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Reach Out and Touch Someone Over the Internet!
Subject Huge cost savings resulting from use of the Internet to route phone calls rather than traditional phone lines
Topic Monopolistic Competition; Profit Maximization and the Firm; Production and Costs
Key Words Competition, Costs, Efficiency
News Story

Telecommunications firms are facing fierce new competition from another wing of their industry - technology that transmits phone signals across the Internet. Given current technology, little new capital is required, allowing even small firms to be extremely competitive against the larger, and formerly dominant telecommunications companies such as AT&T and BellSouth. Firms are even offering no-cost startup plans, and the larger firms are quickly getting out plans of their own so they do not miss out on this change in technology.

Voice over Internet protocol (VOIP) has been around for almost a decade, but only recently have many of the bugs have been worked out to the point that it is a viable product for firms. Issues remain to be worked out; however, since the Internet runs without an independent power supply (that telephone lines do have), there would be no VOIP service during a blackout. Further, it will take some time before this technology becomes widespread - it currently has captured about 3% of the global telecommunications market.

VOIP has the capacity to significantly reduce operating costs because of the efficiencies associated with it. For example, if a firm has numerous locations, employees have only to take their phones to other locations, plug them in, and use their regularly assigned number. No telephone technician must reconnect the telephones. Further, individuals could create one message, and then simply send out the message to numerous voice mailboxes, just as text messages go to email boxes. Further, since VOIP is connected to computer systems via the Internet, it has the capability to significantly enhance customer service and company billing procedures.

The larger firms, while recognizing that smaller firms may have an upper hand right now with this technology, are not rushing out to embrace the technology. Most analysts argue that given the current state of technology of the largest firms, it may be another 10 years before VOIP becomes the industry standard.

(Updated October, 2003)

Questions
1.

What does this new technology do to the demand curves of firms that offer phone plans? Does this represent a shift in demand or a movement along an existing demand curve?

2. How will this technology change the cost curves of the firms who purchase the services? Why will this happen?
3. What are some of the efficiencies possible with this new technology, as outlined in the article?
Source Peter Grant and Almar Latour, "Battered Telecoms Face New Challenge: Internet Calling." The Wall Street Journal. 9 October 2003.

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