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VoIP Connection(5056 bytes)
July 1999


Why You Should Become An ITSP

BY LIOR HARAMATY

Welcome to the first edition of VoIP Connection in Internet Telephony´┐Ż 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.

Let’s briefly look at the equipment that is necessary to bridge the PSTN and data networks to enable IP telephony services (Figure 1).

fig1.gif (8708 bytes)
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).

fig2.GIF (36056 bytes)
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 user’s 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 ITSP’s 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.

fig3.GIF (13654 bytes)
Figure 3. PC-to-phone calls span the PSTN and the IP network cloud

WHAT’S THE ROI?
For an ITSP to calculate its return on investment, let’s 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.

Let’s further assume that the ITSP has established a relationship with a clearinghouse to terminate and originate minutes from their network. For outgoing minutes, let’s 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.


VoIP Connection Glossary

PSTN
— Public Switched Telephone Network, the 100+ years old telephony network we all grew up using. It is the network referred to when discussing telephone calls transmitted the “traditional way” over regular phone lines.
IP — Internet Protocol, the protocol used to transmit data over the Internet and managed IP networks.
VoIP — Voice Over IP, a term that originally described the transmission of real-time voice calls over a data network that uses IP, but currently is used to describe “anything over IP,” for example, voice, fax, video, etc.
Black Phone — A regular telephone (probably originating from the days when phones, as Model-T Fords, came in any color you wanted providing it was black).
IVR — Interactive Voice Response, the automated telephony systems we are all familiar with that direct our calls within a company or organization, e.g., “Please press one for customer service, press two for technical support, press zero for the operator.”
PIN — Personal Identification Number, a multi-digit code used to identify a customer and is implemented for various uses such as automatic teller machines for bank withdrawals/deposits and information retrieval, or as in our case, as a unique user identifier for calling card calls.






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