Why A Cellular Carrier Did Not Buy Skype

The recent purchase of Skype by Microsoft for $8.5 billion caused me to recall an awkward meeting I had in 2005 with a particularly clueless group of cellular executives. Their utter stupidity is a bit disheartening, but highly instructional.

Witnessing The Idiot’s Dilemma

I recently had lunch with a good friend with whom I have a shared experience. Although we did not work at the same company (I was at CallWave and my friend was at SIPphone), during the mid 2000s, we both had the misfortune of attempting to entice cellular carriers to adopt the unique features enabled by VoIP (Voice Over Internet Protocol) technology.

Some of these capabilities are finally entering the market, primarily introduced by non-telecom entrants like Google and Apple, such as: visual voicemail, screening voicemail messages and immediately connecting you to callers with whom you wish to speak, and displaying caller ID on your television. Cool stuff for circa 2005, unless you were an idiot working for a cellular carrier.

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Many moons ago I read Clay Christensen Innovator’s Dilemma and I “got it.” However, I never had a chance to witness first-hand the phenomenon Christensen so eloquently describes, until I met with a particular cellular carrier which had a singular focus on resisting innovations while expanding their reliance on Bad Profits.

In the course of one meeting, I observed the following trifecta of stupidity.

  • Pumping Profits With A Longer Voice Prompt – in the mid-2000s, many consumers’ cellular plans limited their usage and severe fees were levied against anyone who exceeded their monthly minutes. During the course of our meeting, some of the mid-level executives chuckled over the fact that they had recently extended the length of the prompt a user heard prior to leaving a voicemail message.
    Ever wonder why the default cellular voicemail prompt is so lengthy? When was the last time you “Pressed one to page the person you are calling?” Does anyone under 30-years-old even know what “paging someone” means? I doubt it. By padding the voicemail preamble with meaningless instructions, cellular companies increased their revenue by many millions of dollars, without delivering an iota of incremental value to their users. Rather than be embarrassed or ashamed, the executives with whom I was meeting  found the lengthened prompt to be delightful.
  • Skype Sucks – As with most discontinuous innovations, in its early stages, Skype’s performance was not equivalent to the carriers’ vaunted “five 9’s,” which translates into uptime in excess of 99.999%. One engineer in the room found it especially ludicrous that Skype only allowed one person to speak at a time, which caused confusion when people inadvertently interrupted each other. According to this engineer, “this problem was solved over a hundred years ago.” Ha, ha, ha.
  • Our Service Sucks – After having a good laugh at the expense of VoIP in general and Skype in particular, one of the executives said, “Skype might suck, but so does our service. I have to go outside of our building to make a call.” Keep in mind we were in the cellular carrier’s corporate offices. They felt it was entirely appropriate to dismiss Skype as an inferior solution, yet their own service was suboptimal when accessed from office buildings in most major cities.

Although this meeting was entertaining, albeit in a very dark and maudlin manner, I walked away with the assurance that this particular carrier would be one of the last to adopt the features offered by VoIP. Sadly, I was right. Nearly seven years later, this cellular carrier has still not incorporated IP telephony into their services.

Mr. Christensen hypothesized that innovators who create discontinuous technological breakthroughs have difficulty abandoning their technologies quickly enough to adopt emerging ones which they did not create. A more common situation is when the innovator is long gone and the BDC is run by ATM Operators full of hubris and oblivious to the fact that they had nothing to do with establishing the company’s dominant market position. The study of this group would be a perfect follow-up to Mr. Christian’s book. Since A Confederacy Of Dunces is already taken, an apt title would be, The Idiot’s Dilemma.

Entrepreneurs are thankful that such BDC dolts exist, as it makes it possible for smaller, less experienced and resource-constrained startups to launch compelling innovations and eat a bigger company’s lunch before they even realize their plate is empty.

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John Greathouse is a Partner at Rincon Venture Partners, a venture capital firm investing in early stage, web-based businesses. Previously, John co-founded RevUpNet, a performance-based online marketing agency sold to Coull. During the prior twenty years, he held senior executive positions with several successful startups, spearheading transactions that generated more than $350 million of shareholder value, including an IPO and a multi-hundred-million-dollar acquisition.

John is a CPA and holds an M.B.A. from the Wharton School. He is a member of the University of California at Santa Barbara's Faculty where he teaches several entrepreneurial courses.

Note: All of my advice in this blog is that of a layman. I am not a lawyer and I never played one on TV. You should always assess the veracity of any third-party advice that might have far-reaching implications (be it legal, accounting, personnel, tax or otherwise) with your trusted professional of choice.

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