Web Calling Roils the Telecom World By SIMON ROMERO

Will the price of international telephone calls continue to decline? And will more people choose wireless technology over land lines? The answers lie in whether new technologies continue to rival existing ones in the coming year.

A glance across the humbled telecommunications industry might suggest that its largest companies are worried about other pressing issues in 2003, chief among them stabilizing the market for the tried-and-true service of placing calls from a phone tightly tethered to a jack.

After all, telecommunications and technology companies lost $7.6 billion in global market value from March 2000 to September 2002, as the industry was gripped by stunning collapses, financial scandals and an effort to absorb excess capacity on globe-spanning communications systems.

But alongside the industry’s search for its direction after such turmoil are trends that threaten to destabilize global telecommunications further in 2003. These trends could be described as the start of a cannibalization of established services by disruptive new technologies.

A November ruling by Panama’s Supreme Court indicates how friction on the industry’s margins is starting to sting the big companies at its center. In that decision, the court immediately suspended a government decree that had prohibited Panamanians from making Internet-based phone calls.

International calls routed over the Internet and placed on either computers or regular telephones are often offered at steep discounts. The technology used to route Internet calls is a relatively inexpensive way to route calls around the world.

In Panama’s case, one company, Cable and Wireless of Britain, has a venture with the government that allows it a virtual monopoly to provide international calling services. So the Panamanian government’s decision effectively strengthened Cable and Wireless at the expense of smaller companies selling cheaper international calls.

The government ban was “a vain attempt to hold back the inevitable,” said Scott Bradner, a consultant with Harvard University Information Systems.

Although its growth is still somewhat sluggish and in the early stages, Internet-based calling has expanded so much that it is understandable why monopolistic telephone companies, especially in the developing world, are feeling threatened.

Internet-based calls account for more than 10 percent of all international calling traffic today, up from almost nothing five years ago, as they reached about 18 billion minutes worldwide, up from 9.9 billion at the end of 2001, according to TeleGeography, a research firm. Most of these calls originated or terminated in poor countries.

Wholesale carriers carve out a business for themselves by taking advantage of differences in fees charged by local telephone companies to complete calls and the actual, often cheaper rates of transporting voice calls over the Internet.

Several governments in developing countries other than Panama, like Kenya and South Africa, have imposed restrictions on Internet calls, while phone companies in other nations, notably Colombia and Vietnam, have formed partnerships with wholesalers to seize on such opportunities.

For the time being, Internet-based calling volume remains relatively small, about one-eighteenth of the traffic handled by traditional phone companies. But analysts say the real disruption to the industry depends on whether large carriers decide to mothball billions of dollars’ worth of traditional switching equipment in favor of Internet-based technology.

Such a critical decision does not appear to be around the corner, and such a radical short-term shift should not be expected. Instead, analysts expect the growth of Internet-based telephone systems and, to a larger extent, the expansion of wireless calling to continue without rapidly eroding the business of traditional phone companies.

The struggle for supremacy among other telecommunications technologies offers some perspective. As Andrew M. Odlyzko, a professor at the University of Minnesota, points out, the telephone overtook the telegraph in volume in the early 20th century but telegraph use remained stable for years, reaching a peak in 1945.

The business of sending and receiving telegrams effectively died out in the 1990’s. AT&T, which did not formally change its name from American Telephone and Telegraph until 1994, transmitted its last telegram in 1991. So the cannibalization of the telegraph by the telephone took almost a century.

Still, there are reasons for traditional phone companies to be concerned. The United States has had a fourfold increase in wireless calling volumes per person since 1995.

“The substitution of cellphones for wire-line ones is finally becoming a reality,” Mr. Odlyzko said.

The rise of rival communications technologies has many implications for the industry, but in the months ahead the effects are largely expected to be deflationary, pushing down prices for local, long-distance and wireless service.

And as other new technologies emerge, like voice calling over new Wi-Fi wireless systems, at least one thing remains clear. Contrary to the expectations of the Internet zealots of the late 1990’s, the industry’s most potentially disruptive killer application will continue to be voice communications.

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>From now on, DSL will be a product sold exclusively by the Phone Company
(RBOCs) and its growth will suffer accordingly. RBOCs (in the US especially) don’t know how to market and view consumer data services as an inconvenience rather than an opportunity.

The DSL providers, for their part, made a mistake not really discussed in this article. They failed to pay attention to Ian’s Access vs. Value-Added Services rule, to wit: just because you’re selling them access to the internet doesn’t mean they’re going to come to you for other services. In fact, the whole point of the internet is: once you’re on, you can get your email and your web site hosting and your DNS from anybody.

So in other words, if you’re a DSL provider you’re stuck between a rock and a hard place:

– You’ve got competition springing up everywhere fat with cash in an orgy of VC-backed customer grabbing, which drives down the price people expect to pay for the service – You’ve got a bunch of big, unwieldy RBOCS who provision and manage customer circuits for you, and no matter how good your customer service is you just can’t hide their sloth and ineptitude from the end user – You’ve got huge demand which places burdens on your ability to scale customer service and regional rollouts – You’ve got no conceivable way of turning long-term customers into added revenue

Basically, if you’re a DSL provider you are a largely irrelevant organization to your customers (except when it breaks) and you’re an annoyance to your RBOC partners — you’re a meta-layer in between two hostile parties with no functional purpose in life except to herd the faithful towards a cliff of three-month waiting lists, countless visits to customers’ homes, and Windows 98 setup nightmares.

They might as well have filed for bankruptcy when they finished writing the business plan. In a million years you’d never have caught me dead buying stock in the DSL providers — they were and are doomed to failure.

ISPs and Cable and DSL providers used to think they were Portals (remember @HOME?), acting as a gateway to their customers’ internet experience. They have learned the hard way that in the final analysis they’re just plumbers.

Being a plumber sucks. You do all the heavy lifting, you buy all of the vans and ladders and test equipment; you’re underappreciated and nobody cares about you until something’s broken. RBOCs are excellent plumbers (sort of..) in that they own the circuits and control their own destiny.

Internet Services companies are like Interior Decorators. They have flaky ethereal names like “Amazon” and “Yahoo” and “Google” and they are the ones people talk about at dinner parties. They’re cool but they don’t have much substance, and they don’t fuss around worrying about peoples’ phone lines having too much static.

I haven’t seen anyone yet that has successfully crossed over from one to the other. And it’s impossible to be both, on the internet.

I’m not sure what COVAD and Rhythms and others thought, but there was a time in DSL’s evolution when terms like “customer ownership” and “internet gateway” were bandied about in the same breath as “Broadband”..

That was merely the futile longing for profitability gasping for air. Unlike weaker technologies like WAP, once you give somebody an IP address THEY are in control. They go where they wanna go… And they’ll pick their own interior decorator, thankyouverymuch.

So anyway, back to the point. DSL is now once again exclusive to the RBOCs. They will continue to drag their asses (moreso now that there are fewer cattle prods to move them ahead) while they try to figure out how to exploit the DSL Opportunity (sic). Customers will continue to hate them, adoption of DSL will slow, and Broadband Services will continue to be an oxymoron.

So, my final point for you to ponder: “DSL Is Not The Answer”… Discuss.

-Ian.