Peter Nowak: Taking the puff out of Telecom's sails

Unveiling details of its next-generation network last week, Telecom was rather cheeky in talking about whether any savings for phone customers would result.

Chief operating officer Simon Moutter espoused the idea that customers would be getting the same quality of phone service, yet would also have a host of new features to choose from, such as multiple phone numbers and call redirecting.

If you read between the lines, that means Telecom intends to keep charging customers as much as it can while raking in heaps of extra profit resulting from the new network's big costs savings.

But the reality is, decisions on call pricing are quickly being taken out of Telecom's hands, and it needs to seriously rethink its calling strategy.

Telecom stands to make huge savings with its new network. One analyst suggests the firm could shave up to 80 per cent off its operating costs, or about $2.5 billion by current calculations. Even with calling revenue continuing to decline - 7.3 per cent or about $106 million over the past fiscal year - that would be a hefty chunk of change to add to the bottom line. You can't blame the company for getting a little misty-eyed at the thought of so much extra profit.

But offering calls over an internet protocol network is much cheaper than doing so over a regular, old digital network. It's so cheap, in fact, that companies such as Skype are doing it for free, while internet behemoths Google, Yahoo and Microsoft are scrambling to get a piece of the action.

Moutter was quick to point out that Telecom's offerings are "not internet voice," the likes of which Skype is offering.

That type of voice over internet protocol (VoIP) works "okay" some of the time and not at all at other times, while Telecom's services are still top-notch.

To underscore the point, Moutter said Telecom "may or may not participate to some extent in that business" of competing with the likes of Skype. But Telecom, and other telcos around the world, have no choice but to compete with Skype, which heralds a technological revolution the likes of which has transformed other industries.

Take a look at the music business. Who knew that when Shawn Fanning launched his Napster file-sharing software in 1999, he would turn the entire industry upside down? Music labels have had to rethink their way of doing business, and while the end result is far from played out, consumers are already reaping the benefits.

Until recently, music CDs had enjoyed the longest run of any consumer electronic product to not see any tangible decline in price.

Napster changed all that - not only are CDs finally coming down in price, but music companies are having to offer songs online for a discount. In many cases, it's cheaper to download an album than it is to buy the CD in the store. In the end, music prices can only continue to go downward.

The same is ringing true with the movie industry. Piracy and file-sharing software are starting to eat into box-office profits, forcing the industry into a big rethink.

This year Warner Bros released The Sisterhood of the Traveling Pants on DVD in China the same day as its theatrical release in the United States in an effort to beat pirates to the punch.

Other studios are also considering shortening the theatre-to-DVD window to combat piracy, and to save on marketing costs.

Meanwhile, attendance at US multiplexes is down and ticket prices are dropping as a result - a trend likely to find its way here sooner rather than later. DVD prices also continue their freefall.

Again, it's a situation a long way from being resolved, but consumers are already benefiting.

In telephony, the burgeoning revolution is stunning. There are 51 million Skype users, and 150,000 new users are reported to be joining every day. Estimates suggest there are about 40,000 users here in New Zealand.

Skype users call each other free, and can phone regular phone users in most parts of North America, Europe and Australia for just 3c a minute. That compares with Telecom's rates of around 45c to 47c a minute.

The company is also in the midst of rolling out its "SkypeIn" service, which allows traditional phone users to call its PC-based customers. A one-year service, complete with voicemail box, costs about $53 - slightly more than one month's service from Telecom. Price-wise, it's no contest.

As for concerns about VoIP call quality, well that's just plain scaremongering on the part of the telcos. I made Skype calls to Vietnam, Denmark and Canada last week and, although it's anecdotal evidence, there was no delay and the sound quality - through the stereo headset I was using - was at least as good as Telecom's, if not better.

If Telecom wants to keep getting any revenue from calling, rather than see it completely sucked away by services such as Skype, it better get very serious about competing with these upstarts. That means quickly passing on savings to its customers, before it's too late.