VoIP: Whose voice is it anyway?

During the early days of the Internet, one of the first telephony applications that migrated to the personal computer was the answering machine. While the "techno-geeks" proudly demonstrated these to their friends, it didn’t take long for the average consumer to realize that a conventional answering machine was more convenient and less expensive than using a $1000 computer as an answering machine. The late 90’s also witnessed the migration of many more applications to the Internet, and one of them that created a lot of interest and showed some sort of promise was the ability to make phone calls from your computer.

This technology--called softphone--was a computer-based telephony application that allowed consumers to make calls over the Internet. It claimed the potential to displace traditional telephony systems. Companies such as Net2Phone promised drastically reduced communication rates because of “toll bypass,” and passed on the savings to the consumer. Unfortunately, by the end of 2001, the reality of VoIP fell short of expectations, and several companies offering products or services in the VoIP space had to close due to lack of funding. Now, a little over two years later, VoIP is getting its due recognition.

The skeptics of VoIP claim that the traditional PBX offers about 5000 different features, while today’s IP PBX contains only a fraction of that--however, the gap is rapidly narrowing. Most features commonly used by the consumers, like three-way calling, caller ID and call waiting, are already available from carriers offering services based solely on VoIP architecture. Today, many enterprises are upgrading their older generation PBX that runs purely on traditional PSTNs to IP-PBX-based systems that give them the benefit of voice and data convergence, reduced administrative and communication expenses and seamless communication over the LAN, WAN, Internet and PSTN. Perhaps, most importantly, consumers are willing to put up with the shortcomings of the VoIP for the significant savings in communications costs.

As explained in this article, VoIP is going to play a significant role in changing the future of telecommunications as we know it today. In fact, VoIP has even started gaining acceptance from traditional wireline (ILECs) and wireless carriers. Today, most major North American carriers are already offering or have made significant announcements to offer VoIP-based services to consumers in 2004. They are migrating to VoIP-based architectures from their traditional TDM networks to reduce their overall cost of operations, as well as to compete effectively with the alternative VoIP-based carriers.

The cellular industry has also started leveraging the benefits of VoIP technology. Many cell phones that boast the “walkie-talkie” feature or "press-to-talk" functionality use SIP (session initiation protocol), a technology borrowed from VoIP, to communicate with each other. Software vendors and PDA manufacturers are also feverishly working to provide a softphone application so consumers can use their PDA to make calls over 802.11 wireless LANs. Toshiba recently announced bundling the PocketGPhone software client on their PDAs, providing consumers with the functionality to place phone calls over 802.11 LANs using a service from GphoneOnline.

Additionally, technologies under development for enabling handoff between a radio frequency (GSM, CDMA) and 802.11 networks--VoWi-Fi--are increasing the possibility of making ’mobile’ calls all the cheaper. All of these prove one thing: VoIP is here to stay.

ILECs and IXCs are also introducing VoIP services for obvious reasons. In order to compete on price, they need to reduce their operational expenses, and the economics of VoIP are clearly evident. Carriers can see an estimated 35% cost reduction in domestic calls, and up to 80% reduction in international calls due to technology advances and the ability to bypass many local and international tolls. More importantly, this cost reduction will help the traditional wireline carriers to compete with offerings from VoIP carriers such as Vonage and 8x8 as well the “free long distance” offers from wireless carriers. There is also significant savings as a result of consolidation of network domains into a single IP backbone and from consolidation of operations management.

SBC and Qwest have already started offering VoIP services in select markets across the country. Verizon and AT&T have announced plans to offer VoIP over broadband in early 2004.  Level 3 carries upward of a billion minutes per month on their packet network and provides hosted telephony services to 20 other carriers. In line with the ILECs, most of the cable companies have announced their own plans for delivering voice services over their broadband line. The bottom line is that the consumers will have many more local telephone providers to choose from, a year from now – thanks to VoIP.

While most traditional carriers are starting to deploy VoIP, many of the “pure play” VoIP carriers--those who offer voice over broadband--have already started offering advanced PBX capabilities to the consumer. They also are on a customer-acquisition binge that shows they may have a time-to-market edge over the ILECs. These carriers offer unlimited local and long distance in the U.S. and Canada for a low monthly fee comparable or less expensive to their rivals. Let’s look at some of the major carriers and their offerings. 

	Service Description	Local service with custom calling (Monthly)	Unlimited local and LD
Vonage	Vonage currently serves more than 75,000 customers, handles 3 million calls per week and continues to add more than 10,000 lines per month to its network. Traffic volume is over 3 million calls per week. They are expanding internationally as well as forming partnerships with smaller cable companies	$15 includes 500 free LD/Local minutes	$34.99
Voiceglo	Provides free SIP-to-SIP calling to other voiceglo members and charges for calls off the network. It aims to be in 120 of the 177 area codes by 1Q ‘04	$12.99	$29.99
8x8/ Packet8	Services starts at $19.95, but have added offerings like unlimited calling to Europe and Asia for a flat rate ($30). Recently added several advanced features such as call waiting, caller ID, hold, 3-way conferencing etc.	$19.95	$19.95
Cablevision	Cablevision’s voice over broadband footprint stretches to 4 million homes in the New York metropolitan area.		$34.95
Time Warner Cable	On December 8th, Time Warner Cable announced that it had entered contracts with Sprint and MCI to facilitate the rollout of VoIP services in all 31 of its markets with a footprint of 10.9M subscribers.
BT Broadband Voice (In UK only)	In December 2003, BT announced a consumer offering aimed at subscribers of high-speed data access rivals such as NTL and Telewest.	$13.00 plus tolls for peak, international and calls to mobile

One of the most important points to note is that these voice-over-broadband carriers are not concerned about the physical location of the equipment, as long as it is connected to a broadband (DSL/Cable) modem, consumers can be physically located anywhere on the planet. This means that the possibilities of exploiting the broadband VoIP connection are endless.

Consumers and businesses are embracing VoIP because they can drastically reduce their communication costs. Since most IP phones have a software-driven functionality, service providers can introduce new services faster as well. One of the major impacts of VoIP is in the international long distance tariffs.

Imagine this: A consumer based in California could have a broadband connection with a VoIP phone service. The consumer could carry the “broadband box” when they travel and literally plug-in to the hotel’s broadband connection and talk back to the U.S. without paying an extra penny. So, take your broadband phone on your next trip to Europe or Asia and you are sure to save a bundle if most of your calls are back to the U.S.

Likewise, if the consumer subscribes to a VoIP service in the U.S. and physically decides to ‘permanently’ locate the box with their friend or business associate abroad, they are able to call back to the United States without incurring any international long distance charges. So the next time you a dial a local phone number to call your colleague, it may actually be ringing on a VoIP phone sitting in Tel Aviv, Israel. This allows any organization to have regional representatives through out the world – all with local U.S. numbers. These types of services not only provide excellent toll-quality, but also bypass most international tariff agreements, saving the consumer a lot of money. 

Residential LD per minute rate	1994	2003	2003 – VoIP
Domestic (US) Long distance	$0.10	$0.03	$0.01
International LD – U.S. to U.K.	$0.12	$0.08	$0.05
International LD – U.S. to India	$0.78	$0.25	$0.13
International LD – India to U.S.	$2.00	$0.20	$0.00*
Average Monthly Fee (including the local line and any fees)	$25	$25	$25*

 

 

 

 

* Assumes the existence of a broadband connection and service from a VoIP-over-broadband provider.

Looking back at how VoIP has impacted international calling rates in the past decade, consumers in many countries such as India have benefited substantially. It is no surprise that many U.S.-based VoIP carriers are now looking to expand overseas--Vonage plans to expand into Canada, the U.K. and Switzerland starting in 2004.

Perhaps the most significant endorsement for VoIP in the recent years has come from the investor community. Many players in the VoIP space have had success attracting capital in 2003. In November 2003, Vonage closed $35 million in new financing and plans to use the money to further build their network, enhance marketing programs and develop new offerings. Vonage has raised $65 million so far, but claims to have spent only $15 million in building infrastructure across top-100 U.S. markets. In comparison, many CLECs have spent upwards of $10M to introduce local telephony in each market. These economics partly explains why investors are confident about VoIP

In November, 8x8 also announced that it has entered into definitive agreements with certain institutional investors for the private placement of approximately 1,839,000 shares of its common stock, resulting in gross proceeds of approximately $5.2 million. Earlier in September, Telesym, a wireless Internet telephony company based in Seattle, announced their second round of funding of $12 million, bringing their investment to a total of $18 million. Such investments also act as a show of confidence in the VoIP space from the investor community.

Gopan Madathil is a marketing director with Agilent Technologies and the chief volunteer for TechCoire, the largest network of technology entrepreneurs in Northern California. He can be reached at gopan_madathil@agilent.com.

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