May 2000

Internet Telephony 101

BY RICH TEHRANI

As I write this column, thoughts of Spring Break are foremost on my mind. And, it's not that I'm necessarily thinking of winging it down to Mexico instead of writing this column. I have a very large family and many of my college age cousins are about to embark on trips to Jamaica, Florida, and Cancun. Lest you think that all my cousins spend their entire year talking about Spring Break, it's only fair that I point out that many of them even go to class regularly and sometimes they even ask my advice on what they should study. As you might imagine, I always steer my relatives toward technology and the Internet. As my cousins are members of "generation Y," they already understand how rapidly the Internet advances and the potential business opportunities the Internet holds in store for them.

One of the greatest effects the Internet has had on students is in the realm of research, where reams of information are no more than a mouse click away. Before the Internet, students who needed to gather information on any topic would make a trek to a library, search the appropriate card catalog, and then go rummaging the stacks for material. For those students who procrastinated (such as myself) they found that often, all the related research material had been checked out, leaving them in a difficult situation at best. In a sense, you could say the Internet has evened the playing field... allowing procrastinators an even opportunity to research most any topic without fear of the necessary information being checked out. (Not that I'm endorsing procrastination, but more on that later...)

Students aren't limited to just researching Web sites. In many cases they can pose questions to industry experts they've never met. In fact, we've been receiving a steadily increasing stream of letters from students, trying to learn more about the leading edge of the communications market. In most every case, the answers to questions we receive can be found in the articles and columns that appear within the pages of TMC publications. When I receive such letters, I usually help students just enough to get them started and then steer them to TMCnet.com or individual issues of one of TMC's publications. Sometimes though, I get a letter that inspires me to invest the time to answer completely. Sometimes the whole endeavor even seems worthy enough to publish. This month I received such a letter:

Dear Mr. Tehrani,
I am a graduating student in Master in Information Technology from the prestigious University of Asia and the Pacific of the Philippines. I would like to request your comment and opinions on the following questions for purposes of my thesis, titled "Internet Telephony in the Philippines." I have been deeply fascinated by the constant technological development and tremendous market benefits and potentials of Internet telephony. As this technology is not yet deregulated, I am a strong advocate for its liberalization in our country. I understand that you are highly knowledgeable of this industry, and thus wishing for your helpful assistance.
Stanley Cokehyeng

Stanley,
Thank you for the nice e-mail. I am so happy to hear that Internet telephony is making it into academia and I am flattered that you chose me to help you on your thesis. I wish you the best of luck in your degree and will do my best to assist you.

1. What are the effects of Internet telephony on the telecommunication industry in the United States and other developed countries in general? What will be its effect on developing countries such as the Philippines, which have not deregulated the industry in particular? What are the benefits and arguments to open the industry in these developing countries?

The effects of Internet telephony in the U.S. have been nothing short of dramatic and the effects can be seen in many areas.

One of the largest areas of impact has to do with price. There has been a dramatic decrease in long-distance rates by traditional long-distance providers in an effort to reduce customer loss to Internet telephony carriers. The cost savings has many ramifications, not the least of which is lower corporate long-distance bills. As far as I know, telecommunications service and high-speed Internet access are the only two products or services that have been steadily decreasing in price for decades. These reduced costs in turn lead U.S. corporations to be more efficient and more competitive in an international market.

Stanley, I notice you use the term "telecommunications industry." I feel "communications industry" is more appropriate, as Internet telephony brings telecommunications to the realm of data communications. As telecom has migrated to datacom, it has begun to enjoy the rapid advances in microprocessor performance and reliance on open standards that the datacom market has enjoyed for decades.

The development of Internet telephony coupled with the Telecom Reform Act of 1996 that allows competition in communications has truly launched an incredible proliferation of new products to the service provider market. Traditional central office equipment is much more costly than IP telephony equipment. So emerging service providers, also known as CLECs or competitive local exchange carriers, are able to compete against incumbent providers with a minimal investment. In addition to providing telephony, these providers are also able to offer broadband access as well in the form of DSL or wireless broadband.

I am an advocate of open competition at all levels. The U.S. economy is vibrant with communications companies that are continuously innovating in order to supply products and services to next-generation service providers who compete in an open market where customers are free to choose whichever provider they want. These service providers are in turn offering more services for their customers to choose from and as competition increases, these services become even more affordable.

2. What are the effects of Internet telephony on traditional telcos, considering that Internet telephony service providers compete directly with them? How could they (ITSPs and telcos) co-exist in this competitive industry? What are the advantages, if any, to the telcos for this industry to be deregulated?

Long-distance carriers and RBOCs (Regional Bell Operating Companies) have been steadily decreasing their prices to stay competitive with ITSPs. They will certainly continue to lose revenue as consumers realize that they have less expensive alternatives. Traditional service providers realize that they will lose revenue to ITSPs, and are looking for opportunities to expand into markets where they can increase revenue. For example, the international long-distance market still has many arbitrage opportunities left to exploit.

One of the most positive effects that Internet telephony has had on traditional service providers is that of providing less expensive equipment choices than traditional legacy equipment. These service providers can in turn use this equipment to supply voice, data, and enhanced services more economically than they ever could before.

3. To the general public consumers who have tried VoIP, how do they accept this technology, and what are the most common problems/comments/suggestions? Or do they notice at all that they are using Internet telephony instead of traditional toll calls?

The general public doesn't always know when they are using Internet (IP) telephony. Many ITSPs tell me that consumers are less likely to purchase their service if they learn that their conversations travel over the 'net. Certainly, the biggest problem with Internet telephony is lack of control over the quality of the conversation. I have used many international dial-around services that don't advertise that they are using Internet telephony. I have had results that vary from atrocious to incredible. I don't think that consumers would ever know if they are using Internet telephony. Even if they have a poor quality conversation, they probably wouldn't even think of why the quality was lacking. They would just blame the poor quality on the calling card or dial-around vendor.

QoS (quality of service) is the greatest factor in determining the quality of Internet telephony phone calls. Unless your ITSP has control of the network or has agreements to determine levels of bandwidth, calls are at the mercy of the public Internet, which of course means call quality is highly sporadic.

4. In your opinion, how would you see Internet telephony and other related value-added services in a global environment in the next five years? Any projection on what will happen to traditional telcos and the governments should they refuse to open this industry?

The proliferation of Internet as well as managed network IP telephony-based services will continue to grow rapidly both domestically and internationally. Enhanced services will continue to proliferate. Internet fax, unified messaging, and call waiting are just a few. Web-based control of all phone functions (e.g., distinctive ring for specific calling numbers) will be commonplace by that time. I suggest contacting industry analysts as to the more precise rate of this growth.

I can assure you that predicting the downfall of international governments due to the lack of open telecommunications is beyond my scope of expertise. I can however look to our own booming U.S. market and see how the competition in the service provider space has had a profound effect on our economy. There is a mad dash in our market to provide equipment to next-gen telcos and/or to become a next-gen service provider. Huge amounts of investment capital are flowing into the pockets of next-gen telcos and equipment providers. Many analysts believe that this market will continue to be one of the fastest growing segments of our economy for years to come.

Beyond just the general health of the economy, it should be readily apparent that a country's ability to prosper economically and compete internationally will depend heavily on the level of technological adoption within the country. As e-commerce proliferates, the need for every company to have access to inexpensive broadband access will grow exponentially. The fastest route to broadband access is an open service provider market where customers given choice will choose providers based on superior value and service.

5. If you were a citizen of the Philippines, would you be in favor or against the deregulation of Internet telephony in the country? Why or why not? What would you suggest/do to speed up the opening of this industry?

Although I can't speak for your country specifically, it is obvious that free, open markets breed tremendous entrepreneurial competition and this competition in turn leads to more choices for consumers. Increased choice leads to decreasing communications rates, which of course leads to increased profits, a more vibrant economy, and more taxes. From the government's point of view, I can see how they view a monopoly on long-distance as something that can't be beat. Why open a market that is doing so well and generating so much profit?

We have a similar argument here among political parties. Some feel that lowering taxes is good for the economy and others see it as a way of decreasing government revenue. It becomes a philosophical debate it seems. The obvious fact is that in the U.S., we are reaping tremendous rewards from a deregulated communications infrastructure and there is no reason why this success can't be duplicated worldwide.

6. Any other comment and information will be highly appreciated. I hope to have the honor to work in this industry after graduation and meet you someday!

Perhaps the most important and controversial comment I can make is that there is a trend toward all long-distance eventually being free. Please see the sidebar entitled, "Dial W-E-B For Free Long-Distance" for more information.

Rich Tehrani is President, Group Publisher, and Group Editor-in-Chief for TMC publications. He welcomes your comments at rtehrani@tmcnet.com.