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April 19, 2005

As the Phone World Turns Part 1 – Legacy Access Charges

We are not at a tipping point in how we make and pay for phone calls; we are at a FLIPPING point.  The AT&T band, if there still were one, would be playing “The World Turned Upside Down” like General Cornwallis’s band at Yorktown as the British surrendered their arms to the rag-tag colonials.  I’m not talking about SBC buying AT&T: that’s just rearranging the deckchairs on the Titanic.  I’m talking about real change.

I’m indebted to Gordon Cook, author of the Cook Report which you can preview free but have to buy if you want all the riches, for forcefully reminding me that it’s all software now.  Telephony, like email, is moving out to the endpoints. It is exploding at the endpoints largely because of Skype’s successful software distribution model. The middle, where the huge carriers provide overpriced services, is hollowing out.

There is no one who charges you for each email you send.  There are no monopolies in email.  Looking at how email works and is paid for is a great way to figure out how voice calls will work and how voice calls will be paid for.  I’ll be blogging on this for a while but intermittently so that neither you nor I get bored with the subject.

Most of today’s post is about legacy access charges.  They are what local and wireless phone companies charge people to access you on the line you are already paying them for and the equipment you own.  Access charges as a revenue source for phone companies are on the way out – faster than I ever thought would be possible.  Something rather wonderful may happen with them in the future.  I’ve blogged about this speculation and am speaking about it at VON Toronto today.

If you are already a telephony expert – or if you don’t want to learn about legacy access charges just in time for them to disappear – you may want to skip the rest of this post.

Suppose your ISP wanted to charge the sender for each email YOU receive.  You’d say that was absurd and you’d quickly get a new ISP.  But in the United Sates your friendly local phone company gets to charge per minute for each incoming call to you.  These charges,  which are called “access charges” or “reciprocal compensation” depending on how local a call is, are an arcane holdover from cost and revenue sharing after the breakup of monolithic AT&T in the 80s.  They are the pathetic remnant of internal cost allocation within the old monopoly.

Local phone companies love this revenue.  Even nasty public service boards rarely complain about it because most of it is paid by out-of-state callers.  You never see the amount somebody pays to call you on your bill so you don’t complain about it either.  Of course, when you make a traditional “long distance” call, you are paying to “access” someone else.

On a national level, phone companies charge more to terminate an international call than a domestic one.  Obviously, their costs are the same to reach their subscriber no matter where the call originates but the politics are different.  Out-of-country callers don’t have any in-country political clout.

Part of the historic reason that VoIP calls have been cheaper than POTS (Plain Old Telephone Service) is arbitrage against these arbitrary rate structures.  From a POTS point-of-view, an Internet call “originates”  wherever it hops off the Internet and onto the POTS network.  So, suppose you can make a VoIP call from the United States to a POTS phone in Timbuktu.  The call travels from the US to Timbuktu on the Internet.  It is “reoriginated” as a domestic call in Timbuktu and the amount your carrier and eventually you pay for that call is determined by the domestic and not international rate in Timbuktu.  In some cases there is a regulatory distinction between VoIP and POTS calls; in others there is just the practical distinction that VoIP calls look to POTS like they originate where they hop from the Internet to POTS.

Similarly, VoIP providers in the US typically don’t pay interstate access charges for domestic calls which they terminate to the PSTN; this reduces the costs to a VoIP provider and has helped make services like Vonage, AT&T CallVantage, Lingo, Packet8 and others available at attractive unlimited-usage prices.  The regulatory jury is still out on this.  AT&T drew an adverse ruling from the Federal Communication Commission when it asked for a declaratory judgment that even POTS-to-POTS calls which have an IP hop are exempt from access charges.  But the FCC was careful to limit the scope of its ruling so this does not apply to services like those I listed where the calls start on the Internet; their status is unclear at the moment.

But what if a call never touches POTS?  What if it goes from one Skype or Vonage subscriber to another?  These calls are free today to Skype subscribers and are bundled with the subscription price for Vonage subscribers.  The calls are free no matter where in the world the two (or more) people who are talking to each other are located. Hmmm…  Just like email. 

At the same time the FCC ruled against the AT&T petition, it ruled in favor of a petition by Jeff Pulver’s Free World Dialup saying that the free calls FWD provides between VoIP endpoints are immune from access charges.  Hard to even know who would get the access charges but there are certainly some local phone companies who would like to. Not gonna happen, though, says I.  Even with huge lobbies, phone companies aren’t going to get the right to charge tolls on “free” calls that don’t touch their POTS networks.

And now with Skype surpassing 100,000,000 downloads and with millions of subscribers online at any time, the VoIP-to-VoIP calls are becoming very significant.  That’s why we’re at a FLIPPING point.

The second post in this series is about the costs of “free”.

The third is about Metcalfe’s Law.

The fourth is about Skype’s success in building a closed network.

The fifth is monetizing Skype’s network value with SkypeOut.

The sixth is about Skype reproducing the OLD telephony business model with SkypeIn.

The seventh is a summary of Skype features.

The eighth begins coverage of Vonage’s strategy.

A related post contains a very short abstract of what Skype founder Niklas Zennstrom said at VON (Voice On the Net) Canada and a way to download the slides of my talk there.

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