The window of opportunity

However, do these operators need to fear they are going to see a massive migration of their international traffic from their networks to the Internet? Alternatively, is there a defined window of opportunity in which international Internet voice traffic will grow?

I believe that international Internet telephony has a defined window of opportunity set by how long a price differential can be maintained between a local and international call.

Competition in many areas will erode the tariff differential between the Internet call and the traditional international circuit switched call.

Internet telephony started in 1995 when Vocaltel developed software that enabled Internet surfers to place a telephone call from one PC to another across the Internet using the IP protocol. As Internet telephony developed so did the concept of voice gateways and gatekeepers. 1998 is regarded by many as the year that Internet telephony moved from being an added feature of the Internet to become a fully recognisable voice network. The development and implementation of gatekeepers (see diagram) has moved Internet telephony into the mainstream voice market.

It is estimated that the number of voice gateways will increase from some 168 to 504 (MJ Sheele and Associates) from 1997 to the end of 1998.

The following diagram provides an overview of current Internet telephony.

(This diagram is extracted from the Ericsson Web site.)

To understand how a traditional circuit-switched operator loses revenue requires us to understand the difference in revenue earned from voice telephony when comparing traditional circuit switched and packet networks. This, simplistically shown in the following diagram, provides such an overview:

Traditionally, the circuit switched operator would see a call originating on their network that needs terminating on another operator's network. The originating operator bills the customer who made the call while paying the terminating operator a termination fee. Internet telephony only sees the operator in Country A earning a local access fee. Therefore, the operator loses the tariff differential between a local and international call.

Can operators sustain a significant tariff differential between local and international calls? This depends whether the market is deregulated or regulated. In a deregulated market international tariffs are falling as competition increases, whereas regulated markets tariffs are undergoing large reductions as regulated markets rebalance their tariffs (not all regulated markets countries).

Overall, the developed and developing market international tariffs are reducing. Analysis by the ITU shows a worldwide decline in international tariffs. The accounting rate system that has underpinned the international traffic tariffing is under threat. If operators move away from the accounting rate system then we would see a more cost-based approach adopted in pricing international tariffs.

Competition in many areas will erode the tariff differential between the Internet call and the traditional international circuit switched call. If this happens, I believe the tariff structure, as we know it today, will move to the basis of paying for infrastructure access and being offered a range of tariffs that provide for a range of different types of traffic. Many industry observers see this fundamental shift in tariffing occurring over the next 5 to 10 years!

Therefore, there is a defined window of opportunity in which Internet telephony will thrive and will continue to grow while there is a significant tariff differential between the Internet call and the traditional international circuit switched call.

Many observers comment that Internet faxing is currently better suited to the Internet than voice as it uses a store and forward operation, and does not require half or full duplex functionality such as the Internet.

Faxing internationally probably accounts for some 10% to 20% of international traffic so there is a potentially lucrative niche market for an international Internet faxing application.