Death Grip? Holding on to the Telco Voice Model

Updated: September 18, 2006

As the VoIP industry takes increasing advantage of the cost-saving benefits of a global IP infrastructure, one of its biggest challenges will be to convince customers to keep paying for long-distance calls, at least the international variety, on the traditional telco per-minute basis. Its future vitality will depend on how well, and for how long, it manages to do so.

An announcement in early September by Global Crossing, building on a related announcement in June, brought a big boost in those benefits. Both announcements represented major moves toward treating commercial VoIP more like an IP service than a traditional voice service, by rendering call distance and duration irrelevant.

The June announcement introduced what Global Crossing called its VoIP Community Peering Service. The service gave the carrier's enterprise VoIP customers the ability to connect to other customers anywhere in the world with no per-minute charges, just as they would with VoIP calls within their own organizations. Calls would stay entirely within the Global Crossing MPLS-equipped IP network. That would eliminate the charges associated with traversing the PSTN. It would also ensure end-to-end quality of service, and make possible the use of IP-based features that TDM connections can't support.

It amounted to what Bryan Van Dussen, director of service provider research at In-Stat, called "a friends and family plan on steroids." A particular selling point was that it let companies connect with their distributors, manufacturers and suppliers as if through a traditional extranet, but without the additional cost and complication.

The announcement a couple of weeks ago extended the same capabilities to commercial VoIP providers. Rather than paying per minute to transport calls over the PSTN, the providers pay a flat rate to connect to the Global Crossing network at a fixed level of IP bandwidth capable of carrying a certain number of calls. There is no further charge if the calls terminate at another Global Crossing-connected VoIP phone.

The service allows both enterprises and commercial VoIP providers to connect their users to any other such users, anywhere in the world, on a bandwidth rather than per-minute basis. Today, that means more than a million phones. And the service becomes increasingly attractive the more Global Crossing expands its network and adds customers.

"I think the premise of VoIP generally was that it would be cheaper and you'd get more value out of the service, and everyone's been waiting to see when that's going to happen," says Chris Smith, senior product manager for the service. "We're trying to push that way." At the VON show in Boston, the carrier announced VoIP provider SunRocket as an early customer.

If the new service proves popular, it could inspire imitators. And if that happens on a large scale, it has the potential to demolish the entire minutes-based business model, and particularly its lucrative overseas long-distance component. After all, if a service can connect, say, a VoIP caller in New York with one in Hong Kong without any per-minute charges, it could just as easily connect that caller to an IP gateway hooked to the local PSTN in Hong Kong.

That would let the caller reach any phone in Hong Kong for no charge other than some minuscule fraction of a flat monthly fee, plus the cost of terminating a call in that city. It would essentially be a carrier-based version of something like SkypeOut, but possibly even cheaper, because local calls are typically untimed. And the quality would be better, because the calls would travel entirely over a private MPLS backbone until they hit the local PSTN at the end.

Establishing such a service would require two things. First, the IP network operator would have to sell the combined flat-rate transport and local termination service to a VoIP provider as such, rather than only offering conventional minutes-based international call completion. Second, the VoIP provider would have to offer the same bandwidth-plus-local-call rates to its retail customers, rather than continuing to sell overseas calls on a per-minute basis.

There are of course more costs involved with establishing overseas IP circuits than with domestic ones, and with terminating calls to the local PSTN rather than to in-network VoIP phones. But companies operating international IP backbones and terminating international calls for domestic carriers already have such infrastructures in place, so incremental costs should be little or nothing.

In short, offering essentially flat-rate services for international as well as domestic calls is technically and even commercially possible. Already, VoIP providers like Vonage allow customers to establish "virtual" phone numbers overseas, so that friends in the U.K., for example, can call them in the U.S. for the price of a local London call. An outbound version would have similar economics, and in fact Vonage currently offers free international calls from the U.S. to some European countries with some of its packages.

The service would be also great for consumers. It would do the same thing for international calling, at least to countries where the IP links and gateways exist, that IP and cheap fiber-optic trunks have done for domestic calls: specifically, make the length of calls, and the distance they travel, unimportant.

But it could be a disaster for VoIP providers, for one reason: They would lose the revenues they earn by pricing their overseas calls on the same per-minute basis that conventional telcos use. And that means they'll have to do everything they can to avoid making time-and-distance-independent international pricing the rule rather than the cut-rate exception.

It helps that consumers have continued to accept the idea of paying by the pricey minute for overseas calls (though rates to some countries have dropped to pennies per minute), even as they become accustomed to paying flat rates for unlimited domestic calling. But it will take only a big sales push by a well-funded VoIP upstart to make sure consumers know how technically feasible it is to let them call London or Hong Kong for no additional charge.

Once that happens, it'll put all the rest of the VoIP providers — not to mention the telcos — under pressure to do the same. And at that point, it'll take some serious marketing powers to keep consumer IP telephony from going the way of broadband Internet access, with customers insisting on paying a flat rate for all the calls they can make anywhere in the world.

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