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Over the years, the internet has led to a revolution in the way people communicate. For example, the internet now can be used to transmit a phone call. This can be accomplished via PC to PC calling, PC to standard telephone or telephone to telephone. These conversations take place by using what is known as "IP(Internet Protocol) Telephony". IP Telephony or Voice over IP (VoIP) routes calls over both public and private networks. VoIP was first started in early 1995 by using technology that enabled voice conversations between users over internet connected PCs. Traditional telephone companies viewed it as a disruptive technology but felt because of its low quality that it would never gain mass-market penetration. Today, however, because of improved IP telephony technologies and the need for voice, video and data networking, traditional telephone companies are evaluating the efficiency (or inefficiencies) of their traditional circuit switching networks. Since 1998, traditional telephone companies have invested in multi-billion dollar upgrades of their circuit-switched networks to be able to take advantage of opportunities of IP networks(1). Because of the growing interest in IP telephony, many newcomers and traditional telephone providers are vying to win the market, but what business model will be successful for this new technology?
Traditional Telephone Providers:
Since traditional long distance phone providers have a major investment in their switching plants and linewire, maintaining and updating these networks is a major expense. Typically, they charge customers a per-minute fee, which covers access charges, transport, marketing, customer service, administration, depreciation, and a profit margin.
A VoIP call goes to a local VoIP provider, which routes it over the internet to another VoIP provider on the receiving end, entirely bypassing the long distance switching plants (2). This decreases access charges, depreciation on equipment, and other costs. Customer service and marketing expenditures are higher for this service, but the savings under the new technology still allows for a larger profit margin compared with traditional long distance.
Traditional cost structure is represented by the graph on the left and VoIP cost structure is represented by the graph on the right (1).
Traditional Telephone Providers:
Traditionally, telephone companies have offered customers local and/or long distance phone to phone services, which they routed through their own switching facilities and line networks.
For local service, there was generally a flat rate for calls made within a nearby geographical area. For long distance, companies utilized peak-load pricing strategies; that is, charging a higher price for long distance service at the busiest times than for times of the day or week when communications traffic is lighter. International calls were typically more expensive. As competition increased due to the breakup of AT&T's monopoly and subsequent deregulation, long distance carriers responded by increasing advertising and offering special promotions. They devised new pricing strategies that would appeal to groups of end users, such as the "Friends and Family" discounts given by MCI.
In recent years, technological advances have altered this business model. Phone companies are now able to offer more local services, including call waiting, caller ID, conference calling, and last-call redial, to name a few. The concept of "bundling" these features into packages allows providers to offer customers a discount over per-item pricing, while attaining overall greater revenues and building customer loyalty.
The advent of IP telephony and the increase in wireless communications have dramatically decreased revenues for traditional phone companies, since both of these technologies bypass the use of the switching plants. After a period of economic struggle, most traditional telephone providers have taken one of two routes: they have either embraced the new technology, or have acquired other companies that use or have the new technology.
Some companies resisted the incorporation of technological advances, choosing instead to try more traditional changes in their business models. Capsule Communications, for example, developed a nationwide sales force during 1999 in an effort to enlist the aid of local Chambers of Commerce to attract small business customers, but this effort failed (3). The company, which has since been acquired by Covista Communications, Inc., now uses internet agents to attract customers from web sites.
There are three business models that prevail in the IP telephony market (1).
1. Ad Revenue Model
- Used by competitors who offer free IP telephony to customers.
- Based on web advertising model which is an extension of the traditional media broadcasting model.
- The IP telephony provider's web site gives information about their services but allows other advertising messages in the form of banner ads to appear on the web site. Revenue is generated from the ads of the broadcaster (basically advertising revenue).
- This model works best when the volume of viewer traffic is highly specialized and/or large.
- Go2Call uses this type of model (4).
2. Charge/Fee Model
- An extension of the traditional telephone pricing model.
- A phone call made using VoIP will be assessed a per minute rate.
- The fee is less than the traditional telephone call costs.
- If a VoIP provider is using a charge/fee model, they will provide better quality services (usually through a private IP network) and more convenience compared to free/lower priced competitors.
3. Hybrid Model
- This model is a combination of the above two models.
- Due to the uncertain future of VoIP, companies are using this model to generate revenue from different sources.
- Some start out free until a fee structure and infrastructure solutions can be determined that generate desired profit margins for the company.
- Net2Phone uses this type of model (1, 4).
The telephone service industry is in a transitional phase at this time. Technological advances have resulted in the emergence of more choices for end users of phone communications, and have left traditional providers scrambling to capture the profits from new markets while trying to prevent the erosion of their traditional customer base. The cost structure changes and convergence in business models that are taking place today will be discussed in detail in Phase 3 of this project.
The telecommunications industry has many acronyms. The following is list of some of the acronyms that are used in the telecommunications industry.
PSTN - Public Service Telephone Network
ISP - Internet Service Provider
LEC - Local Exchange Carrier
LATA - Local Access and Transport Area
ILEC - Incumbent Local Exchange Carrier
CLEC - Competitive Local Exchange Carrier
IXC - Interexchange Carrier
NOC - Network Operations Center
RBOC - Regional Bell Operating Companies
(1) "Management in an Information Age: A Study on IP Telephony", www.stanford.edu/~jseade/overview_frame_2.htm.
(2) "About VoIPWatch.com," VoIPwatch.com.
(3) Capsule Communications 10-K: www.sec.gov/edgar/data/1113227/000103605001500273/d10k.txt.
(4) Dubowski, Stefan, "Net2Phone and Go2Call have your number," CanadaComputes.com, Oct. 11, 2000.