article...................
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.
- Roderick Beck's Message Board:.
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