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Feature Article
June 2003

The International Market For IP Telephony


When was the last time that you vacationed in Aruba? Maybe you�ve visited Lagos, Nigeria, or Kuwait City recently. Perhaps you have been lucky enough to pass through Quito, Ecuador in the past few months. You may be thinking, �What exactly do these places all have in common?� Well, if you�ve been to any of them then you would have certainly experienced the IP telephony explosion that is taking place in these and similar markets. In fact, people�s daily habits of using IP for carrying voice has penetrated many markets worldwide, far beyond anything happening in the �typical� techno-triggers like the U.S. or Japan. Average people are taking full advantage of the long-promised IP/PSTN convergence, whether at home, work, on cell phones, or simply entering one of the numerous Cyber Cafes dotting the streets.

So why is it that certain parts of the world are experiencing, or are about to experience, a surge of Internet-based calling, while others lag behind? I�d like to offer a first-hand account of this raging phenomenon, and provide some understanding as to where and why IP telephony flourishes.

The Arbitrage Game
A dictionary definition of arbitrage yields the following: The purchase from one market for immediate resale in another market in order to profit from a price discrepancy.

Fact is, everyone needs to chat on the phone, whether with friends, family, or for work. In most countries where the government controls the telephone company, phone rates are typically high, as there is no competition to speak of. Contrast this with the United States, where every day we watch phone companies trip over each other while trying to offer us the best rates and service plans. You may remember with fondness some marketing messages such as �Nickel Nights,� �Reach out and touch someone,� or the dropping pin. Yet due to the lack of competition, these and similar slogans are virtually unknown to most of the world, even today. But that is rapidly changing.

Enter IP telephony. Suddenly, anyone with a connection to the Internet has a plethora of choices when it comes to delivering their voice, whether across their country or around the world. In the phone business, the cost of a call depends mostly on the cost of what is known as the �last mile.� This is what a carrier is charged to bring a call into a particular country, and is related to the volume of minutes that the carrier will deliver. For example, the larger telephone companies can promise a lot of traffic to Country X, so Country X may charge them 5 cents to terminate there, while a smaller carrier may have to settle for paying 6 or 7 cents. Yet the actual caller always pays more -- sometimes a lot more. Often the cost to the end user is many times higher than the cost to the carrier, simply because there is no other way for the person to make a call, and the value of the call is much higher.

Generally, countries that are currently the most active IP telephony users are also countries that have no pricing competition. This makes sense, as the population typically cannot afford to pay the inflated rates they are offered by the government, so they turn to alternative means to place calls. VoIP has grown the most in the Middle East, Africa, and Latin America, where price sensitivity is one of the driving factors.

The world rests on the shoulders of migrant workers. Millions of people each year travel to other countries for various lengths of time in order to earn wages that are unavailable in their home country. For example, many people from the Philippines spend up to two years in Saudi Arabia and other nearby countries, working as day laborers, nannies, and in many other capacities. When it comes to keeping in touch with home many do not have a telephone or simply cannot afford the price of the calls. However, with the advent of IP-based calling, the barrier comes down, allowing almost everyone the ability to place inexpensive phone calls to their loved ones half a world away.

We mentioned that many of these calls emanate from places like Cyber Cafes. However, in order to make the technology even more accessible, many VoIP companies are now offering a pre-paid calling card so that the customer only needs to find a nearby phone, or pay phone, to take advantage of the significantly lower rates. Such services have been deployed in areas as diverse as Angola, Aruba, Iceland, Saudi Arabia, Argentina, and other countries where traveling workers or tourists seek to connect with folks back home. Low-cost devices are available for anyone who has their own Internet connection, be it dial-up or broadband. These devices typically are connected to one�s ISP for connectivity, and then to a regular telephone, so the calling experience is as natural as placing a regular telephone call.

The Next Steps
While most retail IP telephony calls are made either from Cyber Cafes, from hardware devices, or from calling cards, most of these calls are still not exactly welcome by the authorities, who wish to protect their monopolistic interests and maintain their hefty margins.

But the world is slowly changing. During the past year many countries have either deregulated, or announced that they will be deregulating. This means that there will be room for healthy competition, to the benefit of those who will now officially have some choice in the matter. Panama, Brazil, Pakistan, Bangladesh, and Mauritius are just a few of the many countries that have, or will soon, liberalize and offer telecom licenses. IP telephony providers who already have solid reputations with customers who utilized their services in the pre-liberalized days will benefit greatly by expanding their offerings through more conventional methods. Ultimately, the commercial distinctions between VoIP and circuit-switched telephony will blur, as the advantages of low-cost and highly scalable VoIP-based calling will continue to grow, allowing millions of more people to communicate for a fraction of today�s costs.

Today, in addition to consumer calling cards and cyber caf�s, A large opportunity lies in corporate solutions for enterprises looking to scale their telecommunication costs and improve their telecommunication services. Many businesses with remote offices are trying to save money on their interoffice, and local, long-distance, and international phone calls. Others are attracted to the unique features that VoIP can provide them such as free interoffice dialing worldwide, call forwarding and voice mail in a modular, scalable environment that maintains lower operational costs and improves overall productivity.

It is clear that to consumers and enterprises in even the most emerging of countries VoIP is a telecommunications service providing a value that many simply cannot resist. Even in those countries where teledensity is at its lowest, VoIP is a service that is flourishing and will continue to flourish in the future.

Yonah Lloyd is vice president of international business development at Net2Phone. Net2Phone is recognized as the first company to bridge the Internet with the PSTN. Net2Phone currently routes millions of minutes every day over the Internet, saving consumers and businesses up to 90 percent off traditional long-distance rates.

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