VoIP, Skype and Hype

Peter Cochrane looks at Skype:

Could VoIP become a serious threat to the phone companies? Well against the one billion or so fixed lined telephones and over one billion mobiles, Skype has so far seen 10 million downloads and total VoIP service estimates see less than 100 million users. However, such is exponential growth that industry estimates forecast 40 per cent of all calls will use VoIP by 2007.

Everywhere I go in the US I now see people with PDAs, laptops and headsets making VoIP calls. This has been compounded and supported by the rapid spread of Wi-Fi providing a very powerful platform for users on the move.

The mode of operation spans the normal fixed/mobile phone behaviour, plus the use of email to establish contact and prompt the use of Skype, iChat, etc.. The more adventurous are also linking screens and working cross platform – with common applications and displays – in a manner forecast a decade ago but still seldom seen on corporate networks.

I think it would be foolish for any telco to dismiss VoIP and especially Skype. It seems to me that DIY telephony is on the march and will soon be on the scale of Kazaa.

But we should also remember that there are limitations to the performance of IP networks and thus to VoIP or indeed any real time service. The reality is the internet is fundamentally ill-conceived and ill-equipped for the support of real time services of any kind. If you try VoIP you will no doubt be pleased by the quality of the voice connection for at least some of the time. The snag is that for a significant proportion of the time you can find that the quality is extremely poor.

When you make a traditional telephone call a direct and dedicated connection links two telephones for the transmission of those bits throughout the call. This is referred to as circuit switching. On the other hand, when you send an email message via the internet your bits are transmitted in discrete packets that are often routed very differently, packet by packet. So the arrival times of packets can be widely distributed and vary on a second-to-second basis.

For the internet to rival the telephone network it has to have an over-capacity to ensure that communication between two fixed points can be nailed down and held reasonably stable for the duration of a real time service such as a telephony or videoconferencing.

Is this possible? Yes. What is more, it is possible at about 10 per cent of the cost of the old telephone network. Bandwidth is the cheapest commodity we now manufacture and its provision in IP networks is trivial compared to the telco environment.

Is there is a downer in all this? I think there is and it comes in the shape of the virus, Trojan horse, worm and spam. Over 50 per cent of todays in-use internet capacity is being consumed by these negative activities. For VoIP services to become universal we will have to see some constraint put on rogue activities. Alternatively, we will have to provide and waste bandwidth on a huge scale.

Steve Stroh looks at the big picture:

In an April 26, 2004 cover story in Forbes titled Into Thin Air, authors Scott Woolley and Quentin Hardy offer a refreshingly clueful (for the general business press) look at the grim prospects of the conventional telecommunications business, rehashing the now familiar story of how wireline carriers are facing severe competition to their conventional voice services from Voice Over Internet Protocol (VOIP).

But the authors venture into new territory, spotting a nascent threat to the supposedly bright future of wireless telephony carriers… VOIP over Wi-Fi. Excerpt:

Last year American home users bought 12.7 million Wi-Fi transmitters for their computers, says research firm In-Stat/MDR. That poses a ready audience for a second major threat confronting big carriers: Voice over Wi-Fi, which lets callers use free airwaves to gain wireless access to the Internet. A home or office Wi-Fi network for a laptop’s wireless Internet access provides a ready-made pathway for Wi-Fi-enabled phones. Voice over Wi-Fi threatens to steal traffic from the cellular business (with $88 billion in annual revenue in the U.S.), already a harshly competitive world where per-minute prices have fallen by half in the last three years. Few users now have Wi-Fi phones, since currently the phones only work in places like San Antonio Community Hospital that have thorough Wi-Fi coverage. (Leave the hospital, the phone stops working.)

While the authors are to be applauded for having picked up on VOIP over Wi-Fi… they missed the larger trend entirely, that VOIP/WI-Fi phones used in enterprises and homes won’t stop working when leaving the “private” Wi-Fi coverage of an enterprise or home. In places like Dartmouth College in New Hampshire, the city of Cerritos, California, the Auckland, New Zealand metopolitan area, Spokane, Washington, and soon Silicon Valley, ubiquitous Wi-Fi coverage will be available. (Each of these examples are existing deployments of “Metro Wi-Fi” by different vendors.)

Then again, I can’t really fault the Forbes editors for not “finishing the story”. The threat of VOIP over Wi-Fi potentially destroying tens of billions of dollars of market value of wireless telephony companies is plenty frightening to Forbes’ audience of corporate and investor readers… the idea that such value destruction is actually in progress is probably too terrifying to commit to the pages of Forbes.

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Rajesh Jain

An Entrepreneur based in Mumbai, India.