Remember Barriers to Entry

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My father was a successful serial entrepreneur, and I remember him teaching me about Barriers to Entry. He respected a business with decent barriers to entry. The barriers provided incumbent(s) with some protection as a reward for their initial or earlier heavy lifting.

Before I opened my own telecom dealership, I visited a successful one in a neighboring city. We toured his office, and I saw a fleet of service trucks and a storeroom with nearly a million dollars worth of inventory. He said, this is what it takes to be a big fish. His business was 30 years old at the time. Little fish didn’t bother him, as the customers knew who had the techs and inventory.

The barriers to entry into some industries are quite high. Here in Colorado there is no shortage of mountains, but people complain the ski resorts are too crowded – why not open another? Besides the direct costs of things like chairlifts, parking lots, ski patrol, snow cats – there are the general infrastructure areas like roads, airports, nearby hotels, electricity, etc. I can think of a few resorts that have gone under or sold, but can’t think of any new ones.

Telecom has always had significant barriers to entry. On the equipment side it required a national sales and service capability. On the carrier side it required cables or fiber including right of way. In order to avoid every carrier connecting to every home and business – we created layers of tax funded regulation to maintain and share cable plant as well as infrastructure services such as 911.

But this isn’t true any more. Over the past decade the rules changed. AOL created a national dial-up value-add network using other’s people’s network  resources (POPs provided by L3). Skype and Google Voice are both processing tons of calls as a carrier (and well as other forms of real time communications) and neither has a single cable in the ground (or an advertised phone number for customer service). Cloud based telephony as a service (hosted voice) seems to have a new player every week – most offering services nationally often with virtual infrastructure. Most of which are using servers they don’t own.

Barriers are falling and instead we now have access to “other people’s money”.

When I interviewed Craig Walker of Google Voice for NoJitter, he told telecom entrepreneurs “The good news is that its a lot cheaper to build a service today (hardware, open source software, hosted infrastructure, etc.), but you do need to understand the telecom space.” Perhaps “good news” was an understatement. His new venture (Nosh) uses smartphones to crowdsource restaurant dish reviews. Nosh doesn’t provide the phone, the bandwidth, or even the food.

It has happened slowly (like the boiling water and the frog), but when I look around, I’m in awe of all the innovation taking place. Asterisk probably started the avalanche- not only did it lead to several new PBX systems such as Switchvox (subsequently acquired by Digium), Trixbox, and Kerio – but entirely new ecosystems of technologies that involve call processing. Remember when major PBX software upgrades didn’t really add any new functionality? Those were the days.

Now we have cloud as a telecom platform (PaaS) – Voxeo and Twilio are two great examples. If you want to launch a contest with American Idol like dial-up voting – the entire infrastructure can be created and managed from an iPhone app without any upfront costs. These organizations provide the infrastructure and tools so that telephony programming becomes available to non telephony developers. These companies reduce the barriers to voice enabling applications and offer on-demand/usage pricing.

A few years ago, one of the coolest new features in the contact center space was the ability to hang-up yet stay in queue – the system could call you back when the agent was ready. This feature took years to become widely available and was rolled out with various software upgrades. Now, there’s an iPhone app for that available to anyone that doesn’t want to hold – regardless of the call center software.

Amazing.

While most of this is good news, there is a dark side. Quality is continuing to drop and that’s unfortunate. I aborted several video calls on Skype last week due to poor quality. Another problem is around interop and the amount of new clubs forming – Skype, G’Chat, FB, GoogPlus, etc. I just got an invite to participate on a call using Powow – the meeting started 15 minutes late due delay associated with registration and chit-chat about the new service. With competition and innovation comes price drops, but those are being offset with shorter product life cycles and ongoing learning curves.

The fact is telecom, probably for the first time in its 100+ year history – has few barriers to entry. It’s no longer a hardware or a cable plant game. Nor is it limited to telephony software programmers or voice nerds. Got some spare time this weekend? Let’s start a telecom company!

Dave Michels