Disruptive Innovation with Skype

Last year I listened to a podcast of a speech given by Clayton Christensen, author of the Innovator’s Dilemma (and other publications) as well as being a Harvard Business School professor (and a guy with his own flashy web site). In this speech, he talked about how disruptive innovations go through three phases: first they’re “crappy” and established companies ignore it; then they’re “less crappy” and early adopters grab ahold of it and new markets emerge; then they’re “good enough” and that’s when industries flip upside down and companies go away.

I submit that Skype is right between “less crappy” and “good enough” right now.

At any given time I notice five million or more active Skype users and they claim 100 million software downloads (always a suspect number though). Podcasters are using Skype for recorded interviews that rival what I hear from mainstream radio stations. Telephony use alone is nothing short of phenomenal and it’s tough to adequately describe how “near zero” telephony costs — coupled with high quality audio — simply removes any anxiety one might have related to the costs of communicating and how effort and straining to listen melts away. Here’s an example…

• Yesterday I was in southern Minnesota driving with my son and daughter when my wife called on my mobile phone. She’s in Paris and was calling via SkypeOut. Instead of spending nearly $2 per minute calling from her mobile phone, it was $.02 per minute using SkypeOut minutes.

• This morning we had to deal with some future planning stuff with my daughter who is down in Rochester, MN. Again, my bride is in Paris and I first called her Skype-to-Skype; then I called my daughter on her landline; then I connected us in a conference call and we had a nice, pretty relaxing conversation (with audio quality that was delightfully good). High quality audio, coupled with costs so low they were a non-issue, allowed us to instead focus on the essence of our communication.

Skype’s features are geared toward items that enable their users to qualitatively enhance their communications. Even my Vonage line in my office provides me with incredibly useful capability (and is even better quality than Skype but is turning out to overall be less useful). For instance, I can set up SimulRingâ„¢ so my Vonage line will simultaneously ring my office, mobile and SkypeIn numbers so I can answer calls regardless of my location.

To this day — and with all the resources at their disposal — I have to call Qwest to make simple changes to the features they offer me on the one landline I still have (my home phone). We keep it for a bunch of reasons, but I’m as stunned by Qwest’s lack of innovation in the same way that I am with Microsoft’s vs. Apple’s (since the former spends billions more than Apple on R&D). Guess in both cases innovation isn’t necessary when you have gignormous cash flow.

Telephony companies are on life support (and arguably have been for years) but their death may never come even though they may be in a vegetative state for decades. The voice over IP (VoIP) disruptive innovation is going to continue and, in my opinion, accelerate as always-on, ubiquitous wireless internet connections proliferate. So when is the right time to short telephony stocks?