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Here Comes Trouble: The Future of Free

Imagine a world where Internet usage was billed the same way as telephone calls, where visiting a web site on the other side of the world costs more than visiting a web site hosted on the other side of town, and the bill that shows up each month reflects a charge for every link followed. This unthinkable scenario remains a fact of life in the telephone business, thanks to the usage-based financial arrangements involved in network interconnection.

Incremental progress toward flat-rate billing that started with AT&T Wireless’s Digital One Rate in 1998 have always proven successful. T-Mobile’s HotSpot @Home represents a recent example in which a dual-mode phone is utilized to get free calls wherever Wi-Fi Internet access exists. Most wireless carriers offer flat-rate pricing for calls between customers (e.g. AT&T Unlimited Mobile to Mobile) and calls between a short list of friends independent of network (e.g. Alltel MyCircle). The question remains, however, whether the expansion of these plans will ever produce Internet-like, flat-rate global calling.

There exist a lot of practical reasons for carriers to embrace flat-rate calling. Adding capacity can prove far less expensive than trying to keep track of usage. Complicated bills add to customer support costs. Deploying network infrastructure involves very few variable costs, so flat-rate pricing actually simplifies the return on investment calculation. But as long as government regulators play referee between various warring parties, the debate around reducing interconnection fees could go unresolved for years.

The Internet’s 300 million consumer broadband connections remain the best opportunity for unlimited global calling. Skype created a nice business voice-enabling PCs. Cisco’s Linksys and several dozen consumer electronics companies hope SIP-based broadband phones turn the Internet into the world’s largest unlimited calling zone. The future on the telco side will be shaped by the prospect that an emerging infocom industry might actually make this happen.

As with efforts to unwind net neutrality, competition represents a last resort for most telcos. Net neutrality keeps the dream of counting bits like minutes on hold, because as long as a voice bit costs the same as a video bit or a Facebook bit, metering bits doesn’t offer much promise. Club telco enjoys near monopoly control of Internet backbones. Cogent Communications is the only operator of a top ten Internet backbone without a legacy telecom business to protect. The hand-wringing about video-congested Internet backbones represents the precursor of a campaign to unwind settlement-free peering and increase transit pricing. Embarq recently petitioned the FCC to increase the rates associated with terminating VoIP traffic even as Vonage gets nothing to terminate traffic arriving from Embarq.

The Internet will either turn into the telephone network or the telephone network will turn into the Internet, but the conflicting pricing models seem unlikely to coexist forever. The volume of data traffic exceeded voice traffic in 1999 because of the varied applications made possible by global flat-rate connectivity. Voice traffic remains the dominant source of telco revenue nearly 10 years later, so not everyone views the development as an occasion to celebrate.

9 Responses to “Here Comes Trouble: The Future of Free”

  1. MetroPCS has been a flat-rate wireless provider here in the states for years, for all services (minutes, SMS, etc.), so Dirks’ revelation is nothing new.

    And to Ben above in regards to flat-rate conferencing, there’s plenty of free conferencing to go around because of the reciprocal compensation the carrier gets for terminating the incoming PSTN call.

    All-you-can-eat buffets have always existed, regardless of the operating costs involved in providing the service. It becomes a numbers game as not everyone will ‘overeat’.

    The problem at issue here is that rates should be equal between two carriers who exchange traffic, voice, voip, or otherwise. Those incumbent carriers that see revenue and subscribers declining as a result of these disruptive technologies will always try and lobby their way around the fast-moving upstarts.

    I guess if you can no longer compete in your own game, then by all means, change the rules. Is there any regulated industry where this isn’t the case?

  2. The internet’s flatrate model will prevail.

    At least in Germany Thorsten Dirks, CEO of the 3rd biggest MNO e-Plus, said so. “In three years the old business model is over. There will be no money to charge anymore for SMS and mobile phone minutes. Thats why we seek cooperations with Google, Facebook and other internet companies.”

    The dumb pipe is the way to go. With fair prices there is money in this business. When there is no per minute price I will be much less price sensitive.

    Now I try to save wherever I can.

  3. I agree with Daniel’s comments about managing billing versus cost of infrastructure. Ultimately, credit risk management (end users who don’t pay) is a big issue when margins are slim. At Talkster http://www.talkster.com , we skipped the end user billing issue with an ad supported calling model. Using various methods (depends on the origin and destination of the call) we connect calls without cost to the end user. Sometimes there is a cost for a local call, often times this is part of a bundle or flat rate national plan. As for Internet Telephony, there is always the cost of the Internet connection so it’s a numbers game. The perceived free calls are actually being paid for as part of the cost of the broadband/wi-fi or other subscription. There is no such thing as a free call. The old world per minute pricing model will likely disappear over time and simplified, flat rate pricing will dominate. Domestically it works where you control the network or have reasonable interconnect rates. Internationally it will be a long time coming.

  4. The data volumes required for voice are not making existing IP networks struggle and things are going to get better. For this reason being charged the earth for a voice call or a tiny SMS is naturally infuriating. Unfortunately, unlike internet businesses of any sort, in many countries telephony companies are still state controlled and subsidised. Therefore, mind frames do not change from one day to another…
    http://electronrun.wordpress.com/

  5. Well i agree to Daniel, where a lot of people think Voice Over Internet Protocol (VoIP) might be a future of conversation, to see a darker side of it not many view this development as an occasion to celebrate. There are still many uncertainties in considering whether Internet telephony could transform the Internet into a successor or a looser. But i think it would be foolish to panic now and shun VoIP in the face of potential threat VoIP faces today. In my opinion, it is the next best thing to have happened in the information technology front. Instead we should try and look for a way out.

    Parul Bindra
    http://www.bhopu.com – Web 2.0 Blogs