revenue when you call someone non on Skype.  That means the more people join these companies, the less activity they'll be able to charge for.  One day, when the whole world is on Skype, their revenue will return to where it started--$0

Comments

[JoeC]

I think the jury is still out on whether there are indeed, negative economies of scale. In Vonage's case, as I understand it, there are two pricing tiers: $15 per month for 500 minutes and $25 per month "unlimited domestic". I assume half of their subscribers are on each plan so if 1 million customers as they recently said they have (500,000*15*12) +(500,000*25*12) or $240 million in revenue. I am guessing there is significantly less cost for Vonage to Vonage calls so there is, currently, some positive economy of scale in terms of operating income for the company. While I respect what Skype has done, I don't think currently it is a viable replacement service because unlike Vonage, ATT CallVantage and the "fixed VoIPs" like the cable MSOs, they are not even attempting to create a 911 emergency response interface.

I enjoy your blog by the way. Good info and entertaining.

[Davis Freeberg]

While in theory I agree with you, I would argue that companies like skype and vonage will eventually adapt to the market as it matures. Right now, the structure of the Skype model should convert their users into their biggest evangelists. If you have to pay in order to talk to your girlfriend, family or friends, then you will do your best to recruit your associates into their network. Once they can achieve a critical mass, then advertising becomes more important, as well as a new pricing structure. As far as VOIP is concerned it may as well be 1998 again. People are just begining to notice it's potential and are willing to try all kinds of gimicks in order to drive growth. Whether it was free deliveries by Webvan or paying 7.5 million for business.com, I expect to see similar experiments (and sometime failures) in the entire VOIP space. The exciting part will be for the consumer, who continues to benefit from the efficiencies provided by the internet.

[The Stalwart]

JoeC, you're right, I reached a bit with the Vonage example, though I think the Skype example is correct.

And Davis, yes we don't know how these companies will mature though I don't think they can somehow count on advertising. That might have worked back in the days of the screen-based smartphone, but in the days of bluetooth, and Skype on your mobile, i don't think they can profit by selling your screen's real estate.

Thanks for the comments.

[KJ]

Free wireless in-network calling is similar but the wireless companies heavily promote that feature so it must work for them even in a market with fewer competitors. Of course the greater one company's market share becomes, the more likely it is that they'll be able to set the rules for everyone.

[Angryman]

Well, Skype would be extremely happy to find itself in the paradoxic situation you describe. Even with a 100% market penetration people would still have existing phone gear to call from.
I think this is an interesting idea but it applies more to SIP softphone guys rather than to Skype. Skype would/could turn the rules upside-down in a day and there's nothing we could do about it.

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[joe]

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