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February 09, 2005

The End of the Local Number

Phone numbers are losing their connection with geography.  You should not assume that a phone with area code 212 is or ever was in New York City nor should you assume that you are calling the UK when you dial country code +44. Moreover, you shouldn’t assume that you know the geography of a caller from the caller ID you get.

Of course, we all know that roaming cell phones mean that people don’t really have to be in the places their phone numbers indicate they are.  But VoIP (Voice over IP) has created both the means and a powerful incentive to obtain phone numbers which are not related to your physical location.  I blogged earlier that one of the features of Vonage that we like is that, for $4.99 a month, we were able to add a London number that rings on our Vonage-attached phone wherever we happen to have it plugged in to a router.  The motivation here is to let our daughter in London call us at local London rates even though we are usually in the US.  But this is a relatively trivial example.

VoIP-savvy international organizations are buying VoIP phone with US numbers for all their locations around the world.  They are doing this in order to achieve enormous savings on their outgoing international calls AND to make it cheaper to call them internationally!

Of course VoIP calls between subscribers of any single service like Vonage or Skype are free.  As significant as that will be soon, it’s not what I’m talking about.

Suppose you are in Uganda and you want to call someone in Berlin who is not a VoIP user.  This could easily cost you $.50/minute.  Suppose you have a Vonage phone with a US number that you have plugged into your broadband connection in Uganda (you do need to have the broadband connection).  Now you pay only $.03 per minute to call the traditional phone in Berlin.  Calls to the US and Canada, if you make any, are free (more accurately paid for by your monthly subscription).

Now suppose your office in Uganda gets calls from nonVoIP callers in Berlin as well.  The caller in Berlin, if he or she has shopped carefully for a prepaid calling card, might pay no more than $.10 or $.15 per minute to call you in Uganda.  But, if your phone in Uganda has a US number, then the caller in Berlin can easily find a way to call for $.02 or $.03 per minute.

You still want a Ugandan number at your Ugandan office to make or receive local calls in Uganda.  But, if you have any volume of international calling AND if you have broadband access, you are much better off with a VoIP phone which has a US number than using your Ugandan phone for incoming or outgoing international calls.

I think that we will soon see the effects of a telephony version of Gresham’s Law: cheap country codes will drive out expensive ones.  As VoIP phones extend to countries where incoming and outgoing international calls are expensive, these phones will use the country codes of places like the UK and US which are both relatively inexpensive to call from and to call to.  Expensive country codes may simply disappear since country codes are not used for domestic calling.  This will further weaken the creaky old fixed line monopolies in these countries.

Note that this is not just a form of rate arbitrage even though it looks like it is.  The only significant incremental cost a VoIP provider has for completing an Internet-carried call to a non-VoIP phone in the US is the cost of local termination in the US.  It doesn’t matter where the call originated or how far it traveled.  Since the costs to providers for terminating VoIP calls to non-VoIP phones are the same no matter where the calls originate from, it is consistent that the price to the caller depend only on the location of the called phone.

Similarly, the local phone company in Berlin pays the same rate to its wholesalers for all calls to US numbers.  Whether or not the call eventually finds its way to Uganda over the Internet has no effect on the cost of the call to the Berlin phone company nor does that company have any way to know that the called phone is not physically in the US.

There are great opportunities here for service providers who can get access to local numbers in “cheap” countries and deploy them on VoIP phones abroad.  Also some pitfalls since a flat-rate phone with all the calls to US numbers you can make for $24.95/month may end up in a phone-center somewhere in use 24x7.  There are huge opportunities for individuals and organizations to save on international calling.  Those in the know are doing it already.

There are people who say that they can tell where you were born by the first three digits in your social security number.  Of course they have no idea where you live now.  In the not-too-distant future, area codes and country codes will tell you something about historic international calling rates and personal histories – and not much else.  Of course, a few years after that, phone numbers will be replaced by some descendant of the ubiquitous email address.  But first numbers lose their locality.

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