 | Issue: | Latin America II 1998 |
| Article no.: | 6 | |
| Topic: | Drivers of Internet Telephony | |
| Author: | Dr. Ignacio Mas | |
| Title: | Principal Consultant | |
| Organisation: | Analysys, UK | |
| PDF size: | 24KB |
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Article abstract
Internet telephony is an economic threat to the PSTN and challenges existing regulatory policies, yet it may bring about rapid technological developments. The relative backlog of infrastructure development and telecommunications service provision in Latin America may actually prove to be a strong drive for Internet telephony to flourish in the coming years, and the opportunities and threats it offers should be studied carefully both by incumbent operators and by newcomers.
Full Article
Internet telephony is a topic that is being watched very closely by new entrants and incumbent operators alike, as the recent explosion in the number of press reports demonstrates. It is a significant economic threat to the Public Switched Telephone Network (PSTN), yet it may lead to rapid advances in telecommunications development. It is ideally suited to flourish in rapidly emerging economies which face sudden telecommunications liberalisation, and which are attracting large investments across the board of economic activity. These conditions are found in Latin America, which therefore has an opportunity to leapfrog in telecommunications development by acquiring the systems and technologies being developed for the future. The Stakes are High Internet telephony – and the broader issue of voice-data integration that it epitomises – is also a huge challenge to established regulatory policies, upsetting the balance between the competing aims of protecting existing investments, and promoting the development of new networks, services and operators. More fundamentally, many of the basic principles of today’s best regulatory practices are inappropriate for a world in which voice and data converge. For instance, obligations regarding interconnection and universal service are very different for PSTN operators and Internet providers. The non-discriminatory PSTN pricing standards which exist today severely restrict the scope for operators to offer volume discounts or capacity-based pricing. More radically, Internet telephony makes it harder to sustain the regulatory definitions and boundaries on which today’s regulations are based, such as the distinction between operators, resellers and service providers, between voice and data, and between public and private networks. The Economics are Powerful To understand the short-term advantages and long-term sustainability both of Internet telephony as a commercial proposition and of its regulatory treatment, one must understand the key drivers behind Internet telephony. These are derived from its intrinsic technical and economic characteristics. They can be grouped into six categories, which relate to market structure, regulatory structure, technological characteristics, functional service characteristics, economic cost structures and dynamics of innovation. Within each category there are corresponding opportunities and threats for Internet telephony providers, and, of course, the opportunities and threats will operate in reverse for traditional PSTN operators. Contesting Uncompetitive Markets Opportunities: Internet telephony presents an opportunity to circumvent bottlenecks in the core PSTN network, weakening the position of any telecommunications operator whose market power is derived from control of carriage. Internet telephony has very different cost drivers from the PSTN, and offers the possibility of establishing clearly differentiated pricing structures. The cost of Internet telephony is less distance-sensitive than PSTN services. Internet network dimensioning is also less dependent on peak loading than the PSTN, as the Internet has the flexibility to accommodate peak loading (at the expense of quality). Internet services already have higher flat access charges and lower usage charges. Threats: Because the key bottlenecks in telecommunications networks lie in the access segment, Internet telephony does not by itself solve the problem of far-end interconnect. Operators who control access will still be able to protect their PSTN business to some extent. Internet telephony does not yet offer full any-to-any connectivity. There is a large variety of software packages for Internet telephony, which creates compatibility problems. These problems may be resolved in the medium term, but in the meantime they could reduce the perceived value of Internet telephony. In addition, it is still less straightforward to implement Internet telephony than to obtain a new PSTN line, and Internet telephony is subject to systems integration problems (affecting hardware, software, communications links, etc.). For some time to come, therefore, Internet telephony may remain a niche market targeted at very specific customer segments. Regulatory Arbitrage Opportunities: Internet telephony is generally treated as a data or value-added service, with very few licence restrictions or conditions attached. At present, Internet telephony providers benefit from the interconnect obligations of PSTN operators to which they connect at gateways, but are not themselves encumbered by corresponding interconnect obligations vis-a-vis each other and new entrants. Internet providers link to each other via peering rather than interconnection arrangements, and are not subject to obligations of unbundling, cost orientation or non-discriminatory treatment. Moreover, there is no distinction between peering nationally and internationally, and the accounting rate system does not apply for international Internet calls. This allows Internet telephony providers to differentiate themselves on the basis of price. In most jurisdictions today, Internet telephony providers are not required to make any contributions towards the access deficits or universal service obligations of incumbent operators. In contrast, new operators that originate PSTN calls may have to make such contributions, which places them at a competitive disadvantage. The digital nature of Internet traffic makes it impossible to distinguish voice from data. The inability to detect Internet calls makes it very difficult to give them equivalent treatment to PSTN traffic, even if that was the regulatory intent. Threats: In future, the regulatory treatment of Internet telephony may be similar to that of voice, rather than data or value-added services. This would put it on an equal footing to PSTN calls, and preclude regulatory arbitrage. However, it remains to be seen how effective this can be in practice. Technical Efficiency Opportunities: Under Internet telephony, packets are created only when there is sound to be transmitted. This means that there is in-built silence suppression, as the default is no circuit usage. PSTN, on the other hand, requires capacity to be reserved for the full duration of each call, even though there will be times when no sound is being transmitted. Internet telephony also benefits from in-built stochastic multiplexing, which is inherent in packet-based communications. This offers more flexibility for the efficient utilisation of network resources. The digital nature of Internet traffic offers more flexible voice compression possibilities. The connectionless nature of the Internet means that it has in-built network resilience. Packets are automatically re-routed if the network is affected by external circumstances. The PSTN, on the other hand, requires explicit resource duplication to ensure resilience. Threats: At present, Internet telephony offers lower quality than the PSTN, resulting partly from congestion in the Internet due to the absence of usage pricing. This could change in the future, as better quality could be secured through a price-based packet prioritisation system. Nevertheless, Internet telephony may involve an inherent loss of quality, even if sufficient network resources could be guaranteed for a given call. For instance, users generally regard silence suppression as an undermining quality: they often prefer to hear the background noise, as this appears more natural. Internet communications incur substantial packet overheads, arising from the need to include packet labels and error correction protocols, and to resend packets. PSTN signalling overheads are tiny in comparison. This means that much more content can often be packed into the same bandwidth on the PSTN than on the Internet. As a whole, the Internet is less reliable, as it is subject to crashes and power cuts which do not generally affect the PSTN. Expanding Services and Functionality Opportunities: The Internet is capable of offering different grades of voice service, as different packets can, in principle, be treated differently (prioritisation, tolerance for errors, etc.). The PSTN is generally designed with one level of overall quality, as there are specific bottlenecks which condition quality across the entire network. Internet telephony offers many advantages for voice-data integration, and for Computer-Telephony Integration (CTI) applications such as call centres and collaborative working. This results from the end-to-end digital nature of Internet calls and the potential for implementing single terminal devices for voice and data on Internet applications. The Internet also offers greater capability for encryption, and so seems better suited for governmental, commercial or banking applications. Threats: Widespread customer acceptance of Internet telephony is still in question. Because Internet telephony is in its infancy, it suffers from quality perception problems, and it is relatively difficult to install and use. It also requires terminals and software which are more expensive and specialised than ordinary phones. All of these factors mean that the majority of customers may not be in a good position to exploit or even comprehend the new possibilities that arise from Internet telephony. The Internet was not specifically designed for real-time applications. The public Internet cannot offer quality of service commitments, and hence Internet telephony providers find it difficult to manage congestion. As a result, users may be faced with the trade-off between higher functionality and lower quality. Exploiting Economies of Scope and Scale Opportunities: Internet telephony can exploit integrated voice-data network management and maintenance systems. It also offers the possibility of exploiting higher bandwidth, as it ‘free rides’ on the explosive growth of Internet and intranet traffic flowing over the same networks. Thus, Internet telephony may gain substantial cost advantages even if it is not intrinsically more efficient for voice communications than the PSTN. Internet telephony will also benefit from the cost savings deriving from the commoditisation of equipment. It will induce a shift in value from hardware to software, from transmission to processing, and from dedicated core assets to consumer electronics peripherals. All of these are subject to higher economies of scale. Threats: On the other hand, there is limited scope for scalability in today’s commercial Internet gateways. However, this is likely to change in the future when gateways mature as products, and benefit from cost reductions inherent in the normal product life cycle. Dynamics of Innovation Opportunities: The Internet world has proved capable of defining its standards more quickly than the telecommunications world, partly due to the fact that Internet and IT standards are controlled by the industry rather than by governments or official supra-national forums. Internet users have had greater control over innovation because new technologies and applications can be implemented locally on terminals and gateways. As a result, there is a greater diversity in the sourcing of new software and more competition to come up with the applications that users want. In the telecommunications environment, however, most innovation occurs at the core of the network (e.g. Intelligent Network platforms). Threats: If standards are set on the basis of industry precedents, this may ‘lock in’ technology too quickly. It is also quite likely to result in a lack of interoperability between different Internet telephony systems, at least in the short term while precedents are established and standards become entrenched. In telecommunications, on the other hand, early systems do not tend to be ‘locked in’ due to the more protracted and consensual approach to standards formation. As a result, more appropriate technologies, which may take longer to develop, have a better chance of becoming entrenched. Conclusions Are we going to leap into the brave new world of Internet with integrated voice-data offerings, or will operators and consumers feel their way cautiously before changing their way of doing things and espousing new technologies? Clearly, the burden is on promoters of Internet telephony to exploit the opportunities listed above until they are able to create viable and attractive market propositions. The legacy of monopolistic telecommunications markets in many countries has been operators riddled with inefficiencies, out-dated networks and much unsatisfied demand in terms of basic coverage and functionality. Privatisation has proved to be a strong drive for upgrading networks, and liberalisation has given new operators access to untapped markets. These factors, plus the ability to arbitrage regulatory structures, have put Internet telephony on the map. Incumbent operators, as well as new entrants, would do well to consider in depth Internet telephony offerings as an option. However, for Internet telephony to succeed providers will need to deliver voice in a technically efficient manner, juggling the distinct communications requirements of various categories of data and voice. They must match the quality of PSTN voice communications and extend it with additional functions that users come to be dependent on. Finally, they need to seize the traffic volumes that allow them to gain suitable economies of scale.
