VoIP And the Rise of 'Free' Telephony

This is quite a bold statement and one with potentially huge implications on telecom providers around the world. If users already have an always-on connection and can download software applications to enable voice calls, then how can anyone justify charging for the service? And if the service is free, why would telcos need a billing system anyway?

Voice over IP (VoIP) is nothing new. In fact, techie innovators have been playing with “internet telephony” for many years, and companies are now switching to IP-based phone systems instead of the traditional PBX managed services. But it is the proliferation of broadband services that has driven the emergence of consumer-oriented VoIP providers such as Skype and Vonage, bringing new technology and taking advantage of the bandwidth already available to the home. Skype has also grown its own ecosystem with all manner of software and hardware developers bringing new complementary offerings, stimulating interest and helping to build a hardcore of loyal users. In fact, much of Skype’s success has come through viral marketing as loyal users have recommended it to their family and friends.

Of course, these services are not completely free. Users still need to pay for their broadband connection and off-net calls (calls to other networks) still incur costs of interconnection which need to be covered. This in itself is not new either. Cable companies have been providing “free” on-net calls for some time, and local calls in much of the USA and Canada are free anyway.

Today, calling from a fixed line telephone to a cellphone still presents some barriers as users know there are significant associated costs, so calling from a VoIP service may suffer from the same symptoms. At the time of writing, SkypeOut (the Skype prepaid service for off-net calls) rates for calling a UK cellphone are more than 10 times the “SkypeOut Global Rate” of €0.017 per minute. The actual pricing varies significantly from country-to-country, depending on the level of carrier competition, but it is clear that there is a long way to go before it will be possible to make “free calls” anywhere in the world.

VoIP services are not yet being pushed as complete replacements for traditional fixed line and cellular offerings – and this is in some way due to the operation of emergency services. According to their websites, Skype currently “cannot be used for emergency dialling”, and though Vonage enables emergency calls, it is at the mercy of broadband connectivity and users “should always have an alternative means of accessing emergency services”. Even when there is connectivity, emergency operators are not automatically provided with the caller’s location details which is a basic requirement for emergency services.

In Hong Kong, the telecoms regulator has decided upon a two-class system that will provide differentiation between VoIP provided by the incumbent operators, and those offered by new entrants. This should enable users to easily distinguish between services marketed as “replacement phone services” and the lower-cost alternatives, and ensure those that are providing complete VoIP services come under adequate licensing and regulatory control.

Whilst the likes of Skype and Vonage are pushing hard with VoIP, it is the bundling of services such as “triple-play” (voice, internet, television) and combined fixed and cellular offerings that are really focusing the attentions of the major international telcos. As the price for basic voice services drops, service packaging and creative pricing schemes will be an essential piece in the business support systems puzzle. Agile rating and billing solutions will be crucial in gaining and sustaining a competitive advantage, allowing rapid launch and modification of product packages to stay one step ahead of the competition.

In the UK, BT’s much-vaunted 21st Century Network (21CN) promises to deliver VoIP and much more. It will be the basis for all their voice, data and internet services, plus many new services coming online in the future. Whilst customers should expect a smooth transition from their existing service and very little difference in use, BT expects annual cost savings in the region of £1bn by the time the migration is complete in 2008/9. Will this result in free telephone calls for all? Probably not. But we can be sure that prices will continue to fall, and BT will be offering some interesting and very competitive service packages.

As rating and billing is critical, customer relationship management (CRM) is just as important in order to build loyalty amongst users. When there is no financial tie between the provider and customer, there is no value in the relationship. If it doesn’t work or there are problems, it doesn’t matter – it’s free. But when a service has value, being able to meet customer expectations and manage the customer lifecycle is key to long-term business success.

In the 1990s, Linux emerged from being a student’s hobby, to becoming the most exciting breakthrough in software technology of its generation – a “free” operating system which would compete head-to-head with the corporate Unix community. Ten years on, Linux is still here and now stronger than ever, but is it completely free? No. And has it replaced Unix? No. There are now a whole range of companies who have built sustainable businesses by providing value-add to the Linux operating system through user training, support and other packaged services.

Today, Skype claim more than 45 million users of which less than 2 million use the premium SkypeOut service. More recently SkypeIn, Skype Voicemail and Skype Zones (WiFi roaming) have been introduced as premium services, and they have just announced that a video calling service will be available very soon (though no details are yet available as to whether this will be chargeable). So though Skype on-net calling is “free”, there are now a whole range of premium services which carry associated price-tags, and users still pay separately for the underlying network connectivity to use the service.

The convergence of devices and networks means the line between fixed and cellular communications is being blurred. New WiFi-enabled cellphones will help stimulate take-up of VoIP services, but pricing transparency will be even more critical as users roam in and out of cellular and WiFi coverage and wonder what it will cost and who they will pay.

VoIP is yet another pressure being applied to incumbent telecom providers, driving down retail prices through increased competition, but also helping to reduce costs of delivering the underlying telephone services. It is changing the telecom landscape and requires investment in order to achieve the longer-term benefits. VoIP has already passed the student hobby phase, and is clearly here to stay. But to succeed, new entrants and incumbents must overcome the challenges of network interoperability and roaming, and equip themselves with the right back office systems to turn an easy to use peer-to-peer service into a ubiquitous communications system with a continuous revenue stream and sustainable business model.

So who will be the winners in the battle for VoIP supremacy? Skype may be the current darling of the media and there are sure to be many more Skype-like services, but don’t underestimate the power of the incumbents, and the regulators.