Bandwidth.com and Verizon Just Made VoIP Sustainable

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Bandwidth.com and Verizon Communications today signed an agreement that could make it easier for companies such as Skype and Twilio to build out cool VoIP applications and services, as well as set precedent ahead of any regulatory policy on how phone companies charge for VoIP calls. The agreement between Verizon and Bandwidth.com — the fifth largest phone company in the U.S. and the provider behind some Google Voice numbers — Pinger, and other hot VoIP companies that can’t be mentioned, sets the fee Bandwidth.com pays to connect calls on Verizon’s network at $0.0007 cents. That’s about seven times less than the average rate of half a penny charged for terminating VoIP calls on analog telephone networks.

The agreement with Verizon has three implications, with the first being that Bandwidth.com now knows what it will pay to terminate VoIP calls to landlines, which will help it build out a stable cost basis for its business and thus help other VoIP companies it serves do the same. Much like the agreement with the SoundExchange helped Pandora, the online radio station, figure out the costs of providing streaming music to users so it could build out a business model to support itself, this agreement helps Bandwidth.com and other VoIP providers by setting a baseline cost. David Morken, CEO of Bandwidth.com, says he’s in talks with another major wireline provider to sign a similar deal.

The agreement could also help Verizon, which also has a lot of VoIP traffic on its network, pay lower rates to rural telephone companies. Verizon has to pay other telecommunications providers to terminate its VoIP calls, and in some places, it pays almost a half-cent per minute to do so. By publicizing this agreement, Verizon has told the world what it’s charging others, and said what it wants to pay. Expect rural providers to experience pressure from Verizon to bring their VoIP termination fees down to this $0.0007 cent level. From a research note issued today by investment research firm Stifel Nicolaus:

In the absence of reform, we believe Verizon and others are looking to put downward pressure on intercarrier compensation in the marketplace. Verizon is disputing rural carrier collection of access charges for connecting VoIP calls while attempting to negotiate deals, including the one with Bandwidth.com, that move the industry toward lower rates.

The third implication has to do with the somewhat esoteric world of regulation and telecommunications law. The FCC has never ruled on intercarrier compensation rates for VoIP services, because it has never decided if VoIP is a telecommunications service like wireline telephone or an information service like email. Obviously, folks don’t have to pay $0.0007 cents to send an email, although email doesn’t really cross from an IP network to an analog world unless the recipient has dial-up. This private agreement classifies VoIP as an information service and sets a rate — something the FCC hasn’t yet done for VoIP calls. So while the FCC has decades of rate setting and compensation agreements for voice traffic, it has never made the leap to set rates for VoIP. This has left the Verizons and other telcos of the world able to set prices, and the market for VoIP to develop in a way that’s vastly different from the market for email.

So this rather dull-sounding agreement is a big deal for companies like Google, Skype, Twilio and Bandwidth.com, as well as for rural telcos and the FCC. If the FCC decides to make a decision on VoIP interconnection fees rates this year, as some sources have said it will, then Morken says he can let the agreement expire (or not) depending on what the rules say. For Bandwidth.com, which has gone from operating 1 million numbers at the end of 2009 to 17 million numbers today, the agreement is like a hedge against higher prices and regulatory uncertainty that Morken can use to build his business.

With $100 million in annual revenue, up from $85 million the year before, Bandwidth.com is growing well without ever having taken on venture investment. The company, which is profitable, expects to file to go public within the next 18 months, said Morken. We’ve covered the business in December 2009, and I think as an infrastructure provider for VoIP services, Bandwidth.com can sell itself as a credible VoIP platform. Contracts like this only reinforce that legitimacy, although should the FCC declare VoIP an information service, I suppose the contract could become a cost burden other providers wouldn’t have to deal with.

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