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Second Quarter 1998

Internet Telephony: Hype Or Opportunity?
How Service Providers Can Capitalize On A Rapidly-Emerging Industry


The big buzz word in both the telecommunications and Internet industries these days is Internet telephony.  Every week, industry reports are issued regarding the billions of dollars that will be spent on Internet telephony by the year 2001, ranging from $2-8 billion. The questions that remain are: Where do these figures come from, what is all the hype about, and how can service providers capitalize on this profitable industry? The original hype dates back to 1990, when Howard Jonas discovered a way to supply the world with a U.S. dial tone and cheap international long distance rates. His tiny International Discount Telecommunications pioneered what is now a $1.5 billion dollar a year industry — international "call back" telephone service. This technology allows anyone around the world to bypass the high costs of placing international calls from countries outside of the U.S. With call back, companies and individuals save as much as 75 percent on their international calls by redirecting them through the U.S. and suddenly these PTTs had competition. PTTs have been forced to lower their rates and the consumer has benefited by choice of providers and lower rates.

With this background, it is easier to better understand the market projections surrounding IP telephony. While call back did not have the support of such huge companies as IBM, Lucent, Cisco, Ericsson, and Motorola entering the market, IP telephony is quickly gaining worldwide support. If call back can evolve into a billion dollar industry in such a short time, it seems that there is no stopping the IP telephony market from becoming an $8 billion industry by the year 2001. Now that the hype is clearly explained and defined, the second most popular concern is quality of service (QoS). When Internet telephony was first introduced back in 1995, the only conversations over the Internet were from one PC to another. Both parties had to be equipped with a multimedia PC with identical telephony software and be online simultaneously. Aside from the practical problem of these calls requiring prearrangement, the sound quality was choppy, delayed, and poor. For PC origination/termination, the PC client software is generally free. Many gateway manufacturers imply that the public Internet can be used for voice conversations. Although this is probably true to some degree, it is not reasonable to expect reliable, toll-quality conversations to be done over the public Internet. This is simply because of the unpredictability of the Internet load. Conversations that must cross the Atlantic Ocean are often jeopardized by limited Internet bandwidth. In addition, the connection from the ISP to the Internet backbone could have bandwidth restrictions that would hurt the conversation.

IDT ameliorated the shortcomings of the industry with the rollout of Net2Phone, the first commercial service bridging PCs with telephones world-wide. Introduced in July 1996, Net2Phone enabled Internet users to place calls to any telephone in the world at drastically reduced rates. Many quality and convenience issues were resolved since the recipient of the call didn't need a computer, and was able to talk on a regular telephone. Over 350,000 users worldwide have routed more than 15 million minutes over IDT's PC-to-phone service. But that was not all. Soon afterward, many companies began offering products and services enabling people to place calls over the Internet without the need for a computer. Companies like VocalTec, Lucent, and Brooktrout sold gateways that enabled voice conversations to enter and leave the IP network, but didn't interconnect with the public switched telephone network (PSTN), while service providers like IDT and Qwest began selling long distance service over the Internet for as little as a nickel per minute.

The primary function of the gateway is the voice-to-IP (and IP-to-voice) conversion. If the conversation originates/ ends on a standard voice telephone, then the gateway is a physical hardware box which is usually running NT Server or some dialect of Unix. If the conversation originates/ends on a PC, then the gateway is the PC itself which is running client software to perform the gateway functions — the conversation would be conducted using the microphone and speakers of the user's multimedia PC. When looking at Internet telephony from the technical perspective, it is essential to look at the components of the entire system. This is probably the largest error made by those entering the IP telephony world — just like owning a handset is quite different from being AT&T, having a gateway or a PC client for computer telephony is only a very small piece of a big puzzle. The key point is that although IP telephony may be different in the underlying technology, the many fundamentals learned in the last 100 years of telephony still apply. If one were to invent a workable helium car, it would probably still need to have the many features and options that every standard vehicle requires.

There are several manufacturers that sell "gateways." At a minimum, these gateways take in some number of voice lines (usually 24, 48, or 96) and convert the voice to IP. Some of the manufacturers sell the hardware and software for a more durable, industrial-strength solution. Others only sell a CD with the software.

The challenge of a good IP conversation is caused by the synchronous nature of telephone conversations. The speakers obviously want the conversation to be intelligible. They also want the sound to be free of break-up and delay. The maximum delay tolerance is probably less than half a second. A poor compression algorithm can cause delay, but the "wild public Internet" can even cause a greater and tragic flaw.

At Net2Phone, our phone gateways are placed on dedicated fiber links that can be controlled by QoS guidance. The cost of setting up world-wide fiber is prohibitive; we were aided by an existing IP network that we had set up domestically. Various service providers have been looking to offer Internet telephony services for a number of reasons, including:

  • Value-added service to offer the current customer base.
  • A relatively easy way to enter the already deregulating telecommunications market.
  • The ability to emit a hightech image with little investment.
  • An easy way to establish customer loyalty by offering a variety of services.

The most logical types of companies to begin offering such services include ISPs, PTTs, new emerging carriers, utilities, and cable companies. Investment is minimal, especially considering the fact that by offering Internet telephony services, the company is ostensibly becoming a telephone company.

Although many companies have claimed that they are becoming telecommunications companies, it requires millions of dollars of investment and an inordinate amount of time. Offering telephony service is not as simple as putting one gateway in Egypt and one in the U.S. and you can now offer telephony service between those two countries. To offer telephony services, you need a fully integrated IP network, a real-time billing system, real-time data base and monitoring system, scalable, 24/7 customer and technical support as well as a full redundant system. For example, an ISP in Brazil has enough problems dealing with their customers. So is this a realistic opportunity for these types of companies? Absolutely.

IDT has developed many different programs for partnerships for ISPs without worrying about the headaches listed above. IDT provides ISPs with solutions so that they can either resell PC-to-phone service as well as use its existing infrastructure and backbone to provide end users with a phone-to-phone service. An ISP can become a telco easily with little start-up costs and an easy way to build up a customer base and retain consumer loyalty at a low cost. This business model can be customized for each vendor, depending on their needs. For example, IDT recently partnered with Naray, a Korea-based mobile phone company. Although they were in the paging and mobile business, they did not have existing lines by which they could route calls, especially considering that the Korean telecommunications market was on the cusp of deregulation. So how can a company quickly begin offering telecommunications services in a deregulating market? 

By reselling an existing Internet telephony company's services, a corporation can easily enter the telecommunications market without needing existing infrastructure. Through our partnership with Naray, they became a full-service telco with all the bells and whistles. Let's get back to the monopoly issue. Back when call back was invented, PTTs were adamantly opposed, and did all they could to attempt to ban it in their country. When Internet telephony was first introduced, the PTTs started flailing their arms again. But less than two years later, more than a dozen PTTs have made significant investments into Internet telephony.

The biggest announcement was Deutche Telecom's deal with VocalTec. Others such as France Telecom and Telecom Italia have announced that they are testing various gateways. AT&T has released a service in Japan and has also announced plans on deploying services in the U.S. The question is why? Why are monopolistic telephone companies entering a market that will cut into their profits? 

Progressive PTTs realize that Internet telephony is a reality. There is a considerable amount of cost sensitive customers that they can recapture. There is a considerable amount of customers that don't make telephone calls due to the high rates that they can attract. More importantly is that PTTs are also restricted by regulatory and settlement rates. By using Internet telephony, PTTs can lower their rates to their customers and even have higher margins than what they traditionally have. They realize that liberalization is here, and if they don't begin offering new services, they will lose their customers to new and emerging carriers. It is of utmost importance to them to either partner with already-established Internet telephony companies or conduct the research and development themselves. But if the PTTs don't want to get swallowed and lose their margins and customers, they should think twice before ignoring this emerging market. In order to set up a complete Internet telephony service, a number of issues must be addressed:

  1. Security.
  2. Pricing.
  3. Routing/Termination.
  4. Billing.
  5. Reliability.
  6. Standardization.
  7. Scalability.

The ability to authorize each user is essential when discussing secure platforms. In the voice telephony world this is done by knowing the location of the phone device (a home or corporate telephone). For traveling users, a User ID/PIN is used. The authorization function is real-time, and must have a back-end database for verification and a process for handling what it feels is a fraud attempt. Due to the nature of hackers and the clear intrinsic cash value of a toll-call, a gatekeeper without the authorization function is a problem waiting to happen. As with traditional phone networks, rating and pricing can be incredibly complex logic with considerations such as the time, day of the week, method of termination (can the call be completed totally IP or does it need to go to the standard PSTN), etc. In a real-time billing platform, the rating function is used to determine the amount of time that the user can continue this call.

The routing function answers the question, "how should the call be terminated." Considerations include that the call may have to be passed off to a standard voice network — for example, if the terminating user has no IP address. Even when an IP gateway destination exists for terminating the IP-originated call, the routing function must do calculations such as the load currently on that gateway. This process must use tables of the network of gateways to identify the routing endpoint. As the IP call progresses, full tracking must be done for the purpose of billing. At minimum, this mandates the ability to produce a CDR record (the basic information such as the caller, the destination of the call, the duration of the call, etc.). The Net2Phone platform can supply comprehensive CDR records in real-time to any server in the network. Comprehensive billing allows for a rich variety of billing approaches, multi-level account handling, good history tracking and more. In the case of Net2Phone, we applied the carrier experience of our IDT corporation to the billing function to assure that the functions available in our IP telephony solution would be as rich as those provided for standard voice telephony. All technology requires reliability, standardization, and scalability. This is even more so in the telephony world where there is already voice technology that accommodates well these three needs. All the components of the system be reliable, and must be free of the hazards of overheating common in equipment that is on constantly. They must have some level of built-in redundancy.  Critical-path components (such as the central rating, routing and billing platform) must be fully redundant with automatic switch-over capabilities. Standardization is critical in IP telephony — without it, one can converse only with other gateways or PC clients of the same manufacturer. The industry is awaiting a full version of H.323 which should ultimately enable interoperability of platforms. Net2Phone already has a H.323 version; upon the final draft of the standard, we will have a market-ready solution — hopefully the first, standards-based, complete IP telephony solution. Scalability mainly refers to the ability to handle large numbers of calls simultaneously. Any technician will tell you that elegant technical solutions often fall on their face when they are scaled up. Let us point out one area of scalability concern. All digital solutions are based on some processor and other chips — what happens when these chips reach processing capacity? In fact, if only one processor in the sequence reaches capacity, the entire process is slowed — no scalability! 

Every day, another company announces plans to enter the Internet telephony market. Some are start-ups and others are existing telcos such as IDT, Qwest, and Frontier. In order to succeed both in the market and on Wall Street, these companies all need an Internet telephony strategy. No one is saying that Internet telephony will immediately replace traditional circuit switching. Internet telephony has its advantages including price as well as avoiding regulatory tariffs. Companies such as Qwest and Level 3 have announced plans for deploying huge IP networks. If a company is seriously considering getting into this industry, securing a guaranteed network with full redundancy is key for success in this suddenly competitive market.

Mordy Rothberg, EVP, Net2Phone, has been with IDT for 3 years, first spearheading international callback sales, and then with the Net2Phone division. Rothberg has vast experience in the international telecommunications arena, and has spoken at various telecom and telephony conferences about the effects of worldwide deregulation on the telecommunications industry, particularly as it affects Internet telephony. He can be reached at [email protected]  David Greenblatt, EVP of Technical Operations, has much IP multimedia experience and is leading the development of several leading IP technologies at IDT. Mr. Greenblatt welcomes your feedback at [email protected].

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