What they won`t tell you about VOIP

VOIP is a fantastic new technology, and represents the convergence path of the future. One day all your phones will be IP-based, you will have IP roaming over wireless networks, connectivity will find you wherever you go, and all this will cost you a nominal monthly access fee - probably less than an imported beer. But is this here, now, in SA in 2005?

Certainly the most touted application of the "newly legalised VOIP" in SA is the angle of providing corporate savings. On paper most offerings sound great, and should have customers stampeding to their ISP - but there are a few important factors which are being widely glossed over by our potential VOIP service providers.

Herein lies the biggest single factor which will slow the uptake of VOIP in SA. In order to implement VOIP successfully, you need bandwidth - good, clean, plentiful, preferably quality-of-service controlled bandwidth. At the current exorbitant (by international standards) cost of bandwidth in SA, very few corporates have "spare" capacity on their bandwidth, and extra bandwidth will have to be bought for VOIP services. (Some operators even seem convinced that VOIP will only work if you buy "their" bandwidth!) This represents a long-term fixed contractual exposure for the business, even if the VOIP operator bundles the bandwidth into a VOIP service contract.

For the purposes of illustration later in this article, let`s assume the lowest cost option is currently ADSL at around R800 per month. A VOIP channel takes around 25K, including signalling overhead, and as ADSL has no guaranteed throughput, further assume that you can bank on four reliable VOIP channels - this gives you theoretical lowest-cost scenario of around R200 per VOIP channel per month.

In order to implement VOIP, an investment in hardware is needed. This includes VOIP routers, and possibly new or upgraded data routing equipment as well. The cost of this has to be factored into the overall costing, and the payback period should not be longer than 12 months. The cheapest available (not very sophisticated) SIP-protocol VOIP routers cost around R600 per port - adding at least another R50 per month onto the cost of each IP channel. Again, even if the VOIP provider bundles this cost into a package deal, it translates to increased cost of use to the customer.

Simply put, VOIP savings are achieved by making your telephone calls directly through your IP data circuit, thus bypassing the Telkom charge to initiate the call. Maximum savings are realised if you can also terminate the call directly into another IP device, thus also bypassing the Telkom charge for terminating the call to a landline phone. Calls made and terminated directly on customer-premise IP boxes are called "on-net", and where both IP clients belong to the same VOIP network/provider, there is generally no charge levied for the calls. These are generally advertised as "free" calls - this is misleading, because although there is no charge from the VOIP provider for the call, you still have to take into account the cost of the VOIP channel needed to make the call - as per the above example, at least R250 per channel month for the party making the call - and here is the hidden bit - the same for the party receiving the call. So, it actually costs you to receive calls on your IP box, and the fixed cost of branch-to-branch calls is therefore double that of external calls.

Another way of making savings via IP is to launch your long distance (national and international) calls via IP, and terminate them locally at their destination through the regular telephone network - at roughly the cost of a local call, plus profit, billed to you by the VOIP provider. This is called "break-out" termination, and while it will definitely generate good savings on international calls from SA, the same does not hold true for national calls within SA. This is because the current Telkom rates differential between local and national calls is only 33% for the first minute or part thereof - leaving very little margin to pay for your data lines and equipment amortisation. This situation will only get worse next year as Telkom continues its policy of reducing the gap between local and national call charges - to the extent where national VOIP may well become more expensive unless the cost of bandwidth reduces significantly.

There are several other areas where implementing VOIP will result in (generally unnoticed) increased costs to the customer. First, there is the cost of physically maintaining and logically "shaping" the additional bandwidth required for VOIP, in the form of IT support salaries or call-outs from the IT provider. Then, there is also the cost of LCR programming and maintenance on the customer`s PABX, in order to route calls to the VOIP equipment. Bundled offerings (calls, data lines, routers and service) from a provider should be treated with suspicion, as these are often a vehicle to disguise cross-subsidy of the different cost components and particularly traffic types, hiding the fact that each item is not independently commercially viable.

Intangible risks also include those of information security, as your IP traffic can be vulnerable to hacking and spam, and the physical risk of a single medium carrying a large portion of call traffic, providing a single point of failure. Finally, adding any new system to your telephone infrastructure represents an operational risk in terms of teething problems and "waking sleeping dogs" - which can manifest itself in the form of call quality problems, loss of service. etc. It is a simple law: the more complicated you make it, the more can go wrong.

At this early stage of the VOIP lifecycle in SA, the bottom line for any VOIP installation has got to be commercial viability - for if all you are doing is moving the spend from one (simple, stable and established) provider to another (with complex new technology), have you achieved anything?

With the above discussion of VOIP costs in mind, it is hardly surprising that the only concrete VOIP offers to the market so far are punting overall net savings in the region of just 19% to 22% (across all national, international and cellular traffic). In contrast, South African corporates are currently already enjoying average savings of at least 35% on the same basket of calls using "traditional" cellular, national and international least-cost routing - through regular telecoms networks, at toll quality.

What can be made of all this? Initially, VOIP can benefit international calls, where true savings of up to 70% can be realised. For national calls to be viable, large call volumes are needed in order to cover the fixed costs of the hardware and data circuits, and even then the savings percentages could fall short of current LCR offerings - especially for off-net calls. And cellular calls that are currently being carried through cell least-cost routers should definitely not be sent via VOIP as there is no price advantage, and by routing cellular calls over IP you lose one of the biggest plus features of cellular routers - backup telephone lines independent of fixed-line services.

This is not to say that VOIP is not the way of the future. In fact, the technology has many outstanding service delivery benefits as well as cost benefits, and its widespread adoption is inevitable in the long run. And some South African companies can certainly benefit from VOIP straight away - but this is not a given, and VOIP currently is a minefield of hidden costs that must be carefully analysed as the cowboys try and invade the market. It remains after all nothing more than another business decision.