17 Comments

Summary:

SIP-compatible VoIP devices already account for as much as 20 percent of landline telephone traffic. But mobile telephones will not remain a safe haven for long, as more companies start to offer VoIP alternatives to operator voice plans. Yet the displacement of analog phones by VoIP devices has not displaced the telephone network itself.

Session initiation protocol-compatible VoIP devices already account for as much as 20 percent of landline telephone traffic, thanks to the efforts of companies like Cisco, which sells to enterprises, and Comcast (in the U.S.) or Free (in France), which target consumers. Mobile telephones will not remain a safe haven for long, however, as more companies like Fring and Truphone start to offer VoIP alternatives to operator voice plans.

Such plans involve downloaded SIP User Agent software that can also voice-enable gadgets like the Nintendo DS, Sony PSP or iPod Touch. Dan Borislow claims the marketing blitz for his SIP-based magicJack puts him on track to sell 500,000 of the devices by the end of this month. Yet the displacement of analog phones by VoIP devices has not displaced the telephone network itself.

The state of affairs is analogous to printing email before it reaches the destination in order to preserve a role for the post office. It will not last. The ubiquitous use of SIP makes it possible to configure VoIP traffic to peer directly via the Internet, but the business models of VoIP companies depend on the minutes-based charging enabled by the telephone network. Companies like Skype and Vonage, as well as the Web 2.0 voice plays Jajah or Jaxtr, provide for free calls between users, but they all generate revenue by sending off-Net calls to the telephone network.

The 20 percent VoIP penetration number implies that both called and calling parties have VoIP devices about 4 percent of the time. This leaves plenty of work for the telephone network, but the long-term utility of passing VoIP traffic through the telephone network does not look promising. At some point, the penetration of VoIP devices will cross a threshold that makes the minutes-based business model of telco and VoIP players alike untenable.

The strategy of using VoIP to make the telephone network more efficient has short-term merit in that it avoids the expensive process of changing end user behavior. The usual mode of price competition serves as a reasonable placeholder until VoIP devices get sufficiently mature and achieve critical mass. A regulatory environment that requires VoIP players to implement traditional functionality associated with E911 and CALEA contribute to preserving the status quo. In the meantime, patent litigation remains a drag on investment capital, and the availability of suitable Internet connectivity remains particularly weak in the mobile context — Internet access in any form remains an obstacle in many locations around the world. Reliability gives the telephone network an edge over the Internet for sales calls and other high-value communication.

Telephone network integration may provide a useful transition strategy en route to VoIP nirvana, or it may represent a unrecoverable dead end for the current crop of VoIP startups. Companies that depend on the telephone network inherit of a range of artificial constraints. VoIP devices connected via the telephone network lose the prospect of delivering high-quality audio. Traditional telephones do not support the use of domain names for routing or hyperlinking. Global flat-rate termination that serves as a driving force for applications of the Internet get sacrificed. Embracing the telephone network postpones the search for new forms of communication.

The dependence of VoIP plays on the telephone network does not erase the risks VoIP poses to the telco status quo. At this point it’s not even clear if there exists a role in a VoIP infocom ecosystem for traditional service providers. The metered usage charges that make the telephone network attractive from a business model perspective do not exist in an Internet context. Infocom seems likely to mirror the existing infotech bring-your-own-device ecosystem with hardware vendors, software companies and access providers. It will take at least another decade for the forces at work to play out, but this provides little consolation for an industry that traces its roots to 1876 and telco executives unable to retire before the music stops.

Daniel Berninger is the CEO of Free World Dialup

  1. The dependence of VoIP plays on the telephone network does not erase the risks VoIP poses to the telco status quo. At this point it’s not even clear if there exists a role in a VoIP infocom ecosystem for traditional service providers.

    Share
  2. I completely challenge the statistic that 20% of fixed line traffic is signalled with SIP. Please provide a rock solid reference/s.

    Share
  3. The long term conversion of circuit switched to packet switched and routed systems has been well on its way for a number of years, both within and without the telco operations. SIP is a very efficient way to manage channel allocations for a given user population. There still may be some residual rationale for nailing up a circuit, but this era is coming to a close.

    And now, we have alternative interconnect carriers that globally cater to no-on e but VOIP providers, making it possible to hop off the packet switched services and terminate to local exchanges world-wide, with all of the peering and termination fees hidden by these super-carriers.

    The conversion of mobile to fully VOIP is not far away. The idea of seperate voice data plans is merely a convenient partitioning of the mobile carrier’s productization, for all of their payload past the tower interconnect is packet switched and managed dynamically in any case.

    Share
  4. After several years of debating whether to proceed, we finally cancelled completely the wired telephone company. Maybe a 50% increase in the monthly charge (‘One Company Advantage’- HAH!) was the final nail in the coffin. I cannot believe that MANY more homes have not done the same since cell phones are everywhere with long distance calls the same as local calls– and the wired companies will fade into the sunset because they have nothing to offer. They SHOULD have been lowering the rates to keep their customers!

    From the same view, why would a ‘magicJack’ company believe it will succeed? It requires a wired phone for its cheap long distance calling.

    Share
  5. Daniel,

    The idea (or ideal) of flat rate telephony pricing either globally or in a smaller domain breaks down, not because of the technical transport mechanism (TDM circuit switched vs. VoIP), in my opinion, but because the underlying business model for termination of calls for almost all wireline and wireless telcos is, as you pointed out, minute-based. In some areas like the US the rates per minute are generally uniform and low, even for termination to wireless networks. (There are notable exceptions where some small US-based CLECs or ILECs have obtained or maintained relatively high termination rates and are involved in “traffic pumping” schemes.)

    Where termination rates are low and predictable, carriers – whether traditional or VoIP – can reasonably safely engage in flat rate pricing to business users and consumers. This type of business model assumes a reasonable distribution of demand from users for the flat rate prices. An ongoing risk is that arbitrage wholesalers will buy the “retail” flat rate service and terminate huge amounts of traffic thereby breaking the business model.

    Probably the largest impediment that I see to implementing flat rate pricing globally is the entrenched business models of non-US wireless (mostly GSM) carriers. These carriers charge high termination rates to other carriers to reach users on their networks. This business model was historically tied to these carriers charging their users for outbound calls, but not charging their end users for inbound calls. This made having a mobile phone more attractive and helped increase the rate of penetration of mobile phones in these markets. The down side is that the carriers charge other carriers high rates to terminate calls to their users. It was only in the last couple years that regulators like Ofcom in the UK have worked (see mobile termination on this page: http://www.ofcom.org.uk/research/cm/icmr07/overview/landscape/)
    to reduce these rates, since it has become clear that there is no market mechanism to correct the issue. All that being said, there are too many mobile carriers that depend upon these revenue streams to expect that the rates will match landline termination rates anytime soon. This in turn will require all carriers, whether VoIP or not, to set their rates to cover these potential costs.

    I would expect that the path to a true SIP or VoIP flat rate telephony world will be through the expansion and interoperability of various VoIP “islands” of users. The ability of VoIP carriers to grow their closed or semi-closed VoIP-VoIP user groups into the mainstream seems to me to depend upon increasing the availability of clients on the termination end of calls. This need could be mitigated to some extent by well implemented voice messaging and presence technology. But traditional analog telephony is hard to beat in this respect since POTS phones are available to receive calls almost 24x7x365. Many existing SIP clients depend upon desktop or laptop computers being on and having the software client loaded. In a mobile environment VoIP software clients may cause battery life issues.

    Share
  6. broadband_fan Wednesday, June 25, 2008

    Comcast does not use SIP for residential voip at this time.

    Share
  7. broadband_fan,

    SIP runs at the core of Comcast’s network, so they can peer (if they so choose) with any other SIP network. Comcast is moving to Docsys 3.0 which also supports SIP end points. Skype also does not support SIP end points, but they use SIP to connect with the telephone network (e.g. SkypeOut). The column makes the point Skype and Comcast can connecting callers without touching the telephone network.

    Share
  8. [...] For more – GigaOm Sees The End of Telephony [...]

    Share
  9. [...] Telerupted: Twilight for Telephone Networks, Daniel Berninger projects that at some point VoIP networks will connect more individuals than the [...]

    Share
  10. Macdad – there is no requirement to have a landline in order to use MagicJack. Like at ATA, Magicjack does require an analog endpoint (phone), but does not utilize a POTS landline at all. It is a USB based dongle, with an FXS port to which you attach a traditional analog phone.

    The service is limited somewhat because it requires a running PC in order to faciliate calls, but the pricing model is certainly disruptive enough to have attracted a lot users in a short time.

    Share

Comments have been disabled for this post