July 1999
Why You Should Become An ITSP
BY LIOR HARAMATY
Welcome to the first edition of VoIP Connection in Internet Telephony� Magazine. The
purpose of the column is to provide you with information necessary for launching,
managing, and growing a communications service based on Internet protocol (IP) telephony.
In this issue, I will focus on the business proposition of becoming an Internet Telephony
Service Provider (ITSP). This is not a technical discussion but rather an explanation of
the business models supported today by Voice-over-IP (VoIP) networks.
As this magazine has widely reported, IP telephony is here to stay. Analyst figures
show significant upward curves in past growth and future projections. Today, a wave of
ITSPs are taking advantage of the arbitrage opportunity that toll bypass over IP networks
has to offer, providing low-cost IP telephony service for phone-to-phone, fax-to-fax, and
PC-to-phone services.
For phone-to-phone or fax-to-fax services, customers do not need any additional
equipment beyond the standard telephone or fax machine. VoIP network equipment does all
the work. The true advantage of VoIP is that it provides ITSPs a quick and low barrier of
entry solution to the formerly exclusive world of large telco providers. These packetized
networks enable low-cost calling while providing a foundation for new and enhanced
services to stay ahead of the competition as prices continue to drop, deregulation takes
effect, and competition expands.
Breakthroughs in VoIP technology are also improving performance. Voice can be
transmitted over data networks with quality that is comparable to and has the
potential to be better than that of calls made on the Public Switched Telephone
Network (PSTN). Quality is improving as a result of new voice-compression technology, more
abundant bandwidth, and intelligently engineered networks. Furthermore, IP telephony
supports different levels of Quality of Service (QoS), enabling ITSPs to address different
markets with tiered pricing. PSTN assumes a single customer type and lacks a solution for
ITSPs to provide different classes of service. The reality is, some customers want premium
service and are willing to pay for it while others prefer lower prices and are willing to
make certain sacrifices. IP telephony provides a solution for addressing these different
market needs.
Lets briefly look at the equipment that is necessary to bridge the PSTN and data
networks to enable IP telephony services (Figure 1).
Figure 1. The diagram shows some of the equipment needed to
bridge the circuit-switched (PSTN) and packet-switched (IP Network) worlds.
The call is initiated on a regular phone and travels over traditional phone lines to an
IP telephony gateway. Gateways are essentially routers that transfer traffic between the
PSTN and an IP network. Once the gateway receives the call, it queries a gatekeeper (the
brains of the IP telephony network) with questions regarding authorization,
authentication, billing, and routing. After communing with the gatekeeper, the gateway
transfers the call through an IP network to another IP telephony gateway, which transfers
the call back to the PSTN where it travels through traditional phone lines to a regular
phone. Assuming these two gateways are located in different countries, the ITSP completes
the call via local calls rather than one costly international call, passing on savings to
customers.
BROADENING YOUR FOOTPRINT
Clearinghouse Services
ITSPs can sign up for service with the growing network of clearinghouse service providers
to generate more revenue by exchanging traffic with other ITSPs. By signing up with a
clearinghouse, ITSPs can either terminate minutes generated from their own customer base
beyond their own footprint of gateways, and/or terminate the traffic of other ITSPs at
their own gateways (Figure 2).
Figure 2. The relationship between administrative domains A and
B and a Clearinghouse.
Clearinghouse service providers save ITSPs the expense of developing
individual bilateral relationships with other ITSPs that own terminating gateways around
the world. Instead, the ITSP has a single business and operations relationship with a
clearinghouse, which in turn handles all routing, network management, authorization, and
settlement. Savvy marketers can operate a service by distributing minutes through a
clearinghouse without ever owning or operating gateway equipment. Examples of
clearinghouse service providers today include ITXC , AT&T Global Clearinghouse, and Arbinet.
Interoperability
ITSPs can also exchange minutes with other ITSPs independently of a clearinghouse. To do
so, it is important to consider the need for IP telephony equipment that is not only
compliant with leading standards, but also with industry initiatives that further define
standards to support interoperable products today. For example, in order to facilitate
interoperability between IP telephony equipment from different vendors, VocalTec, Lucent
Technologies, Inc., and ITXC Corp. created the iNOW! Profile. Based on H.225.0 Annex G,
H.323 inter-domain and inter-gatekeeper communications, and with more than 20 companies
committed to this initiative, iNOW! compliant products support true interoperability,
enabling ITSPs to exchange traffic with others regardless of vendor equipment.
VoIP Services
Once an ITSP has a network in place, and perhaps an established relationship with a
clearinghouse or other ITSP for broader reach, a number of different services can be
launched using VoIP technology. Some of these services mimic traditional PSTN services but
are available at a lower cost.
Pre-Paid and Post-Paid Calling Cards
IP telephony provides a transport medium that supports more competitive pricing for
pre-paid and post-paid calling. From the customers perspective, pre-paid and
post-paid calling cards that use IP networks work the exact same way as PSTN-based
services. In the case of pre-paid calling, customers buy a card for a given value and
start placing calls. An Interactive Voice Response (IVR) asks for a Personal
Identification Number (PIN), printed on the calling card, and the destination number.
Pre-paid credit is decreased as calls progress. Callers can talk or make additional calls
as long as there is credit.
The advantage of this scenario is that credit is bought up front and payment is
guaranteed. ITSPs do not need to worry about the expense of billing or collection. Users
buy cards in stores and use a two-stage dialing solution to make calls. With post-paid
calling cards, once again, the experience from the customers perspective is the same
over IP networks as the PSTN. To sign up for service, users give the service provider
their credit card information in exchange for a unique PIN. Accounts allow callers to
process calls in a similar way as a pre-paid calling card, only the users credit
card is charged upon completion. This provides users with a convenient solution for making
calls since there is no payment limit other than the credit line available on the charge
card. On the other hand, the ITSP assumes more risk and more complications resulting from
implementing processes for credit card verification.
An advantage of IP telephony is that it enables customers to sign up for service and
replenish value on calling cards at a Web site. Users simply access a Web site, enter
their credit card information for either pre-paid or post-paid service, and are given a
PIN code in a secured fashion at the Web site or by e-mail. Web-based calling provides a
convenient way for customers to replenish credit without having to leave the comfort of
their own home.
Direct Dialing
IP telephony supports other long-distance services such as those that require
customers to dial 10-10-XXX to access a long-distance service provider followed by the
desired phone number. This single-stage dialing solution is just like a PSTN 10-10-XXX
service. Users are charged according to the cost of connecting the originating number to
the dialed number. Once again, the users experience is no different from a PSTN
service, but an ITSP can offer more competitive pricing by using IP as a transport medium.
PC-to-Phone
ITSPs can also offer PC-to-phone service. In this scenario, end users download a free
dialer software application. (ITSPs should look for dialers that can be customized to
reflect their corporate identity). In this model, end users experience even lower cost
calling. Phone-to-phone calls travel over the PSTN at both the points of origination and
termination. With PC-to-phone calls, the call travels over the Internet the entire way
until it transfers at the ITSPs local gateway to the PSTN.
PC-to-phone (Figure 3) calling allows ITSPs to become worldwide phone companies by
providing service to anyone in the world with an online PC who wants to realize higher
cost savings a need that is particularly great outside the United States. It also
provides customers with the convenience of being able to make calls from their PCs while
online either at home or on the road.
Figure 3. PC-to-phone calls span the PSTN and the IP network
cloud
WHATS THE ROI?
For an ITSP to calculate its return on investment, lets assume an ITSP has a 24-line
system including a gateway, gatekeeper, and network manager. This setup costs
approximately $40,000 plus a turnkey robust billing solution roughly priced at $15,000.
This system has the potential to process 1,036,800 minutes per month, per T1 line. [30
days x (24 hours in a day x 60 minutes) = 43,200 minutes per line. $43,200 x 24 lines =
1,036,800] Assuming that utilization of this number is 25 percent, the ITSP is looking at
approximately 250,000 minutes per month, per T1 line.
Lets further assume that the ITSP has established a relationship with a
clearinghouse to terminate and originate minutes from their network. For outgoing minutes,
lets assume the ITSP is charging customers 15 cents per minute and paying the
clearinghouse 10 cents a minute. So, the ROI is the 5-cent spread multiplied by 250,000
minutes, which equals revenue of $12,500 per month. Without factoring in other expenses,
the varying margins from country to country, or revenue generated from terminating minutes
from other ITSPs in the clearinghouse, the ROI for this model is: $55,000 divided by
$12,500, which makes the payback period only four and a half months.
THE BIG PICTURE FOR ITSPs
IP telephony supports low-cost calling services, whether pre-paid or post-paid calling
cards, direct dialing, fax-to-fax, or PC-to-phone. ITSPs can broaden their reach by
signing up with one or more clearinghouses and/or establishing independent relationships
with other ITSPs based on interoperable equipment for originating or terminating minutes.
And while providing a solution for generating income today, IP telephony infrastructure
supports a range of new and enhanced services for targeting new markets a subject
we will investigate further in future columns.
Lior Haramaty is a co-founder of VocalTec
Communications, and belongs to the original group that started the VoIP industry.
Haramaty has dealt with passing audio over data networks since the late 80s; VocalTec
started shipping VoIP products in the early 90s. Haramaty has a multidisciplinary
background in the business, technology, and marketing fields, is a co-inventor on VoIP
patents, and initiated and spearheaded standards activities in the industry. The goal of
this column is to clearly explain issues related to Voice (and other media) over Internet
Protocol (VoIP) to anyone, including the acronym-impaired person. Requests for
future column subjects to [email protected] are
welcomed.
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