FYI do your homework, this article is key to our cuccess here in this sector, take it seriously.
Bruce
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April 6, 1998
IP Telephony Sees Price Wars
By Andrew Marlatt
Voice-over-Net question is no longer how, but how much to pay
In a trend reminiscent of online brokerage commission wars,
Internet telephony service providers (ITSPs) are bidding down their
prices in hopes of luring consumers away from standard telcos.
I-Link Inc. earlier this month unveiled a 4.9-cents-a-minute rate
for calls between six major metropolitan areas in the West. The rate
bests IDT's 5-cent rate and Qwest Communications' 7.5-cent
charge. IDT and Qwest, however, offer larger calling areas.
The rate reduction was one of a series of announcements made
earlier this month, including a deal linking Yahoo's white pages
directory with IDT's Net2Phone service, and the release of a study
by Forrester Research estimating that long-distance Internet
telephony service revenues will grow from $30 million in 1998 to
$1 billion by the year 2002 [see chart, right]. Despite the industry
interest, however, analysts don't expect consumers to abandon the
telcos en masse. Sound quality and ease-of-use still give
traditional telephony providers the edge for now.
Lower rates and lower quality may differentiate IP telephony from
traditional service, but the businesses do share a common feature:
confusing pricing structures. For instance, I-Link's 4.9-cent rate is
available to subscribers whose calls originate and terminate in
calling areas connected to I-Link's IP network. Calls outside the
network are 6.9 cents a minute.
But both the penny price wars and disparate pricing schedules
could soon become a thing of the past. Forrester Research analyst
Chris Mines forecasts that sometime this year, an ITSP will
introduce unlimited voice for a flat monthly fee, similar to ISPs.
How low those flat fees are will depend in part on the regulatory
environment, he said.
The current lack of FCC regulation is a large reason why IP
telephony is cheaper than traditional service. Currently, telcos
must pay access fees to local carriers both where the call originates
and ends, whereas the FCC does not require ITSPs to pay those
fees. Analysts expect that to change, though not this year. When
that happens, said Mines, "One school of thought says, 'It's all over
for IP telephony, because a regulatory end-run creates their price
and cost advantage.' We disagree. There are fundamental technical
underpinnings to cost and price advantages that ITSPs would have,
and those would persist beyond the end of regulatory disparity."
The technical advantages of a packet-based IP network include the
ability to support several conversations on one line, unlike
standard phone lines, which can host only a single conversation,
said Mines. But the Internet protocol also has drawbacks,
particularly in compression. While voice over a proprietary IP
network is "at least equal to a circuit-switched network" because it
avoids the public Internet, "most voice-over-the-Net [VON] providers
compress data, thus introducing delay and lost conversation
fragments," said Carl Boeing, an analyst at Atlantic ATM.
While hardware vendors like Cisco Systems and Bay Networks are
working on gateway products to improve quality over disparate
networks, VON is already attractive in international markets, where
traditional sound quality is typically lower than the U.S. phone
system. Companies such as Delta Three have focused on
international calling, offering PC-to-phone service at 12.5 cents
per minute. This branch of IP telephony is the biggest threat to
traditional telcos, which make huge profits on international calls,
said Forrester's Mines.
blurred boundaries Some telcos are responding with their own IP
initiatives. AT&T, for instance, plans to unveil WorldNet Voice in
the second quarter of this year, offering fees of 7.5 to 9 cents per
minute from selected cities.
ITSPs, meanwhile, are fighting to make their names as synonymous
with phone service as the RBOCs'. IDT's announcement that its
Net2Phone will be available on Yahoo's People Search white pages
directory, allowing Yahoo users to instantly place calls from their
PCs, brings IP telephony "into the mainstream," said IDT senior vice
president of business development Jonathan Reich. "It's probably
the first such event that's brought it to the consumer at large," he
said.
Forrester's Mines, however, labeled the deal a sideshow. "Using
your PC as your primary voice communications device? I don't see
that as a big, mainstream marketplace," Mines said. Instead, he
believes calls placed phone-to-phone over an IP backbone will
constitute the larger slice of the pie.
But when technology allows, the real power of Internet telephony
will be found in its multimedia capabilities, said Atlantic ATM's
Boeing. "If you subscribe to a local exchange carrier and place calls
over a copper wire pair, it's very difficult to obtain integrated
services like videoconferencing and video-on-demand," he said.
"With this technology and the Internet's potential as a
communications entity, these applications are rapidly becoming a
reality." Such extended services may help ITSPs enter the business
market, an area they have pretty much left alone. Consumers, who
pay an average of 20 cents a minute for long distance service, are
seen as a larger immediate market than corporations, which often
pay only 7 to 8 cents a minute already. But the ability to turn
intranets into low-cost phone systems may give businesses an
incentive to look at IP telephony.
"That business has not taken off," said Mines, "but it seems like a
no-brainer." |
