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Walks Like a Telco, Yalks 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.

By Alec Saunders, Vice President, Developer Relations, BlackBerry

Filed Under


Dan Campbell  –  Jan 8, 2008 8:58 PM

Well, Vonage is (a.) still very cheap, (b.) provides good service and (c.) supplies service that even non-computer / non-Skype people can use.  Aside from the $25/month flat rate for US calling, which is cheaper than I was getting before between my LEC and IXC, I get very cheap rates when calling the UK, which is where my wife’s folks and friends are.  Better yet, for a mere $5/month I get a London phone number so that calls made to us from my wife’s London friends and family appear to them as cheap local calls within London and are free to us.  That is an unbeleivable thing and totally win-win.  And it’s no different than any calling they already have been making their whole lives.  Also, the features they offer, particularly the control you have through their web-interface, are awesome.  Skype is also great and we use both the voice and especially the video conferencing between the US, London and other places.  But it hasn’t replaced Vonage for us and won’t unless Skype comes out with an external phone-like appliance that eliminates any computer dependence, both literally and in terms of know-how.  (If Skype has such a device, I’m not aware of it.  We use it through our PCs.)  Overall, Vonage has been great and I will be really in a bind if the lawsuits cause them to go under.

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