article

Soap Box – Days of Reckoning for Telecoms May Lead VoIP Carriers to Promised Land

Posted: 12/2001

Soap Box

Days of Reckoning for Telecoms

May Lead VoIP Carriers to Promised Land
By Eric Weiss


Eric Weiss

Voice over the Internet is enjoying new found respectability because it addresses the top three concerns of wholesale carriers today — profitability, quality and credit.

Despite falling margins and a capital market that has slammed the door on capital-intensive business models, some carriers still are getting a good night’s sleep. The fact is, the bad news for carriers with overpriced networks and over-leveraged balance sheets is good news for those who can control costs.

People have not stopped talking. Demand is growing faster than ever with lower prices, prosperity and increased teledensity — especially in developing countries. Prices are falling — no doubt about it. But all of that is good news for those carriers that have figured out the Internet is the most efficient way to transport data — even the most demanding data such as voice.

Any carrier that plans to remain in the game is adopting voice over Internet protocol (VoIP) to increase profitability, because the combination of packet technology and compression promises huge efficiencies and cost savings.

The real value lies not in the IP technology, but in VoIP’s use of the public Internet that makes VoIP so economically compelling. Using the public Internet to transport voice packets requires one-sixth of the capital needed by dedicated IP or legacy phone systems to generate the same $1 of gross profit. In today’s capital-starved market, voice on the Internet constitutes a wise investment decision — for the carrier, the equipment vendor, the telecom investor, and ultimately, the customer. By utilizing the Internet, incumbent and emerging carriers can increase profitability — even in the face of

rapidly declining prices.

Voice on the Internet, however, historically has suffered from a bad reputation for three reasons. First, the initial forays into VoIP consisted of voice-to-voice connections through two PCs. Among early adopters, being novel and cheap was more important than quality. Second, the PC was not, and still is not, designed to transport voice quality like a phone handset. And third, the equivalent of a decentralized, unmanaged public highway, the Internet suffers from unpredictable traffic conditions.

To be sure, quality is more predictable and easier to manage over legacy networks or dedicated IP links. And, make no mistake — providing good, consistent quality over the Internet is hard. It’s very hard. Some carriers try to have their cake and eat it, too. Many choose expensive managed or private IP access because of lingering concerns about quality. And while these options make quality easier to attain — they undermine the economic advantages of voice on the Internet.

Instead of paying for inflexible, capital-intensive point-to-point managed IP or IMT links, some VoIP carriers simply connect to the public Internet. This method is significantly less expensive and provides a pre-existing fully meshed network that gets you anywhere in the world — with one low fixed-price connection.

However, any carrier that attempts to provide tier-one voice and service quality over the “raw” Internet without specialized technologies, applications and routing techniques is doomed to fail. The “raw” Internet is simply too inconsistent to deliver reliable, high-quality, real-time applications like voice and fax.

But quality over the Internet is possible. Several VoIP carriers have had success delivering both Internet economics and consistent tier-one quality to carriers by routing calls around Internet congestion. In many parts of the world, the quality is so good that the top U.S. carriers and international carriers like China Telecommunications Corp., Cable & Wireless Optus, and Telstra Corp. route their calls over wholesale VoIP networks. In fact, Frost & Sullivan’s recent market study, World VoIP Services Market, found “wholesale and retail VoIP traffic volume exceeded 6 billion and 15 billion minutes respectively last year, and is projected to increase, with growth rates varying by world region, to account for approximately 75 percent of the world’s voice traffic by 2007.”

Even credit — the third major area of concern to carriers — works in the VoIP carrier’s favor. PSTN carriers are filing for bankruptcy at an alarming rate. Each failing carrier, when defaulting on payment, triggers a domino effect which in turn topples many of its thinly capitalized suppliers. Tier-one carriers are tightening their credit terms dramatically and even raising prices to the “credit-challenged” carriers, while not paying these carriers any faster for minutes the tier-one carrier sends them, which, in turn, accelerates their demise.

With each market transition, however, comes an opportunity. VoIP carriers offer attractive promotions and even special discounts to credit-challenged carriers on a wholesale, prepaid basis. This allows credit-challenged carriers to enjoy attractive VoIP wholesale pricing without facing credit obstacles. Even in these hard times, VoIP carriers can benefit by working with the credit-challenged carriers who pay in advance, fill routes quickly and supply low cost “directs” into high-cost countries. While cash flow is affected by prepayment, small carriers who can accept such discount terms are much better partners for the long term than those who overpay and show better short-term cash flow. Negative gross margins never can be made up with volume! So, unlike most traditional telecom carriers who believe the sky is falling — VoIP carriers believe the sky is the limit.

Eric Weiss is the executive vice president of ITXC.net (www.itxc.net). One of ITXC’s original co-founders, Weiss is responsible for ITXC’s core wholesale international phone-phone business unit, WWeXchange, as well as the technical operation of ITXC.net. He can be reached at
itxc@itxc.com

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ROUND TABLE

Roundtable on FCC Proposal to fine SBC*

“The fine issued by the FCC … is the regulatory equivalent of a ‘five-dollar parking ticket.’ CompTel is disappointed that the FCC did not take stronger action and send a message to SBC that the commission is serious about its role in opening local phone markets and that the accuracy of information filed at the commission is paramount. This incident illustrates that the FCC must closely scrutinize all future Bell applications for long distance, and draws attention to the dangers of self-certification of information by the Bells.”

— H. Russell Frisby Jr., president,

Competitive Telecommunications Association (CompTel, www.comptel.org)

“SBC has not exercised the degree of care we expect from our regulatees. We are disturbed by SBC’s apparent actions here.”

— FCC Enforcement Bureau report (www.fcc.gov/eb)

“We are particularly disappointed that, given that the FCC found no evidence of intentional wrongdoing or harm in connection with the loop qualification system, the commission’s Enforcement Bureau has nonetheless proposed a substantial penalty. We are confident that the commission will give SBC’s case an open-minded review and adjust its response accordingly.”

— Priscilla Hill-Ardoin, senior vice president of federal policy,

SBC Communications Inc. (www.sbc.com)

* The FCC has proposed to fine SBC again, this time for allegedly falsifying information on the incumbent’s approved Section 271 request to provide in-region, long-distance services in Kansas and Oklahoma. The commission’s Enforcement Bureau concluded that SBC did not intentionally provide false information, but the bureau did find SBC apparently committed other violations and fined the company $2.52 million, the maximum allowed. SBC is appealing the fine.

The
Links

Cable & Wireless Optus www.cwo.com.au
China Telecommunications Corp. www.chinatelecom.com
Frost & Sullivan www1.frost.com
ITXC.net www.itxc.net
Telstra Corp. www.telstra.com


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