IP Telephony Sees Price Wars
By Andrew Marlatt, April 6, 1998
iw.com
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."
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Keywords: telephony
Date: 19980406
Copyright 1998 Mecklermedia Corporation.
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