VoIP: Consumer Market Trends


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VoIP: Consumer Market Trends

  1. 1. VoIP: A Discussion Paper For the Greenlining Institute March 10, 2004 Alex Gault Small World Ventures
  2. 2. Summary (VoIP) is an emerging disruptive technology that has the potential to dramatically improve the quality and cost of phone service for consumers. VoIP has been“If the Consumer stands to benefit commercially available for at least eight years, but only now is the technology beingsignificantly from Internet Voice we deployed to deliver services that are competitive alternatives to the traditionalshould let it blossom. The burden phone service. The cost for most commercial grade VoIP services are minimal –should be placed squarely on the some are free.government to demonstrate whyregulation is needed, rather than on VoIP is native to the Internet. VoIP calls traverse the Internet in data format, akininnovators to explain why it is not. I to the way email travels from one computer to another. Although VoIP calls canthink the potential benefits are very transmit friction-free from the Internet to the Public Switched Telephone Networksubstantial.” (PSTN) and vice versa – and often do – they do not necessarily require PSTN Michael Powell, Chairman, FCC authenication to work. Because the existing federal and state regulations that govern consumer phone services apply exclusively to the use of the PSTN (which are powered by circuit-switched technology are not dependent upon Internet protocols) they provide an inadequate framework for protecting the rights and interests of VoIP consumers.75% of adults of have of VoIP.66% have heard of DSL. Presently, the FCC and state bodies which oversee telecommunications policy are14% have heard of WiFi. considering overhauling the regulatory environment for consumer phone services, in order to address the benefits and risks of VoIP. Incumbent industry stakeholders Ipsos-Insight Express Study which have built commercial services atop the PSTN are also maneuvering to protect their short term interests, while investing aggressively into Internet infrastructure in expectation of a VoIP future.
  3. 3. What is VoIP? VoIP is a generic term that refers to all types of voice communications which use the Internet as a transmission medium, whereby calls are powered by Internet protocols (IP) rather than traditional circuit switched technology. This includes useInternet Protocol (IP): of packet technologies by telecommunications companies to carry voice at the core of their networks in ways that are not controlled by and not apparent to end users.A data-oriented protocol used bysource and destination hosts for Many VoIP services are transmitted via the public Internet, thus bypassing part orcommunicating data across a all of the public switched telephone network (PSTN). Because the vast majority ofpacket-switched network. telephone subscribers are served by incumbent local exchange carriers (ILECs) on the PSTN, presently most VoIP calls do traverse the PSTN. However, as VoIPIP by itself is something like the services become prevalent the technology may eliminate the need for both thepostal system. It allows one to PSTN and circuit switching.address a package and drop it inthe system, but there’s no directlink between the sender and the VoIP can occur between computers, between a computer and a phone, andrecipient. between phones. Commercial services exist to serve each method.TCP/IP, which supports real-time For users who already have broadband Internet access, some VoIP software nowcommunication between clients on a provides for free telephone calling from anywhere-to-anywhere in the world.network, establishes a connectionbetween two hosts so that they cansend messages back and forth for a How VoIP Worksperiod of time. Because all transmissions must be digital, the caller’s voice is first digitized. This can be done by the telephone company, by an Internet service provider, a cable company, or by the caller’s computer. Next, the digital voice is compressed and separated into packets, using complex algorithms. The packets are then sent across the network using IP addressing, and reassembled in the proper order at the destination. Again, this reassembly can be done by a carrier, ISP, cable company, or client computer.
  4. 4. VoIP network environments: • Public switched telephone network. • Private managed networks. • The public Internet.
  5. 5. The Economics of VoIP The networks used and owned by all telecommunication carriers currently make intensive use of IP, because it provides the following economic benefits: Efficient use of Infrastructure. The PSTN circuit-switched technology”… There are people in Washington requires a circuit between the telephone company’s switch and thewho don’t understand a great deal customer’s premise to be open and occupied for the entire duration ofabout [VoIP] or even the concept of the call, regardless of the amount of information transmitted. Inthe layered approach to contrast, on IP networks all content – whether voice, text, video, orcommunications networks and computer programs – travels over the network in packets that areservices. The idea that you could directed to their destination by diverse routes, sharing the samehave a transport link that isindependent of sound or analog facilities most efficiently.waves is new to them … It’s acompletely different way of thinking Almost Free. IP systems offer a more cost effective means forabout our networks. In many providing communication connections. In particular, Internetrespects it all really comes down to technology makes available to anyone with a personal computer andan issue of educating people.” modem the ability to bypass the long distance PSTN. Robert Pepper, Chief of Resilient. Over the long term, IP networks will deliver higher reliability Policy Development, FCC than the circuit-switched network because IP networks automatically re-route packets around problems such as malfunctioning routers or damaged lines. Open Source Architecture. IP is a nonproprietary standard agreed upon by hardware and software developers, and is free to be used by anyone. Thus the barriers to entry for entrepreneurial firms developing new hardware and software are very low. In contrast, the PSTN operates as a closed system.
  6. 6. Incumbent Local Carriers vs. Dedicated VoIP VendorsIndustry Associations Incumbent Local Exchange Carriers (ILECs) stand to benefit from VoIP. Faced with an uncertain landscape and increased competition, ILECs must retain customers. ByVoice on the Net (VON) Coalition offering VoIP, in and of itself, carrier’s can retain customers and increase traffic. • www.von.org • Lobby group opposed to Moreover, introduction of IP allows carriers to offer integrated premium services VoIP regulation (voice, text, audio, and video) over a single connection, thereby further enhancingNational Cable & value and expanding their porfolio of services.Telecommunications Association • www.ncta.com In the short term, ILECs are marketing VoIP services principally to largeNational Exchange Carriers enterprises. Over the long term, most will likely commit to consumers andAssociation households, as they will realize substantial savings as IP infrastructure is far less • www.neca.org costly to maintain and upgrade than the PSTN. • Lobbying group for rural exchange carriers Small entrepreneurial companies are driving the acceleration of VoIP use in theInternational MultimediaTelecommunications Consortium consumer market, and they enjoy tremendous cost advantages over ILECs. • www.imtc.org Because they use the Internet as the backbone for VoIP calls, they don’t have to • Exchange for negotiating rent or build expensive switching facilities, and thus have limited existing costs to and sharing information about standards and amortize. compliance VoIP will force the commoditization of the enhanced services – like call waiting,International TelecommunicationsUnion caller ID and voicemail – that ILECs currently offer. Enterprise network vendors like • www.itu.it Seimens, Cisco and Avaya already bundle those services into their real-time • International organization collaboration suites at no additional cost. Skype’s free VoIP service for consumers where governments and the private sector coordinate (computer-to-computer) supports conference calls, and will soon provide instant global telecom networks messaging. As enhanced services deliver high margins for ILECs, a competitive and services environment where they are available for free will exert further pressure to evolve existing service offerings to VoIP.
  7. 7. Key Trends and Wild Cards Universal standards. It is still far from certain that VoIP will become instantaneousProjections for cable VoIP and transferable over all sorts of devices (computers, cell phones, PDAs andsubscribers by the end of 2004: telephones) and over all kinds of networks (circuit-switching, public Internet, cable, • Comcast: 1.3 million private managed networks.) • Cox: 976,173 • Mediacom: 55,000 Convergence of voice, text and video. Collaboration software suites which provide • Charter: 24,533 integrated platforms for voice, email, instant messaging and video conferencing are • TimeWarner: 2,000 already in use within large enterprises. Cable vendors Comcast and TimeWarner are • Cablevision: 5,006 piloting comparable services for consumers and households. Consumers will soon • Others: 1,250 be able to use the Internet from any location and instruct a home phone to forward • Total: 2.4 milllion calls to another phone number -- or listen to voicemail via the Internet from any Source: MRG location. FCC Chairman Michael Powell envisions many practical benefits for consumers, including the following: “… you make an Internet call to a doctor’s office to make an appointment. The doctor’s system calls up your medical records, your medications, and your last visit and instantly displays them. It also brings up the appointment times available, allows you to select one and then calls you back, or sends a text message to your cell phone, the day before the appointment to remind you.” VoIP & WiFi. VoIP over WiFi offers many benefits to corporate users, such as eliminating the need to use valuable cellular airtime within a campus network. Local VoIP cell phones will soon be able to bypass cellular phones networks in locations where they can access the internet via commercial hotspots in public areas – like coffees shops, universities, and municipally subsidized WiFi antennas. Nearly every U.S. cellular carrier has either expressed an interest in selling Wi-Fi access. T-Mobile is the only one with a service available now, which gives its customers access to Wi-Fi networks inside about 2,000 Starbucks and other cafes for a fee.
  8. 8. VoIP: Emerging Regulatory Environment ILECs (ex. Verizon, SBC, BellSouth) have various degrees of interest in VoIP, but are resistant to embracing it quickly or completely, because doing so meansChronology of Key Events admitting to shareholders, regulators, customers that both monopoly control and artificially high voice revenues may disappear. As a delay tactic, they have1982: mobilized their considerable lobbying skills in favor of preemptive regulation thatFCC framework for subsidizing would burden competitive VoIP firms like Vonage with additional costs and rules,universal phone service. while delaying their own offerings.1996: Baseline StandardsThe Telecommunications Act madeuniversal phone service costsexplicit and removed them from For VoIP to meet the quality and public service standards typically of existing phoneaccess charges. services, it will have satisfy the follow: • Use North American Numbering Plan (NANP) resources.1998:The FCC published the Stevene • Be able to receive calls from or terminating at the PSTN at one or both endsReport, which classified VoIP into of the call.categories distinct from traditionalphone service. • Represents a secure and reliable replacement for ILEC services. • Use IP transmission between the serviced provider and the end user customer, including use of an IP terminal adapter and/or IP-based telephone set.
  9. 9. Existing Regulatory Benchmarks • Communications Assistance to Law Enforcement Act (CALEA) Emergency servicesChronology Continued: Universal phone service Access charges2000:FCC studies by DeGraba and Access ChargesAtkinson concluded that the existingintercarrier compensation regime The Telecommunications Act of 1996 called for making universal service costsdistorted competition. explicit and removing them from access charges. Since, the FCC has lowered access charges substantially – from more than a dime a minute for both ends of a call to2003: an average of about a penny a minute today. Yet those charges still add up to aCPUC gave six VoIP providers three hefty subsidy, with AT&T, MCI, Sprint and other long-distance providers payingweeks to apply for the same license approximately $15 billion a year in rent to ILECs.that incumbent carriers require tooperate. At the last minute, the Even penny per minute rates could add as much as $5 to $10 to the monthly bills ofCPUC delayed the requirement customers subscribing to dedicated VoIP providers. Thats enough to make VoIPindefinitely. service uncompetitive, especially as a customer needs to pay both $40 for broadband and roughly $30 for unlimited long distance.2004:US Court of Appeals overturns year-old FCC decision to force incumbent VoIP holds great promise for saving consumers billions of dollars and further givingcarriers to share their networks with a boost to national productivity by providing new communication services. But thatdistance rivals at disounted prices. wont happen if those making VoIP a reality are burdened with either subsidizing the old local telephone monopolies or meeting impossible regulatory demands.
  10. 10. Key Public Officials, Analysts and Industry SpokespeopleAnalystsKevin Werbach (www.werbach.com) • Technology analyst • Former counsel for new technology policy, FCC • Former editor, Release 1.0John Hodulik • Wireless telecommunications analyst, UBS WarburgDavid Isenberg • Technology Analyst • Formerly researcher (for 12 years) with Bell LabsBob Frankston • IP Expert • Technology AnalystPublic OfficialsMichael Powell • Chairman, FCCRobert Pepper • Chief of Policy Development, FCC • Robert.pepper@fcc.gov • (202) 418-1500
  11. 11. Kathleen Abernathy • Commissioner, FCCKevin Martin • Commissioner, FCCSen. Ted Stevens (R-AL) • Chair, Senate Appropriations CommitteeSen. Lamar Alexander (R-TN)Industry SpokepeopleJohn K. Billock • Vice Chairman & COO, Time Warner CablePeter Pitsch • Communications Policy Director, Intel CorporationTom Evslin • Chairman and CEO, ITXCMarilyn Cade • Director, Law and Government Affairs, at AT&TDave McClure • President, U.S. Internet Industry Association
  12. 12. VendorsIncumbent local exchange carriers (ILECS) • SBC • Qwest • GTE • AT&T • Verizon • BellSouthCable telephone providers • Comcast • AOL Time Warner • Cox • Cablevision • MediacomDedicated VOIP providers (consumer) • Skype • Vonage • Net2Phone • Pulver.comDedicated VOIP providers (enterprise) • Cisco • Avaya • Nortel • Seimens
  13. 13. Wifi providers (ferrying VOIP over 802.11 wireless networks) • Telesym • VoceraWireless carriers • Nextel (combining VOIP with push-to-talk service)Gaming Vendors • Xbox (Microsoft)Resellers • Primus Telecommunications • Voiceglo