The magazine of the Melbourne PC User Group VoIP - Changing The Way We Phone Peter Lange

The technology known as Voice over Internet Protocol (VoIP) is revolutionising what we know today as telephony. It will forever change the way we telecommunicate. Much cheaper than conventional telephone calls, even virtually free, and by its nature ideal for combining voice, video and data to form a truly integrated service, VoIP is sending shock waves through traditional telephone companies like Telstra, forcing them to scramble for ways to deal with this new competition. The technology is maturing, enabling voice quality almost equal to conventional telephone calls. VoIP is no longer a futuristic idea. It is available to be used right here, right now in Australia, and anywhere else there is Internet access.

Historic Overview

VoIP is less than 10 years old. Experiments with transmitting voice over data networks started in the mid 1990s. Vocaltec, an Israel-based company was the first to release software for PC-to-PC VoIP in 1995. Users would need only a home PC with a sound card, speakers, microphone and modem. The software, called InternetPhone, compressed the voice signal, translated it into voice packets and sent it out over the Internet. The technology worked as long as both the caller and the receiver had the same equipment and software. Although the sound quality was nowhere near that of a conventional telephone, this effort represented the first IP phone.

PC-to-PC solutions like Vocaltec's meant that VoIP communication stayed within rather small, closed groups of users at the time, like companies, or computer enthusiasts.
 
By the late 1990s, several companies began setting up gateways to enable the first PC-to-phone and later phone-to-phone connections using the Internet as the transmission medium. The cost of these IP-based phone calls was significantly lower than that of conventional phone calls, especially for international calls. Some of the offerings actually included making calls absolutely free, using a regular telephone, provided that the user was prepared to listen to an advertisement at the beginning of the call.

Around 1998, the first IP switching equipment appeared on the market. It was similar in principle to the switching equipment used in the exchanges of conventional phone companies, enabling true VoIP call connectivity. A growing number of companies began establishing themselves as service providers, effectively they were alternative telephone companies - and some have since grown into multi-million dollar businesses. At the same time, IP phones and IP-PABX (IP-based Private Branch Exchanges) began appearing on the market.

In 1998, 150 million minutes of international phone calls were carried by VoIP, less than 0.2% of the world's total international traffic. Today, billions of minutes of VoIP traffic worth more than a billion US dollars are carried per year, representing more than 10% of the world's international traffic. It is estimated that this figure will rise to 50% within a few years and that IP technologies will then form the core of most telephony networks in the world.

Pressure On the Telcos

What does all this mean for the telcos - the conventional telephone companies with their traditional switching equipment and copper networks, like Telstra in Australia? Well, they don't sleep soundly at night any more! VoIP in the hands of other Internet service providers (ISPs) threatens to eat right into their core business and biggest cash cow, voice telephony. So, most of the incumbent telcos are fleeing ahead and have started to use the technology themselves while at the same time trying to make life as difficult as possible for the new, upcoming VoIP service providers who for the most part, still depend on the incumbent telco's network infrastructure to reach their customers - for example the conventional copper telephone wires that the telco owns to every house, and ISPs use to deliver their Internet and VoIP services.

However, telecommunications regulation in most countries ensures that a de facto monopolist incumbent provides equal access to its network infrastructure for competitors and that no anti-competitive behaviour is used to push competitors out of the market. Many startup competitors will still not make it against the telcos' vast financial strength and market power, but at least one pressure remains and has already taken a heavy toll on incumbents - price.

Price?

How can price be an issue any more when telephone calls are already so cheap? With a conventional phone call, you can call anywhere in Australia for five cents a minute these days, and calling Europe, the other side of the planet, interestingly costs even less, three cents a minute. True - but do you remember when it was that these prices came down from the several dollars a minute we suffered, not too long ago? Yes! pretty much around the time VoIP came along. It costs between 30 and 80% less to carry a phone call over the Internet using VoIP than to carry it via conventional telephone networks. The new VoIP service providers used this fact to undercut the telco rates, and as the technology matured, the telcos had to follow with price reductions. So not only are they losing market share to the VoIP providers, they also have to live with smaller profit margins on the remaining market share.
 
Naturally the telcos also started saving costs by using VoIP to carry their own calls. Prices came down firstly on international calls - the area where VoIP was mainly used in its early years - to undercut the telcos' exorbitant rates. National long-distance calls followed. Telcos around the globe tried to compensate smaller profit margins in these areas by raising their prices for local calls and their monthly service fees where, admittedly, the biggest costs for a telco lie, in operating and maintaining the local access network, those millions of wires that run from the telephone exchanges to every house. Telcos in most countries actually started billing local calls by the minute rather than charging the untimed flat fee that we are still enjoying here in Australia. But alas, this last de facto monopoly domain of the traditional telcos is also being attacked by VoIP service providers: In Australia for example, Comindico http://www.comindico.com.au is now offering VoIP-based untimed local calls for 8 cents, while conventional local calls are still billed at around 18 cents. It won't be long before prices in the local call domain adjust to levels that are achievable with VoIP.

Fully Integrated Services

Price is no longer the main differentiator between VoIP-based and conventional telephone service. The real attraction of VoIP lies in the fact that it enables true integrated services, location independent, with always-on capability and great flexibility: Voice, video and data, all over the same line and the same technology, terminating at a single device which could be your PC at home, your laptop when travelling, or your wireless-enabled PDA (Personal Digital Assistant) or Smart Phone. With VoIP, voice is just another type of data transmitted over the Internet, and with all these services being Internet-based, you can be reached for all of them under the same single identity, your IP address.
Future bla-bla, telco anywhere-anytime sales lingo? Well, you will already have a taste of what lies ahead in the way we (or at least our children) will communicate in the future if you are an Instant Messenger (IM) user. Think further - VoIP applications actually offer some fundamental, practical advantages:

• Your broadband connection (eg. DSL, or cable) can take care of your data and voice needs. You don't really need your separate phone and fax lines any more. Saves costs, and means one less wiring system to install and maintain around the house or office.
  
• An IP phone is uniquely identified by its IP address, no matter where you plug it in (unlike the phone numbers of conventional phones which are location depenent). This makes additions, moves and changes a snap!
  
• Individual phones no longer need to be directly connected to the switch or the PABX, they can actually be anywhere in the world as long as there is an IP network (an Internet connection) there, connecting the phone back to the switch or PABX. This makes telecommuting (working from home) and globally distributed workforces easier than ever.
  
• Conversely, the switch can be anywhere in the world as long as there is an IP network there, connecting it to the phones. A business with offices in Melbourne, Sydney, Brisbane, Adelaide and Perth for example would need only to invest in one IP-PABX to be installed in one of those offices, rather than five conventional PABXs. All phones in the entire company in all cities could then be extensions of just the one IP-PABX, like in one big office.
  
• So-called "road warriors", people who work on the move, can use their PCs as a "softphone" to plug into an IP network in a remote city and be connected back to their office network, with all its facilities, data and voice, and be reachable as if they were back in the office.

So the major attraction of VoIP is its flexibility and the range of applications it opens up. But on the price front it has one last revolution in store. Eventually we will see flat fee pricing for our broadband Internet connections (as we already see today), but it will include all our "telephone" calls as well. There is no reason why not. The effort of billing those billions of minutes individually, all for a few cents each, is already becoming an over-proportional burden for the service providers - not technically, but just imagine all those many billing enquiries from customers they get every day, that take up time and resources and therefore cost money! Yes, indeed, voice services embedded into our Internet access can still get even cheaper than it already is today, moving towards a cost close to zero.

Other Issues

Quality concerns are diminishing, but there are other issues as well.
 
There are so many positives for VoIP - are there any negatives? Inferior voice quality and reliability/delay are often quoted. In the days when conventional phone calls were still a lot more expensive than VoIP calls, admittedly the quality of VoIP still left a lot to be desired. But by now this is almost a thing of the past. These days VoIP can be engineered to be as reliable as one wants it to be - the necessary compression technology exists and the Internet bandwidth within and between most countries to provide call quality almost undistinguishable from conventional phone calls. Often you will be making VoIP calls these days without even knowing it. International calls in particular (where we are already accustomed to slightly degraded call quality and delay) are often routed using VoIP, especially when you don't use the telco's own international direct dialling (IDD) but a calling card or callback provider.

Before VoIP really becomes a mainstream technology for telco-grade voice services, however, a few other issues besides quality still need to be worked on:

• Integration of VoIP telephone subscribers into the White and Yellow Pages and directory information services.


• Emergency access. Ensuring that VoIP callers are connected to the nearest police station or fire department when calling the respective emergency numbers. It can be imagined what a complex task this is, remembering that VoIP is location independent, which we discussed earlier as a major advantage of VoIP. The emergency access problem is similar in the mobile networks and has been worked on there.


• Last not least, security concerns. Legislation in most countries requires telephone companies to provide access to their networks for government security and law enforcement agencies - wiretapping, essentially. VoIP services are typically not yet covered by such legislation.

The World and Australia

The leading VoIP markets in the world are currently the USA and Japan, but the very nature of VoIP makes many facets of the business truly international. For example VoIP is used extensively even in developing countries such as in Africa, to bypass the local incumbent telcos' exorbitant rates for international calls - in both directions. Locals use VoIP (illegally in many countries) to make their international calls, and carriers (companies that carry telephone traffic) use VoIP to interconnect other carriers' networks and terminate calls from abroad in these countries, because the local telcos would also charge excessive prices for this termination service.
 
The biggest players in this segment of the VoIP business are ITXC http://www.itxc.com, (backed by AT&T and Vocaltec by the way) and iBasis http://www.ibasis.com. Others, like Net2Phone http://www.net2phone.com, DeltaThree http://www.deltathree.com and Vonage http://www.vonage.com focus on providing VoIP-based services directly to end users. Viper Networks http://www.vipernetworks.com, in addition to being a service provider, also offers its own hardware, the vPhone for example which looks like a normal telephone handset but plugs into the USB port of your PC or laptop and enables you to make VoIP calls using the company's worldwide network. Or the IP Phone Adaptor which connects to your PC's USB port on one end and any regular telephone, including cordless phones, on the other. The company's own Dialer software enables you to make calls with any of these devices via your Internet connection to regular phones anywhere in the world.

You will notice that all of the companies named here are based in the US, but nothing stops you as an Australian from subscribing to some of their services too, because VoIP is location-independent. The fact that the companies' servers and switches are located in the US and their call prices are US-based makes no real difference, a call to Australia (within Australia for you then) still costs only about 2.5 US cents, about 3.5 Australian cents - still cheaper than any other way of calling.

But there are also some Australian VoIP players: Comindico for example http://www.comindico.com.au offers untimed local calls at a flat fee of 8 cents as mentioned earlier, and national calls to other Comindico subscribers cost the same. Other national long-distance calls cost 6 cents per minute, a call to an Australian mobile 23.3 cents per minute, and international calls to the most popular destinations between 7 and 11 cents per minute. The company's service is currently aimed more at businesses rather than the residential market, with the smallest package involving a $250 minimum charge per month, which includes $200 worth of calls. Comindico has announced a product aimed at the residential market for the middle of this year.

And then there is Skype http://www.skype.com. Downloaded over 12 million times in just 8 months since beta launch, this free software enables you to make absolutely free VoIP calls, but PC-to-PC only. So really, it's back to the roots, like Vocaltec's good old InternetPhone software 10 years ago, where you can only call people who have the same software. In practice today, these are generally only people you know, friends and family. This makes Skype more like a voice-only Instant Messenger (see page 16 - Instant Messaging), rather than a fully fledged telephone system. Why though, despite this limitation is Skype so much more popular than InternetPhone ever was? Certainly because VoIP call quality is better now than it was 10 years ago, also because the time has come where so many more people are constantly online, with always-on broadband connections, so they can actually be reached around the clock, same as via a conventional telephone line. So, while InternetPhone back then was really something for a small geek community who had to establish with their friends, times they would be online, Skype today enables people to call their friends and families for free (worldwide!) more in the way you would via a regular telephone.

At the time of writing the company has announced it will enable calls to regular phones as well (at a charge then) some time this year, so it will then be a handy tool that combines both your free PC-to-PC voice communication and regular calls.

As we go to press, the first beta version of Skype for Linux has been released and is available from http://www.skype.com. So, all you penguins out there can now take advantage of this free software.

About the Author
Peter Lange, peter.lange@netcontel.com has worked as a consultant in the telecommunications industry for over 15 years.

Reprinted from the July 2004 issue of PC Update, the magazine of Melbourne PC User Group, Australia

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