Not Just Money, Honey!

Take it or leave it, IP telephony’s days in the closet are over. Exceptions

notwithstanding, largely on account of state mollycoddling of incumbent service

providers, IP telephony is happening almost everywhere and growing quickly.

While many of the traditional circuit switched telephone networks realized this

only when their revenues went into a tailspin or they felt threatened, many

embraced it, passing on tremendous cost benefits to users of voice services, in

terms of substantially reduced long distance call rates. Of course, reduced call

rate is just one of the many benefits that the deployment of IP-based telephony

services entail. And there are still quality of service and reliability issues,

among other things, that need to be looked into before we bid adieu to point to

point dedicated telephony, in favor of packet-based ones.

Historically, IP telephony has evolved (though many regard it as a disruption

and hence a revolution) and grown in countries with high PC and Internet

penetration as a substitute for high cost PSTN telephony, allowing users to

avoid high long distance and international call prices. Beginning sometime in

1994 with PC to PC voice chats, the system evolved into PC to Phone calls in

1996, and Phone to Phone in 1997. It is largely believed that PC to PC and PC to

Phone calls over the public Internet created a new set of users for whom cheap

call rates were the biggest incentive for avoiding PSTN networks.

Currently, there are hundreds of players, mostly based in the US, who claim

to offer "free" PC to PC or PC to phone domestic and international

long distance service. These include names like Net2Phone.com, Phonefree.com,

Dialpad.com, iConnectHere.com (formerly Deltathree.com), etc. Much of the

traffic carried over PC to PC is regarded as new traffic that would not

otherwise have existed.

 The same is true of much of the PC to phone traffic —

especially the free ones. However, existing carriers are losing market share

because of some of these and a great majority of calls carried over Phone to

Phone services would have been otherwise made over PSTN.

Many of these PC to Phone or PC to PC service providers have vanished despite

offering cheap or even free voice, pointing towards the fact that offering

standalone cheap voice is not a business that could last long. A case in point

is Firetalk.com. The company will be closing shop this month, notwithstanding

its two million registered users. As such, a more recent approach that this

market has been following is that of leveraging cheap or free voice to get

consumers to subscribe to a host of value-added services like unified messaging.

IDC estimates that the IP telephony market generated traffic equal to 2.7

billion minutes in 1999, and would expand to 135 billion minutes, with revenues

of US$ 19 billion, by 2004. Tarifica estimates that more than 40 percent of all

international calls will be carried over IP by 2004. While Deltathree.com

estimates that IP telephony will account for 35 percent of international traffic

by 2005, Analysys think that it would reach 25 percent by 2004.

According to a survey conducted by iLocus.com, there are over 1,600 companies

offering Internet telephony, of which 50 percent are backed by financial

institutions. The global IP market is growing at a rate of 120 percent annually,

with PC to phone traffic reaching 280 million minutes per month.

According to the survey, the manufacturing sector in IP networks is growing

at 149 percent annually, but soon the services growth figures will take over the

equipment growth rate.

For the telecom regulators, this fast paced growth of IP telephony has posed

many questions, fueling a debate on whether to embrace and then regulate it or

just ignore it or prohibit it completely. While IP Telephony is permitted

unconditionally in the USA, it is permitted in the European Union countries only

when the voice traffic is not real time. Countries like Japan, New Zealand,

Poland (Phone to Phone by mobile operators only), Czech Republic (except Phone

to Phone by other than the incumbent), Hong Kong SAR, Singapore and Switzerland

permit real time IP telephony, with certain light conditions. In Australia,

Canada and South Korea it is permitted and treated on par with other voice

telecommunications services. Acknowledging its inability to check proliferation

of clandestine Internet telephony operations, China opened its IP telephony

market in April 1999, with licenses to three state-owned carriers to roll out

services.

Many countries, mostly developing ones, do not allow any type of voice

traffic that bypasses circuit-switched networks largely because competition with

incumbent carriers is prohibited. However, many of these may be tolerating PC to

Phone calls because it is not considered voice telephony at all by them.

Besides, many others have liberalized services like Fax-over-IP (FoIP). The

International Telecommunications Union (ITU) has noted that many developing

countries are following "asymmetric policies" with a view to

maximizing incoming settlement payments. This, according to ITU, means that many

countries permit (or even encourage) use of the Internet to carry outgoing

international calls (thereby bypassing the accounting rate system), while

insisting that carriers making incoming international calls pay the full inward

settlement rate.

Interestingly enough, even though the US Federal Communications Commission

(FCC) has ruled that Phone to Phone IP telephony (both true Internet telephony

and VoIP) appears to be functionally equivalent to PSTN voice services; they are

not governed by any telecommunication regulations. Incidentally, the US is also

the country of origin of the highest number of IP telephony voice calls.

While users have benefited from the cheap IP telephony based long distance

calls, for incumbent carriers, especially in countries where IP telephony is

allowed, this has forced a number of complex issues. While on the one hand a new

set of pure IP-based service providers, with no legacy networks, have

cannibalized their revenues, on the other hand, it has left them wondering

whether to move towards providing telephony services over an IP platform and at

what speed. This is largely because many of the incumbent operators who planned

to implement VoIP, matching the quality and reliability of circuit switched

networks, found the price advantage disappearing in the face of dampening prices

for traditional telephony. For instance, long distance calls in the US are now

down to 5 cents per minute from around 25 cents per minute a couple of years

back. In places like Hong Kong, where a call to the US cost 20 cents per minute

a year back, it now costs 3 cents per minute. PSTN calls to the US during the

night in Hong Kong, cost as little as one cent per minute.

VoIP, however, has certainly forced the incumbent carriers to reorient their

business strategy and technological inclinations away from a circuit-switched

environment. In most cases traditional carriers are looking at migration to an

IP-based platform as a step towards facilitating integrated voice, data and

video services, thereby opening new revenue opportunities. Cheap voice as a

business case is already out of favor with these carriers. These include

carriers like AT&T, BT, KPN, Deutsche Telekom, Telekom, Telenor, Telia,

Sonera, Telstra, KDD, NTT, Korea Telecom, Sprint, Japan Telecom, China Telecom,

etc. These carriers are mostly looking at combining the values of traditional

telephony—reliability and quality of service–with the convergence-multimedia

opportunities offered by IP.

Ravi Shekhar Pandey