Patrick’s Blog(2)

Thought I share this little gem with you. Given the industry’s uptake of Voice over IP as usual the level of cluelessness will rise significantly. Anyone who has been involved in VoIP or any other emerging technology can attest to that. So enjoy!

A response with a European perspective to Bob Cringely’s predictions for 2005, particularly focused on the $100 Asterisk VoIP appliance for the mass consumer market.

The Linksys Wireless-G Broadband Router WRT54GS has already been modified to run a slimmed down version of Asterisk. The results are rumoured to be promising but it will not be the killer VoIP appliance. Imho only $100 for a Asterisk based appliance seems a bit challenging given the price of FXO (for connecting to the telco) and FXS (for connecting to a phone) ports. In current similar setups a CF card is needed to store Linux & Asterisk as well as the appliance’s config. And those don’t come cheap either. Then there is that lovely thing called patents that forces the box’s vendor to pay for using codecs like g.729. Hooray for Linux and Asterisk.

Admittedly I have never requested a quote for e.g. a million CF cards. Given the right vendor, marketingplan, target volume and good design this may actually be doable (want to sell a few million PPC chips IBM?). So let’s assume the appliance can be built for $100 consumer price and it hits the European consumer market. The one thing it will immediately do is scare the living daylights out of the I(T)SP’s and Telco’s. The availability of the Asterisk appliance will mean choice to their customers/market and choice is a bad thing unless their Marketing department spindoctered it in some service offering that will make them money either way.

The result of the availability of the Asterisk appliance with VoIP service could be any of the following:

• I(T)SP or Telco will accelerate their VoIP based services. Their rates will probably be not very competitive because they have the advantage of upselling/attach rate. An example is Wanadoo in the Netherlands which recently launched their Livebox (voice+access 512k/512k) for €22.50/mo. A xDSL wholesale operation in the Netherlands (BBned.nl) has been selling xDSL+VoDSL since 2004. The same has been rumoured about KPN
• I(T)SP or Telco will find some creative way to mess with VoIP traffic which they do not receive money for (evil but not unthinkable)
• the Telco/incumbent will try to get VoIP regulated (in other words way more expensive to build and offer)
• the Telco/incumbent will make it difficult for competing VoIP Service Providers to terminate traffic at competitive rates. I’m told in Europe the large Telco’s will only speak to you when bring at least tens (hundreds) of millions of minutes per month. Now how would a starting VoIP Service Provider be able to do that?
• the Telco/incumbent will acquire the VoIP Service Provider once it gains a certain momentum and market size. While I’m all for entrepreneurs getting rewarded for setting up a successful business, this will mean that innovation will be stifled and that consumers will be thrown back to square one

It will not be a $100 Asterisk box by itself that will bring VoIP to the European mass consumer market. It can be successful in Europe when an independent pan-European VoIP wholesale business is established that will successfully sell their service into the European I(T)SP’s and have enough cloud (minutes) to get the competitive termination rates that the big Telco’s are giving each other.

Given the target price of $100 for the appliance it is necessary to maximize the marketsize to bring the potential volume to a level that facilitates that $100 consumer price. A small European country like The Netherlands or Belgium simply does not have a marketsize large enough to create the required volume. It is doubtful the price will drop to $100 unless you think “Europe” hence the requirement for a pan-European VoIP Service Provider.

The telco business is about volume because of the tiny margins made on minutes. While it is difficult to increase margins on regular traffic, the less expensive backend of a pan-European VoIP Service Provider’s operation means it can generate relatively better net profits than incumbents given the volume on a pan-European scale. Local calls that stay on-net can be priced at rates the incumbents can not touch give the regulatory framework and the financial dynamics of their operation. At the same time local on-net calls are extremely cheap to terminate and provide another excellent example of the potentially high margins a pan-European VoIP Service Provider can generate on local calls.

Then there is the matter of the higher profitability of international calls. An independent pan-European VoIP Service Provider will be able to maximize its profits on international calls simply by leveraging its pan-European network:

• the equipment that drives the pan-European VoIP Service Provider’s IP network is far cheaper than the very expensive legacy TDM equipment deployed by the incumbents. Relatively speaking it is far cheaper to transport Voice over IP than it is over a TDM network
• Incumbents typically hand-off their international traffic in-country at interconnect points while a pan-European VoIP Service Provider will be able to pick up the traffic closer to its origination and deliver it closer to its destination. This means the pan-European VoIP Service Provider does not rely on as many third parties to terminate its traffic as the incumbents which creates another relative financial advantage
• if the traffic stays on-net because it is VoIP end-to-end then break out the champagne because that generates profit margins the incumbents can only dream of

While it is great that a pan-European VoIP Service Provider can generate healthy margins that allows it to operate a sustainable business, the consumer is the ultimate winner as he/she will get a phone service with better rates and more features than ever before.

So who will be that independent pan-European VoIP Service Provider? Companies with large pan-European fiber backbones that connect Europe’s major cities and Internet Exchange Points like Interoute and Globalvoice come to mind. They have the fiber backbone that will allow VoIP traffic to move across Europe with a minimum of latency and packetloss. They also have the required extensive peering with most European I(T)SP’s and high-bandwidth direct interconnections with the largest Tier-1’s. Add the Tier-1 links to the US, Asia and the rest of the world and you can see how disruptive VoIP will be on a global scale.

It will be interesting to see who will be first to understand the importance of an independant pan-European VoIP wholesale operation and takes up the gauntlet. Don’t worry about the current absence of the $100 Asterisk box. The B2B market is far more likely to pick up on VoIP services and probably more profitable too. Contact me if you need any help making it happen.