Access Charges

In Light Reading's story on Level 3 withdrawing its forbearance petition, they make the statement that carrier access charges "make up the subsidies used for programs such as Universal Lifeline and E911."

I've seen statements to this effect before, but they're wrong.

Universal Service is funded by carriers paying a percentage of their interstate and international revenue directly into the Universal Service Fund. (Before the CALLS plan was adopted in June, 2000, access charges did contribute to the USF.)

Many (most?) carriers levy a E911 surcharge that ostensibly funds the E911 system, though it's not clear all the money goes to E911. But the E911 surcharge is a user charge, and has nothing to do with carrier access charges.

Access charges are local exchange carrier revenue, plain and simple.

Disappearing VoIP

Irwin Lazar writes, among other things, that VoIP will have succeeded when "customers will be in a position to buy low-cost phone service that looks, acts, and performs exactly like the phone they have today, perhaps with some added features such as web-based call control."

The ILECs could do that tomorrow. (OK, the added features such as web-based call control might take a bit longer. Though Verizon is offering them now with their iobi service.) All they have to do is slash prices, and customers will be in a position to buy, yes, low-cost phone service that looks, acts, and performs exactly like the phone they have today. And VoIP as a technology will have disappeared from the customer perspective, though not perhaps in the way that Irwin meant.

To date Vonage, for example, has raised $205M in total financing as of 8/25/04. Verizon, for example, has $2.3B in cash on hand and a free cash flow of $4.3B.

In a race to the bottom, which would you bet on?

VoIP succeeded for a little while as an international calling arbitrage play. It can succeed for a little while as a low-cost alternative to POTS. Long-term, providers need to take advantage of the capabilities of VoIP and the architectures that support it to do things that POTS can't do. Like improved sound quality via better codecs, like fixed-mobile convergence, like presence and universal messaging and applications that people haven't even thought of yet.

Otherwise, my money's on the guy with the deepest pockets.

Level 3's VoIP Forbearance Petition Withdrawn

Level 3 has withdrawn its forbearance petition on VoIP access charges the day before the FCC was required to rule. Light Reading had reported last week that sources close to the Commission were saying that the FCC was going to deny the forbearance request rather than letting the deadline pass, though they may have issued a subsequent ruling further exempting VoIP from access charges.

Currently, VoIP calls are not subject to any access charges due to an Enhanced Service Provider exemption. Had the forbearance request been denied, carriers would have been required to pay switched access charges for VoIP. Switched access charges are paid to the local exchange carrier for calls sent to, and calls received from, the LEC; the average price of switched access is around 1.2 cents per minute for interstate calls and about 1.8 cents per minutes for intrastate calls.

Level 3 maintains that VoIP calls should be subject to reciprocal compensation charges, under which the interconnecting carrier pays for calls sent to a LEC, and receives payment for calls received from a LEC. The average price per minute for reciprocal compensation is about 0.1 cents.

It seems that with the clock running, Level 3 felt that the FCC would potentially reach a decision unfavorable to them and the VoIP industry. Withdrawing the petition allows things to continue in their current state of uncertainty, which for VoIP carriers is certainly preferable to an unfavorable FCC ruling with a possible future rule change.

The carrier switched access charge structure was originally developed at the time of the AT&T divestiture to compensate local exchange carriers for the cost of "exchange access", connecting users' telephone lines to interexchange carriers' networks. It was an implicit subsidy mechanism; rates were set more than an order of magnitude higher than rates for interconnection of geographically-adjacent local exchange carriers (e.g., a Bell company and an independent telco). Switched access charges have come down significantly since divestiture; however, they are still more than an order of magnitude higher than reciprocal compensation charges, which generally tend to be more reflective of the actual cost of interconnection.

Broadband Voice and the PSTN

Several blogs (Om Malik, Aswath Rao, Andy Abramson) write about how the voice quality of SkypeOut is not as good as the voice quality of Skype because Skype uses a wideband codec (the GIPS iSAC codec) for Skype-to-Skype calls but uses G.729a for SkypeOut calls. Aswath comments that it "looks like the interconnect providers still do not see the need to upgrade their gateways to support the wideband codec."

The problem is, even if someone built a VoIP gateway that supported the iSAC codec, the circuit-switched side of the gateway would still be talking G.711 to the PSTN. You could get voice quality approaching that of a PSTN call, but you're not going to get the 8kHz of voice bandwidth that you can get on a Skype-to-Skype call (with sufficient network capacity and performance).

Of course, PSTN-quality is better than G.729a (by about 0.5 MOS points), so by using G.729a Skype is accepting a voice quality lower than PSTN for SkypeOut calls. I would conjecture that they choose to do this because G.711 over IP is a bandwidth hog (about 95 kb/s with 20ms frame size, compared to about 40 kb/s for G.729a). But given that a carrier can achieve PSTN-quality (at the expense of bandwidth) simply by using G.711 for the sessions that interwork with the PSTN, what's the motivation for them to upgrade their gateways to support wideband codecs?

Funny, though - with wideband codecs, sound quality could be a differentiator for VoIP services, rather than a detriment. (I'm by no means the first person to think of this.)

Network Reliability

There's been a flurry of news about VoIP network outages the first week of March: Light Reading and Om Malik's blog (and a commentary on Om's blog) seem to have the most information, unless you want to dive into the Vonage Forum or Broadband Reports VoIP forum.

If you read product datasheets for VoIP equipment (softswitches, media gateways, application servers, take your pick), you will be flooded with terms like "carrier grade", "99.999% availability", "fully redundant", "live software upgrades", and "no single points of failure". I've even seen a vendor claim of "99.99994% availability", which means that over a five-year deployed life, a system will be unavailable for about a minute and a half.

So how do you reconcile all this extremely reliable equipment with networks that go down for hours at a time?

One possibility is simple: Vendors lie. Or, to put it less judgementally, vendor claims of equipment reliability are theoretical calculations that are not borne out in real-world deployment.

Given the historical perception that VoIP is less reliable than traditional phone service, there is clearly an element of marketing hype in vendors' reliability claims. But any vendor that tries to sell into a telco knows that their claims are going to be held up to some level of scrutiny, and the methodology they use to forecast reliability and availability had better be "generally accepted in the industry". For the most part, that means forecasts in accordance with methodologies and models in Telcordia Reliability and Quality Generic Requirements. While 90 seconds of downtime over a five-year lifespan (which realistically means that of 20 boxes deployed for five years, 19 never go down at all and one goes down for half an hour) may tax one's credulity, I don't think that there's a strong reason to believe that VoIP network equipment is intrinsically less reliable than traditional phone network equipment on a box-by-box level.

I think the actual reason is much more subtle and deep-seated, and is pervasive across equipment vendors and carriers. It's not one of equipment, or of engineering, but of culture, and of a mismatch between corporate culture and customer expectations.

"Traditional" telcos, and "traditional" vendors, have a culture of reliability above all. If this is your mindset, you do things like rigorously testing new software before deploying it - and you deploy it at 1:00 AM on a Saturday, not midday on a weekday. You have processes and procedures in place to deploy with well-defined checkpoints, safe stop points, and capabilities to backout. Vendors with this mindset do their own rigorous regression testing before releasing new software to their customers.

This has its own downside - testing adds time and cost to software releases. Processes and procedures slow things down and require a different mindset. It's hard to "get an idea on Tuesday and deploy the service on Wednesday" if you have to integration test and regression test the software with everything in your network - let alone if you have interoperability with other networks to worry about.

Neither approach is wrong. The problem comes about when the company's culture clashes with the customer's expectations (which, of course, mostly come about from the company's positioning of the product). If Skype stops working for a couple of hours, there's some grumbling but not a lot of repercussions - after all, it's free, the users are self-identified early adopters who tend to be tolerant of glitches, and they buy into the value trade-off that Skype presents them. If SkypeOut has problems, the grumbling escalates, because SkypeOut is a paid service, and the customers' expectations are higher. And a mass-marketed "phone service" that you can buy at Circuit City generates expectations of reliability and availability consistent with that of the "phone service" that people have been accustomed to for the last 75 years. If the culture of the company providing that service is more focused on providing low-cost service with new features than on providing reliable service, problems are inevitable.

Companies - both vendors and carriers - have to decide what they want to be, they have to communicate that message and those expectations to their customers, and they have to live them. If your marketing message is that you're a Phone Company, you've just bought yourself 130 years of history that people are expecting you to live up to. Those expectations can help you win a lot of customers. But if you're really trying to be a fast-moving, low-cost provider of disruptive technology for voice communications, and your corporate culture is based on that model, perhaps "Phone Company" isn't the message you want your customers to walk away with.

463 West Street

In 1907, Theodore Vail concentrated all of the research and development activities of the Bell System at the Western Electric plant at 463 West Street, New York. Eighteen years later, this building became the headquarters of a new company, jointly owned by AT&T and Western Electric, called Bell Telephone Laboratories, Inc.

There are now apartments at 463 West Street; what used to be Western Electric is now Lucent Technologies, Avaya, and Agere Systems; and AT&T is being bought by SBC in a sort of reverse-Saturn-devouring-his-offspring move.

Times in telecommunications continue to be interesting, and I hope this blog can contribute some small amount of insight, with some historical perspective.