Firms Vie to Dominate Messaging Convergence

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Google's expansion into instant messaging and a web-based calling opens another field of competition with Microsoft and Yahoo. Robert Siegel talks with Scott Cleland, CEO of Precursor, an independent investment research firm tracking technology and telecom sectors.

ROBERT SIEGEL, host:

Scott Cleland tracks the technology and telecom sectors as CEO of an independent investment research firm called Precursor.

Scott Cleland, what do you make of Google's expansion into this Web-based phone service and instant messaging?

Mr. SCOTT CLELAND (CEO, Precursor): Well, it's not a surprise because they have a very powerful audience and position in the market. And what we're seeing is that technology has enabled virtually everybody to offer voice over their software platform.

SIEGEL: Now a colleague today introduced me to Skype, which, I guess, makes me about the 100 millionth person on the planet to become a customer. I can make phone calls through my computer to other people who've downloaded Skype. But it's free. It's free. So where's the business plan here if what's to be had can be taken for free?

Mr. CLELAND: Well, you really can't project the future from looking at the past because when you start doing voice over technology--and we call it techcom, which is a convergence of technology and telecom--you're really changing from a service to an application. And that application is very easy; almost anybody can attach that software application to another software application.

SIEGEL: What do you mean by that distinction when you say it's no longer a service but an application?

Mr. CLELAND: Well, we've all grown up by paying, you know, the Bell system, you know, 20, 30, 40, $50 a month in order to reach anybody, whether it's a local call or a long-distance call. And when you add techcom technology, essentially what you're doing is you can ride on the back of the Internet or ride on the back of other connections and simulate what used to take a dedicated network to do.

SIEGEL: And there was an announcement from Skype today out, out of--this is a Luxembourg-based company, and they say that they're now going to be licensed and embedded in other people's software, I gather.

Mr. CLELAND: Well, what Skype is doing is trying to piggyback some of the commercial arrangements. At first they were a free service, and people were asking, `How are they eventually going to make money?' And now they're migrating and trying to become a partially paid-for service, now that they've gotten so many people to download their software.

SIEGEL: So when you speak of the techcom service, you are linguistically anticipating the demise of a discreet telecommunications industry?

Mr. CLELAND: Well, it's interesting. If you take the word AT&T, that was American Telephone and Telegraph. Nobody talks about telegraph anymore, and telephone replaced it. And we think techcom is what's going to replace telecom because what is happening here is that the tech sector is entering communications. We have Microsoft, Yahoo!, AOL, now Google, IBM. Everybody in the tech sector is now getting into communications.

SIEGEL: A great virtue of the old-fashioned telephone is that I can call up somebody who subscribes to a different telephone company than my own. But if I have an Internet telephone provider, I talk to the other people who are part of that network. When do these various networks start talking to each other, or does it require somebody to buy them all up and make them one company?

Mr. CLELAND: Well, the Internet allows everybody to talk to one another. And now what we're talking about is many different companies--Google, Yahoo!, Vonage or a cable company--they all are using slightly different protocols and ways of doing this. Some can talk to everybody; some can talk to just portions. We're in a transitional phase. Over time everyone will be able to talk to everyone.

SIEGEL: There's a delightful experience to making a call on Skype wearing headphones, and I gather Google says it'll be even more delightful, at least to the ears of a radio person. The line is very high quality. It's much better fidelity than an ordinary phone call.

Mr. CLELAND: And that's--when you go digital and when you're over the Internet and you have enough reliable bandwidth, you can get very high quality. And what you're going to see over time is that the concept of voice is going to get better. You're used to stereo quality or digital quality, where the normal phone system was designed actually to truncate about two-thirds of people's voice. So it's not--you're not hearing over the phone everybody's true voice.

SIEGEL: So what's happening today, what Google has announced, could be a pretty significant step into the future.

Mr. CLELAND: Yes, because, you know, Google is about as ubiquitous as any brand and as any tool out there. And what they're going to do is essentially take voice and piggyback the success they've had. And so they'll be a player along with Microsoft, AOL and Yahoo!

SIEGEL: Scott Cleland, thank you very much for talking with us.

Mr. CLELAND: Thank you.

SIEGEL: Scott Cleland, who is CEO of the independent investment research firm Precursor.

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