The (by now) well discussed Barron's *International* Telecom article - the section which pans VOIP (I'll assume everyone knows the speakers):
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Q: For all our talk about wireline and wireless communication, will the Internet and satellites hurt or help phone companies as we know them?
Grubman: To encourage use of the Internet for voice traffic and enhance phone services, the Federal Communications Commission ruled that, unlike long-distance carriers like AT&T, MCI, Sprint, whatever, Internet service providers -- ISPs -- need not pay access charges to local phone companies. That's the only reason ISPs have a cost advantage over regular carriers of domestic long-distance voice traffic.
Before ISPs, if you wanted to call from New York to Chicago, here's how it worked: You'd pick up the phone in New York, and your long-distance carrier would pay Bell Atlantic on the originating end, and Ameritech on the receiving end, three cents per minute.
New long-distance carriers quickly figured out that if they could offer voice service over Internet protocols, or IP, they could avoid paying access charges. Guess what? If you look at the unit cost per minute for AT&T and its ilk, 60% of that sum is the access charge they pay to the RBOCs. If 30% of long-distance calls went over the Internet, this traffic would be carried by long-distance providers, which own Internet backbones, and the Bells would lose all these access fees. Rest assured, this won't be allowed to happen. Voice-over-the-Internet basically is an arbitrage to avoid access fees.
If the playing field becomes level again, and I'm sure it will, the threat to RBOCs from the Internet, at least for domestic calls, largely will go away.
Q: How's the quality of Internet telephony?
Grubman: When you make a regular circuit-switch call, you use a dedicated circuit. When you send any kind of message over routers, which happens on the Internet, there's no network management, no queueing. A bunch of data hits the routers. The data go off on their merry way, looking for their destination. The problem is, the data may not arrive the way they were sent.
Q: Please elaborate.
Grubman: Let's say you send five packets of data. Each packet goes looking for a path. They all do arrive at the destination point, but the third packet may get there before the first one does.
Q: How much sooner?
Grubman: We're talking seconds. That's okay for data, meaning numbers, but not okay for voice. It needs to be recompiled in milliseconds or fractions of milliseconds. That's why you have a delay on voice over IP. You can't have full duplex conversation, meaning you can't both talk at once. You'll never hear voice over IP with quite the same total quality and lack of delay as you get on circuit switches.
Again, if the entire cost advantage of voice over IP is a lack of access charges, we know that advantage will disappear one way or another. In the developed world, I don't view voice over IP as being that much of a threat. There's another factor here.
Q: Tell us.
Grubman: There's a huge shortage of bandwidth, and it will continue. If you own a lot of bandwidth, why would you commit it to what amounts to a penny-per-minute voice service when you can use it for data services that generate higher revenues? That's why I don't believe voice over IP will take over the world.
If a voice call is a unit of one voice-grade circuit, the typical data message that corporations need is anywhere from a unit of 2,000 to a unit of 100,000. Data messages are outgrowing voice by 10-to-1. Here's the key: Everything rides the same fiber, whether it's a voice call, a data call or an IP message. More importantly, voice networks are engineered for 6-9 of reliability. Data networks provide 20-9.
Q: Huh?
Grubman: Quite simply, what all this mumbo-jumbo means is that data networks carry much more mission-critical stuff than voice networks. If you and I are conversing and the line goes dead, okay, fine, we'll call back. But if you're running someone's global data network around the world -- for money transfers, foreign-exchange reconciliations, inventory transfers and the like -- a line going dead is a very big problem.
In 1996, when MFS bought UUNet, virtually 100% of UUNet's commercial customers were connected to it with a T-1 line that handles 1.5 megabits of transmission. Today, probably 33% of new customers signing up with UUNet want OC-12 lines, which offer 36 times as much capacity. All this has occurred in less than two years.
My point is, demand for bandwidth, fatter pipes if you will, keeps going up and up and up from corporations around the world. Therefore, to be perfectly blunt, voice over IP is a waste of fiber capacity. It's a little niche business that will remain that way. And I bet that providers of voice over IP will be forced to pay access fees to local phone conpanies within 18 months.
Castro: Let me add something. Outside the U.S., especially in Europe, incumbents are the biggest providers of Internet access in general, and will be the natural providers of IP telephony. They're not doing it now because it doesn't make any sense.
Q: Okay, on to satellites, those expensive electronic birds that are parked in the sky. Will this business be profitable?
Grubman: Annual global telecom revenues are about $800 billion. Less than 10% of the world's population has a phone. Satellite providers hope to serve the 90% that isn't served by a telecom infrastructure. These ventures are a play on the lack of teledensity outside the 20 largest markets in the world.
The biggest threat to satellites is this: By the time all their equipment is up and running, global telecom settlement rates and bilateral agreements between existing telecom markets largely will have broken down. I wonder if economic models on which satellite business plans are based -- namely, multiple dollars per minute of international calling to a lot of places -- will be viable. I think their revenue expectations are unrealistically high, looking out three or four years.
Castro: These enterprises are pricing their services for the elite, not the masses, and there are too many satellites in the works. I'd like to see a satellite venture that could provide broadband on demand. One privately owned company, Teledesic, is talking about this. It could represent a great opportunity.
Q: As opposed to what?
Castro: Offering voice connections only to places where there is no telephone service. Some investors are participating in this field because some very great visionaries have gone into this business. I'll buy a piece of it only when I see it working properly, at prices that are affordable for everyone. Currently, it's cheaper to install a cellular system anywhere in the world than build and launch a satellite.
Grubman: Exactly. The problem I have with satellites is the lead time it takes to put them up. There's a reason why no telephone infrastructure exists in many parts of the world. The markets that these satellite guys want to serve are markets where there isn't much to serve. And when there becomes something to serve, chances are there will be a lower-cost way of doing it. Chances are, if all of a sudden the Sahara Desert becomes the epicenter of telecom transit, guess what? Lucent Technologies and Ericsson and Siemens and others would be installing infrastructure, and someone else would be paying for it.
Q: Is there enough data business for competing satellite systems?
Grubman: Fiber optics is a point-to-point business. Point to multi-point is something that satellites always will do. You can network fiber together. There will always be a need for high-capacity bandwidth capability through satellites. I'm just not sure this justifies having multiple satellite systems.
Q: Let's sum up these potential threats to traditional telcos. First, you say voice over IP telephony in the U.S. now exists only because providers of it don't pay access fees to regional phone companies. This advantage could disappear within 18 months.
Second, you say the business plans of satellite ventures are flawed. The revenues they expect won't be available by the time they get all their birds up in the sky.
Castro: Exactly. |
