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This article, written by Rachel Brown, originally appeared in Rural Telecommunications, July/August 2005.
In the late 1800s when the transportation industry was evolving from horse and buggies to automobiles, many in the buggy business were not enthusiastic or optimistic about the new "horseless carriages." Most viewed motorized vehicles as a threat to their lucrative operations and predicted that the automobile would not catch on because only a few city roads were paved - the rest were dirt or gravel, making travel by car too slow and cumbersome.
Now, more than 100 years later, the telecommunications industry is evolving from the telephone to the Internet via voice over Internet protocol (VoIP) the technology that carries voice over the Internet in digitized packets. Many telcos and co-ops are not pleased with this phenomenon, particularly because it threatens their access revenues. Naysayers cite the lack of broadband networks and predict this will hinder VoIP because standard dial-up is - well, too slow and cumbersome. It does not take a history major to see the parallels between the two industries. Nor does it spell the demise of traditional telcos and co-ops.
Take William Durant and Harvey Firestone: both men were heavily invested in the buggy business but they shifted their focus and energy to the automobile business. Durant went on to found General Motors; Firestone switched from making buggy wheels to manufacturing car tires. They understood they were in the transportation business and realized they had to give the public what they wanted, rough ride that it was. Many say that the telecommunications industry is at the same crossroads, and, like it or not, VoIP is here to stay.
Vonage, one of the largest start-up VoIP providers, is already up to 600,000 customers. MetaSwitch, one of the leading VoIP equipment manufacturers, estimates that 25 million residential users will subscribe to VoIP within five years. In-Stat, a market research firm, agrees that a mass migration to VoIP will occur over the next four years and will peak in the time frame of 2010 to 2014. Andy Randall, vice president of marketing for MetaSwitch, said good VoIP candidates are companies that have built broadband networks or offer fiber-to-the-home. For those that have not done that, he points out that loans and grants are available from the Rural Utilities Service (RUS) for building broadband and fiber deployments.
"But that money is also available to competitors," he said. "RUS is only going to give that money once, and once a broadband network is in your area, you're not going to have access to those funds."
Hank Buchanan, vice president of industry affairs for the Rural Telecommunications Financing Corporation (RTFC) in Herndon, Va., agreed and recommended that telco executives begin planning for five years down the road. "In the long run, telcos and co-ops are better off investing [in broadband] and having a plan to migrate customers to new services like VoIP," he said.
Some telcos began looking into VoIP years ago. Bill Buchanan, general manager of Bijou Telephone Cooperative Association (Byers, Colo.), explained that his company first starting using VoIP five years ago as a toll bypass to allow rural Colorado customers to make a local call to Denver. "This was VoIP on the trunking side," he said, adding that after eight months, the co-op had to abandon this system when one of the carriers it connected to lost its funding.
"We put the VoIP equipment on the shelf," Buchanan continued. "Eventually we began using it on the back side to take a circuit call and make it an IP call and then put it back on the circuit. Our customers were unaware of it. We wanted to test it out and see how far down we could compress it. At the time, we got it down to 16 kilobits before it got choppy - now it can go lower."
A year and a half ago, Bijou deployed a VoIP private branch exchange (PBX) to use on its wireless Internet network outside its area. "It works 99% of the time," said Buchanan.
Toney Prather, president of Comanche County Telephone Co. (De Leon, Texas), said his company also is using VoIP to do the backbone work on its wireless operations. "It allows us to bridge several cell towers on one facility," he said. "It cuts down on transport costs because it is three times more efficient on some cell towers."
Randy Houdek, general manager at Venture Communications Cooperative (Highmore, S.D.), said that his company has been testing out various VoIP solutions for the past six months. "We're trying out ATA [analog telephone adapter] boxes to check out quality because we want it to be transparent to the person on the other end," he said. "We're basically making hundreds of test calls to learn how calls are terminated on the network." So far, Houdek said the company has tested out four vendors and is pleased that the trial costs have been minimal. "It's evident that VoIP is the natural migration path for voice. Rather than get caught off guard, we want to be able to offer it."
Bijou's Buchanan echoed the same sentiment. "We like to be forward thinking," he stated. "We're always testing new technologies. Even if we don't deploy them, at least we know what the competition is doing and can understand the playing field they're on. But VoIP as an end user product? We're not in a hurry to do this."
Neither are Comanche or Venture, with all three citing the loss of revenues. "If we weren't concerned about access rates, we would've rolled VoIP out to our customers years ago," Buchanan said.
"The intercarrier compensation issue will drive our rollout more than the technical issues," agreed Houdek. "Access fees are a very important factor and still a huge chunk of our revenue stream - we can't walk away from it. We'll wait until the rules come out to see how the FCC requires us to treat this type of traffic."
The FCC first initiated an intercarrier compensation (ICC) proceeding four years ago to seek proposals on how to replace the current access charge and reciprocal compensation plans. This past March, the commission released a further notice of proposed rulemaking (FNPR) seeking comments on these proposals. Comments were due May 23; reply comments are due in July.
"There will be a period of months in which the staff will evaluate the comments and make recommendations to the commission," said Mark Wigfield, an FCC spokesman. "At which point, the commission will take it up at one of its meetings. But beyond that, it's impossible to say when the rules will be completed."
Curt Walzel, general manager of Livingston Telephone Co. (Livingston, Texas), is not holding his breath waiting for the FCC. "Access rates are a non-issue in my opinion," he said. "Access fees have fallen 50 percent every year for the past two to three years. The FCC wants to do away with access rates altogether."
Livingston recently rolled out VoIP to business and residential customers, but it did so in a way to sidestep all of the problems with 911 connections and the wiretapping requirements under the Communications Assistance for Law Enforcement Act (CALEA).
"Basically, our customers keep their landline for local calls and use VoIP for long-distance," Walzel explained. "We have developed a method that allows us to keep our local traffic local because we don't send local traffic to the softswitch. We are the only phone company that has done this."
Walzel said that he had offers from several VoIP providers that wanted to resell their services. "But in every case, they all wanted us to ship traffic to their soft switch," he said. "Local calls would then be routed back to us. I thought that was bad use of the IP pipe because it doubles the traffic for no revenue."
To come up with a better solution, Walzel said he worked with the manufacturers' networking engineers and software developers to come up with a customized solution. "We installed a data set device at the customer premise that sits at the front of the network," he said. "This allows customers to continue to use the regular POTS [plain old telephone service] phone. We do it by line, not by phone."
The benefit of this unique approach is that customers don't have to buy a special VoIP phone, according to Walzel. "We don't have to redo equipment, and it's much easier to install," he said. But Walzel concedes it was not easy to come up with this solution. "The biggest problem was finding carriers to work with us - not all carriers want to do this," he explained, adding that different carriers have different ways to receive transmitted calls. "This can get tricky."
Now, Livingston customers pay for their landline, plus a flat monthly fee for VoIP services, whether that covers the continental United States, Europe, or blocks of minutes. "We offer competitive packages similar to Vonage," Walzel said. "They are different all-you-can-eat scenarios for a flat monthly fee. This gives the customers what they really like because people like to know how much the bill will be, especially for older folks on a fixed income."
Walzel believes this system was made easier by the fact that his telco can deliver broadband to 99% of its customers. "We didn't see customer demand for this, but we wanted to react before the customers did," he said. "We wanted to maintain our customers so they weren't soliciting needless competition."
The sheer number and variety of potential VoIP players is staggering. In addition to Vonage, there are other small VoIP start-ups like Skype and 8X8. Cable companies have their cable VoIP offerings, such as CableVision and Net2Phone. AT&T and Verizon also are entering the VoIP arena. In March, America Online announced that it will soon roll out its VoIP service, and other major Internet service providers are bound to follow suit.
Despite these big guns getting into the ring, Walzel says one of his biggest fears is RadioShack. "Lots of small towns have a RadioShack, and it has a solution that gives VoIP," he said. "I don't want to lose a customer to RadioShack." With nearly 7,000 retail stores in the United States, RadioShack is indeed a threat. Comanche's Prather said he realizes it's not a smart move to wait until competition is in the area before rolling out VoIP. "You need to get out in front," he said. "You're fooling yourself if you wait until competition comes to town because, by then, it could be too late."
Prather said Comanche will first try to sell the service outside its service area to wireless Internet customers. "They'll buy it as a second line for longdistance," he said. "This way we won't be harming ourselves in terms of losing access fees."
Lynn Merrill, president and chief executive officer of Monte R. Lee Company, an engineering consulting firm based in Oklahoma City, Okla., pointed out that this is a common strategy for telcos getting into the VoIP market. "If you're offering broadband service in the town next door, it makes financial sense to put VoIP over your broadband network versus building a telephone network in another town," he stated, explaining that it is much cheaper to put VoIP on the broadband network than it is to bury copper wires for traditional telephone service. "This is a stair step approach."
MetaSwitch's Randall agreed, pointing out that telcos can then target commercial customers outside of their service area. "Businesses are particularly attractive because they are higher margin customers, but telcos can also go out of the region for residential customers," he said.
Randall said a VoIP softswitch costs several hundred thousand dollars. "But deploying VoIP is still significantly less expensive by an order of magnitude than the last generation of switches," he clarified. "Many of our customers find that the cost of a soft switch is completely justified because it allows them to avoid upgrades to their legacy switches to handle CALEA requirements, number portability, and additional capacity. The VoIP investment paid for itself because they didn't have to buy the latest software upgrades for their legacy switches. It's an easy decision to make in that light."
RTFC's Buchanan acknowledged that VoIP is still not a slam-dunk decision for many telcos. "I wouldn't recommend that any telco eliminate traditional service and go full bore with VoIP," he said. "But we're in the business to lend money, and broadband is probably the future for rural telcos because it'll be easier to recover more of their costs from adding new services rather than raising rates on existing services." He also conceded that it is a real conflict for telcos to let go of access rate revenues. "But the handwriting is on the wall," he said. "I hope that the traditional revenues stay in place, but the future of USF [Universal Service Fund] and ICC doesn't look promising."
Venture's Houdek believes VoIP is inevitable. "It's evident that VoIP is the natural migration path for voice," he said. "Rather than get caught off guard, we want to be able to offer it."
Livingston's Walzel pointed out that the telecommunications industry has spent 100 years building its networks and establishing trust in the community. "I don't see us giving away a customer - to Vonage or any of these other providers - that we've worked our whole lives to get," he stated.
"It's evident that VoIP is the natural migration path for voice. Rather than get caught off guard we want to be able to offer it."
"Lots of small towns have a RadioShack, and it has a solution that gives VoIP... I don't want to lose a customer to RadioShack."
Rachel Brown is a freelance writer. She can be reached at .
Copyright National Telephone Cooperative Jul/Aug 2005