Telerupted: Twilight for Telephone Networks

Session initiation protocol-compatible VoIP devices already account for as much as 20 percent of landline telephone traffic, thanks to the efforts of companies like Cisco, which sells to enterprises, and Comcast (in the U.S.) or Free (in France), which target consumers. Mobile telephones will not remain a safe haven for long, however, as more companies like Fring and Truphone start to offer VoIP alternatives to operator voice plans.

Such plans involve downloaded SIP User Agent software that can also voice-enable gadgets like the Nintendo DS, Sony PSP or iPod Touch. Dan Borislow claims the marketing blitz for his SIP-based magicJack puts him on track to sell 500,000 of the devices by the end of this month. Yet the displacement of analog phones by VoIP devices has not displaced the telephone network itself.

The state of affairs is analogous to printing email before it reaches the destination in order to preserve a role for the post office. It will not last. The ubiquitous use of SIP makes it possible to configure VoIP traffic to peer directly via the Internet, but the business models of VoIP companies depend on the minutes-based charging enabled by the telephone network. Companies like Skype and Vonage, as well as the Web 2.0 voice plays Jajah or Jaxtr, provide for free calls between users, but they all generate revenue by sending off-Net calls to the telephone network.

The 20 percent VoIP penetration number implies that both called and calling parties have VoIP devices about 4 percent of the time. This leaves plenty of work for the telephone network, but the long-term utility of passing VoIP traffic through the telephone network does not look promising. At some point, the penetration of VoIP devices will cross a threshold that makes the minutes-based business model of telco and VoIP players alike untenable.

The strategy of using VoIP to make the telephone network more efficient has short-term merit in that it avoids the expensive process of changing end user behavior. The usual mode of price competition serves as a reasonable placeholder until VoIP devices get sufficiently mature and achieve critical mass. A regulatory environment that requires VoIP players to implement traditional functionality associated with E911 and CALEA contribute to preserving the status quo. In the meantime, patent litigation remains a drag on investment capital, and the availability of suitable Internet connectivity remains particularly weak in the mobile context — Internet access in any form remains an obstacle in many locations around the world. Reliability gives the telephone network an edge over the Internet for sales calls and other high-value communication.

Telephone network integration may provide a useful transition strategy en route to VoIP nirvana, or it may represent a unrecoverable dead end for the current crop of VoIP startups. Companies that depend on the telephone network inherit of a range of artificial constraints. VoIP devices connected via the telephone network lose the prospect of delivering high-quality audio. Traditional telephones do not support the use of domain names for routing or hyperlinking. Global flat-rate termination that serves as a driving force for applications of the Internet get sacrificed. Embracing the telephone network postpones the search for new forms of communication.

The dependence of VoIP plays on the telephone network does not erase the risks VoIP poses to the telco status quo. At this point it’s not even clear if there exists a role in a VoIP infocom ecosystem for traditional service providers. The metered usage charges that make the telephone network attractive from a business model perspective do not exist in an Internet context. Infocom seems likely to mirror the existing infotech bring-your-own-device ecosystem with hardware vendors, software companies and access providers. It will take at least another decade for the forces at work to play out, but this provides little consolation for an industry that traces its roots to 1876 and telco executives unable to retire before the music stops.

Daniel Berninger is the CEO of Free World Dialup