≡ Menu

Walks like a telco, talks like a telco… must be a telco.

Vonage's latest woes are written up by Om Malik in Vonage: How Low Can You Go.  More interesting than Om's reportage (Sprint wins case, Vonage ordered to pay damages, stock drops to $1.30) is the commentary afterward, in which one reader takes Om to task for the "gleeful" way in which he reports the demise of the VoIP companies.

VoIP companies are dying because they're undifferentiated.  In most cases, the early success stories have been built on the idea that they could simply clone the phone company's service and offer it at a lower price.  Boosters made the argument that VoIP was fundamentally cheaper than the TDM systems that phone companies deploy, and so therefore they enjoyed a price advantage in the market place. 

Anyone in the business of supplying telecom equipment, however, will tell you that the argument is flawed. 

VoIP companies like Vonage must build out networks of gateways and softswitches, or outsource those requirements to third party suppliers like Level 3.  That's a capital cost.  The incumbent telcos don't have that cost.  They have existing working systems that are, in many cases, paid for. Moreover, the incumbents are using the profits from their existing networks to fund the build-out of more technically advanced VoIP systems. The benefit Vonage offers the customer is cheap calling, but the incumbents have the advantage.  We've seen that as, here in Canada, Bell Canada has responded to VoIP pricing pressure by offering a $25/month unlimited North American pricing plan.

To get to free phone calls requires a fundamental change in architecture which Vonage et al have not embraced.  It requires pushing the core calling functionality to the edge of the network, which implies turning off the "minute meter".  Voice, in this scenario, is nothing more than an undifferentiated stream of bits, charged at the bandwidth rate of the network operator.  The profits must be made from the services surrounding the call – before and after – not during.

The SIP standard anticipates this model by allowing for both peer-to-peer calling models, and calling models which pass through a centralized proxy.  While no VoIP "operator" has ever embraced the peer SIP model, Skype has delivered peer calling on their proprietary protocol.   Skype understands that the money isn't in transporting the bits, but rather in all of the ancillarly pieces that can be offered around that bit transport — ring tones, voice mail, phone numbers, and protocol licensing to third parties who wish to attach equipment to the Skype peer network.  Similarly, by embedding conference calling in Facebook, at iotum we're trying to create a better experience before and after the call, rather than during simply focusing on the cost of the call (although free is pretty compelling, I would argue…)

That's the fundamental difference between the success of Skype and the failure of Vonage and SunRocket.  Skype doesn't look like a telco.  Vonage, however, walks like a telco and talks like a telco…. without a telco's deep pockets.

{ 1 comment… add one }

  • David Williams July 2, 2009, 6:28 am

    you think by now someone would make an easy way to hack newer phones, an app – one for all kinda thing. just my thoughts, if you get a min take a look at my site, hopefully you'll like :)

Leave a Comment