IP Telephony Goes Mainstream March 23, 1999 - 9:30 AM
By Roderick Beck
A year ago, many pundits were predicting the death of
Internet telephony due to rumored changes in FCC
regulations. As usual, they were wrong.
Not only is Internet telephony thriving in the international
telecommunications markets, but many of the largest
U.S. carriers, like AT&T and GTE, are planning or
building IP (Internet Protocol) networks to handle
virtually all their domestic traffic: voice, data, fax,
videoconferencing, Internet and Intranet.
Let's now take a look at some of the key events of the
past twelve months and discuss the future direction of
Internet telephony.
The Access Charge Battle
There are two key facts to understanding Internet
telephony. The first point is that most Internet telephony
runs not over the public Internet, but rather over
better-managed private networks that use Internet
technology.
The second key fact is that long distance companies
pay for the right to use the local phone company network
to originate and complete toll calls. These 'access'
charges, which are used to subsidize local residential
service, currently total 3.71 cents per minute, the single
largest cost in the long distance business.
In 1997, long distance providers paid in excess of $20
billion in access payments. The appeal of Internet phone
calls is that current FCC rules exempt traffic carried by
a network based on Internet technology from paying
these access charges. Without the rules, local phone
companies could levy per minute charges for anyone
dialing into the Net, a highly unpopular idea.
In April of 1998, reports surfaced that the FCC was
planning to eliminate IP telephony's exemption as a
result of Congressional prodding. The fear was that
exploitation of the FCC's loophole by long distance
carriers would deprive the local phone companies of
revenues and force them to raise local service rates.
In an early Raging Bull article, I correctly suggested that
the FCC would not upset the status quo given that this
would ignite a political storm. Subsequently, the FCC
fudged by declaring that the issue should be decided on
a case-by-case basis.
Frustrated by their inability to get the regulations
changed, several months later US West and BellSouth
declared they would unilaterally impose charges on IP
voice calls. Their argument is that the original intent
behind the access charge exemption was to protect
data traffic, not voice. This is quite true. At the time the
exemption was put in place, placing phone calls over
data networks was not possible.
In classic tit-for-tat, Qwest and IDT responded that they
would not pay them, and one VOIP provider, ICG
NETCOM, plans to take BellSouth to court. The most
likely scenario is that a drawn-out legal battle will ensue
in which the courts, lacking the expertise, will refer to the
FCC for a definitive ruling.
As a result, domestic Internet calls appears safe for at
least another year, probably two. Even though VOIP
appears safe for the time being, many IP voice providers
are hedging their bets by looking for alternative ways to
reach their customers without using the local phone
networks. AT&T plans to use cable networks, and
CLECs will leverage their own local networks. In neither
case will access charges apply.
Interestingly enough, the predictions of access charge
melt down have not come true. The reason is simple.
The long distance giants are afraid of Internet telephony.
They are wracked by internal battles over the merits of
the technology with the older generation 'BellHead'
engineers championing the traditional circuit-switched
technology and younger 'NetHeads' proselytizing on
behalf of the emerging Internet technology.
As a first hand witness to this debate, it has many of the
trappings of a religious war. Another factor holding back
the largest carriers is that they cannot do Internet
telephony on a large scale without triggering FCC
regulation, which would destroy the value of their
investments in the required infrastructure. Indeed, the
dominant carriers, having lost over 20% of long distance
revenues to smaller players, fear the impact of Internet
telephony on prices.
This contrasts sharply with the competitive fringe of
smaller long distance carriers. Many small carriers are
leasing very expensive long distance circuits and
exploiting the fact that 5 or 6 IP calls can be squeezed
into a single phone line. This offsets the high costs of
leasing circuits, lowering per unit (minute costs) and
reducing the heavy capital requirements that discourage
entry in the long distance business.
However, the large carriers own fiber, meaning their
transmission costs are already very low. Hence, IP
telephony is a great equalizer in that it helps smaller
carriers considerably more than it benefits larger
carriers. Given that the cost of adding network capacity
to handle an extra minute is less than half a cent for the
largest carriers, residential rates of 9 or 10 cents have
fat profit margins.
Small carriers are beginning to take aim at these profits.
IDT's Internet phone service offers consumers 5 cpm
for all long distance and regional toll calls without
monthly fees or minimums. For the small carriers, IP
telephony is a price weapon.
Large carriers like AT&T and MCI view IP telephony very
differently. They want IP networks in order to simplify
their networks and provide advanced services that are
difficult and expensive using traditional technology.
Currently phone companies have many distinct
networks to provide a variety of different services.
A videoconference requires coordinating the voice
network with a streaming video network and requires
advanced scheduling. More generally, any service that
mixes voice and data can be handled with greater
success by using an IP network. The dream of young
engineers are 'Convergence': a single IP network to
carry all traffic.
Such a network would drastically reduce overhead. It
would also create economies of scale, because several
smaller networks would be replaced with one larger
network. Another key advantage is introducing new
services and upgrading them. The Internet Protocol is
an open standard.
This means that it is ideal for offering new services and
upgrading them. For example, when AT&T decided to
improve the sound quality of its voice network a few
years ago, it discovered that it was very difficult to do so
without replacing hardware. However, an IP network can
easily do so by change the software code used to
process sound signals.
Traditional networks are based on hard-wired proprietary
technology. By contrast, IP networks use
software-based open standards. The result is that what
is easy to do on the IP network becomes virtually
impossible on a traditional network where technology is
embedded in the hardware.
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