IP convergence: Economics, 08/10/98

IP economics

By Susan Breidenbach
Network World, 08/10/98

In theory, packetized voice is more efficient than traditional analog technology and will increase its advantage over time. Computing power at the edges is being used to save bandwidth on the backbone, and Moore's Law says the same money will buy twice as much processing power in those edge devices every 18 months. It will cost carriers less to transmit packets, and some of those savings should get passed on to customers.

Carrier costs for coast-to-coast calls - IP beats the public net
As the diagram shows, carriers reap the greatest savings with IP over long distances where high-speed lines are employed. In this scenario, the IP savings amount to nearly a penny per minute, or about 64% compared to using the PSTN. For regional calls, where mainly T-3 lines are employed, there is no real IP savings.
chart

Note: Each sencario assumes the carrier owns the routing and switching equipment and leases the transmission lines.
Source: Joseph Rinde, MCI.

Some experts say packetized voice can save subscribers substantial amounts on long-distance charges, based on today's prices. How much can be saved - if any - depends on the number of switches and length and type of WAN links.

Joseph Rinde, director of switched network architecture for MCI, says regional public switched telephone network (PSTN) and IP telephony costs are about the same. However, IP telephony can handle coast-to-coast calls for 64% less because the efficiencies of packet networks compound as distance increases.

But the economics of international calling are a bit different. Because overseas bandwidth is relatively scarce, switches used for international PSTN calls have evolved into much more sophisticated creatures than their domestic counterparts. They support bandwidth on demand and are able to handle voice, fax and data more efficiently. Consequently, Rinde concludes it costs no more, on average, for carriers to run voice over the PSTN internationally than it does for them to run voice over IP; he even gives the PSTN a slight edge.

While converged services from carriers are not yet widely available, companies with private intranets spanning the country are in a position to benefit by adding IP telephony internally. "This is where cost savings can be realized right now because these self-contained private networks can be controlled and managed," says Mark Fisher, vice president of corporate marketing for Concentric Networks, an IP services provider in Cupertino, Calif.

Nortel last year did just that, and reduced its phone bill by 40% in the process, says John Roth, the company's president and CEO. Intracompany voice and fax calls now go across an internal IP data network, riding on previously unused bandwidth.

The use of corporate intranets is an interesting parallel to the evolution of T-1 networks in the 1970s and 1980s, when corporations started setting up their own internal telephony services to save on long-distance charges. Then companies began taking advantage of the silences within and between voice conversations to send data bits for free on these private leased lines.

"Now data is getting so large relative to voice that we will soon reach the point where voice can be absorbed on the data networks, just as the original data traffic was absorbed by voice networks," says Roshan Sharma, principal of Telecom Network Science, a consultancy in Dallas. A pioneering designer of the first T-1 voice/data networks, Sharma says companies can now get voice costs down to zero to 2 cents per minute by implementing IP telephony.

It's hard to know what converged networks could save on voice costs in any given instance because IP telephony billing has yet to sort itself out. Circuit switching is a connection-oriented Layer 2 technology that lends itself to keeping track of individual calls and billing for them. Devising billing systems for a connectionless environment such as IP is a much bigger problem.

"ISPs came up with the 'all you can eat for a flat rate' approach because they had no way to keep track of call-by-call usage," says Ed Kennedy, vice president of marketing for Alcatel's data networking division in Ashburn, Va. "You have to know the origination address, destination address, authorization, type of service the caller has and so on."

On the PSTN, switches track all these factors by communicating with one another through a separate Signaling System 7 network. There is no equivalent in the IP world. Also, big PSTN Class 5 voice switches maintain databases with complete sets of information, while everything is distributed in IP networks. Call information has to be collected and assembled because it isn't all stored in one place.

"IP telephony billing is still very immature," Kennedy says. "The problem is huge."

Sprint is trying something new with its recently announced Integrated On-Demand Network service. You pay a flat rate for a fat pipe, but a virtual "bit meter" keeps track of usage and adjusts your bill accordingly. The approach may be cheaper, depending on pricing, which Sprint hasn't yet announced. At any rate, this model will make phone costs more predictable and enable users to provision bandwidth for themselves.

But the main savings from IP telephony will stem from increased productivity, which is harder to quantify than transmission costs. While business is moving rapidly toward extranets and electronic commerce, many companies can't participate because they lack the in-house expertise to implement and manage the necessary infrastructure.

As convergence pushes intelligence to the network edge, carriers can help address that problem. Smaller companies and those with remote offices can outsource many functions to avoid expenses. Outsourced functions might include Web sites, electronic commerce servers and e-mail systems.

Another outsourcing candidate is fax, which is often cited as a natural IP telephony application.

"Half the cost of a fax server is tied up in gear for talking to the analog phone network," says Bill Fallon, vice president of marketing for FaxSav, a provider of IP fax services in Edison, N.J. "If faxes can just stay on IP as they move on to the public network, companies don't have to invest in all that equipment."

Companies can also save a lot on line charges, at least today. Fax traffic accounts for about one-fifth of all domestic long-distance calls and more than half of all PSTN international calls that originate in the U.S. Substantial savings can be realized by moving this traffic across the public Internet backbone instead, and little or no infrastructure investment is required. You can install IP gateways to do it yourself, or sign on with an Internet fax service.

"It's not just about saving on transmission costs," says Paul Severino, chairman and CEO of NetCentric, a start-up in Bedford, Mass., that sells Internet fax technology to service providers. Optional in-box software can turn incoming faxes into e-mail, he says, which can be distributed or stored like any other electronic document. It moves us one step closer to universal messaging.