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February 19, 2013

SKYPE News - Skype's Market Disruption Continues

By Gary Kim, Contributing Editor

Skype (News - Alert) may now account for about a third of all international “long distance telephone traffic,” TeleGeography says. For some, that might be about as good an example of “market disruption” as can be found.

TeleGeography (News - Alert) estimates that cross-border Skype-to-Skype voice and video traffic grew 44 percent in 2012, to 167 billion minutes. This increase of nearly 51 billion minutes is more than twice that achieved by all international carriers in the world, combined.

Carrier international long distance traffic grew about five percent in 2012, far less than the 13 percent rate carrier had been seeing for most of the past decade or two.

However, if Skype’s traffic were added to carrier international phone calls, international voice traffic would have grown 13 percent in 2012, in line with historical trends, TeleGrography notes. That would suggest, to many, that Skype cross-border traffic now is cannibalizing carrier international voice. 

And that’s where the “disruption” notion seems to fit.  Disruption, though sometimes equated with "better products," is more than that. Disruptive innovation creates new markets and new value networks, typically displacing older incumbents who dominate those markets.

That can happen because the incumbent's cost structure means the incumbent really cannot serve some customers. In other words, it’s more appropriate to call the business model “disruptive," in that sense.

In some cases, that means a disrupting company can build a market out of a segment that the market leaders cannot afford to serve.  

Characteristics of disruptive businesses, at least in their initial stages, can include:  lower gross margins, smaller target markets, and simpler products and services that may not appear as attractive as existing solutions when compared against traditional performance metrics, according to Professor Clayton Christensen.

Over time, though, performance improves, eventually making the challenger value proposition more of a head to head competitor to the market leaders. That is why so many disruptive technologies (and business models) start at the low end of an existing business, moving up the value chain over time. Huawei (News - Alert) comes to mind.

But so does international voice, as Skype alone now accounts for nearly a third of all international voice usage. Most observers would agree that the fundamental problem over the top voice apps represent is a cost structure, and therefore a retail pricing level, that established carriers cannot match, long term.

Edited by Brooke Neuman

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