How Economically Viable is VoIP?

Today I highlight the economics of VoIP.

Introduction of VoIP is the beginning of another era in telecommunications services, as it is the enabling technology to potentially switch away some local telephony customers from the telecom carriers. Several VoIP services will be launched locally soon offering free on-net calls within their closed user groups and extras including voicemail, conferencing and termination services to the public switched-telephony network (PSTN).

These all have minimal network infrastructure, relying on 'peer-to-peer' typologies to support the services. The private VoIP applications challenge the traditional voice service providers, both fixed and mobile, to adopt new business models if they are to survive.

New versus old

Assuming the existence of effective VoIP networks and the correct future vision of convergent data-voice services, it is evident that VoIP is relevant and will actually work.

The existing PSTN network is depreciated, though its operational life can be prolonged. However, value-added extensions to the traditional circuit-based voice product are costly and take a long time to develop. The OPEX (operating expenditure) associated with PSTN switches will only increase as time goes on.

VoIP is becoming recognized as a proven technology on corporate LANs and WLANs. The growth of broadband in the local loop emerges as a key enabler, which both drives the associated IP infrastructure deployment and directly reduces (OPEX) relating to the copper local loop.

This then prepares the ground for VoIP to be truly cost-effective, as the phasing out of the PSTN would lead to a more manageable, converged network. VoIP is truly timely and cost effective with demand growing especially for call-centre applications.

Fixed-line revenues are falling as a result of regulation and mobile cannibalization. Operators hope that an integrated IP platform might support voice services, such as 'click-to-call' from the computer, with the potential to generate new revenue streams.

Also, dynamic routing with VoIP offers the possibility to have a single number that connects to your current call location, be it at home, in the office, or on the move. With its potential for value-added, integrated data and voice services, VoIP offers the opportunity of incremental revenue.

Residential broadband could enable the introduction of fixed handsets with features that are characteristic of mobile systems, or even a roaming 'personal handset' configuration that could include among other features something like a portable address book.

A tightly regulated and highly competitive voice market means that revenue and margin erosion are the very real threat.

New services will emerge, such as click-to-call and secure business voice communication, which may increase ARPU or at least protect fixed-line voice revenues as the traditional voice products decline in value.

A significant proportion of most incumbents' customers and revenues come from rural areas. Remote areas require local intelligent network of digital local exchanges to be distributed over a very large number of sites. VoIP offers a greatly simplified switching architecture. With the aid of a few core soft switches and related servers; it would best be used to reach the last mile.

Deregulation of the public network has completely changed the service provider landscape. Key technologies are making major strides, these are Internet Protocol (IP) telephony, wireless Internet and speech-driven user interfaces.

New and essentially free services Ð like Internet voice and unified messaging Ð are quickly reaching the marketplace. Service providers will face a different competitive environment much more sophisticated than before.

Basic are the same

The basics are still the same: how to build revenue by offering services that attract new customers and how to keep revenue by retaining customers while maximizing profits. They've got to face the challenges and still be flexible enough to change at Internet speed-keeping things simple and convenient for customers.

With skype.com VoIP offerings receiving major publicity in the world, it is evident that VoIP is relevant. It is expected that OPEX costs will rise over time for traditional networks, in contrast to those for VoIP, which are expected to fall as global economies of scale are realized.

Whether you are a telecommunications start-up or an incumbent giant, your winning options in VoIP will largely depend on the product you offer, its price point, and the target market you need to persuade rapidly.