Taking the VoIP Plunge

Analysts report that more than one third of ISPs plan to offer Internet-based phone service before the end of 2000. Is this a viable revenue producer?

by Gerry Blackwell

[June 11, 1999]  Britt Clark's grandiosely-named company, World Presence Internet Services, is that rare thing these days, a small local ISP start-up.

When we talked to a frazzled Clark in Huntsville Ala. a few weeks ago, he was just days away from launching the service, but already making firm plans for the next bold step: offering voice over Internet (VoIP) service—cut-rate long distance telephone service using the public Internet infrastructure.

"Nobody else in this area is doing it," Clark says in partial explanation of why he has decided to go the VoIP route.

In fact, World Presence will be among a small but growing minority of ISPs pursuing the VoIP business opportunity - or apparent opportunity. In this first in a series of monthly columns focusing on VoIP, we raise the basic question, how good an opportunity is it?

In a recent survey of local/regional ISPs by Infonetics Research of San Jose Calif., 7 percent said they will do VoIP in the short term, and 39 percent said they intend to offer VoIP services by 2000.

"But we think 39 percent is optimistic," says principal analyst and Infonetics founder Michael Howard. "They'd like to, but they'll will find out there are complexities."

Differentiator, diversifier
While Clark hopes offering VoIP service will be a differentiator and help attract more customers to his access service—the reason most often stated for going this route—he also believes it can make money on its own. In fact, the VoIP service will be open to anyone, not just access customers.

The business case, he reckons, is a no-brainer. The only capital cost is the Cisco VoIP gateway, which he will lease for $11,000 to $12,000 a month. The VoIP service will run over existing T1s, using voice-capable ISDN PRIs (primary rate interfaces).

Clark expects to charge customers 3 to 5 cents a minute for long distance anywhere in the U.S.—or anywhere he can find another ISP willing to let him terminate calls.

"The system can maintain 48 simultaneous connections," Clark explains. "And there are a whole lot of minutes in a day. If you can pretty much maintain 50 percent usage, you can make $2,000 or $3,000 a day. And it doesn't cost a lot of money to do it."

Muddled model?
It can't be that simple, of course. And it's not. For starters, Clark's math doesn't quite work—48 connections going 12 hours a day (50 percent capacity) at an average of 4 cents a minute brings in revenue well short of $1,500 a day. But it could still be profitable.

Also, the "complexities" Howard mentions include some potentially knotty ones, like making arrangements with other ISPs to handle your calls.

The idea in the VoIP model Clark is pursuing is that you route calls from your customers over the Internet to a VoIP-capable ISP near the destination, hopefully within local calling range. The other ISP dumps it out to the public switched telephone network (PSTN) at no or little cost.

For now, Clark will make arrangements with individual ISPs, but he has visions of some kind of cooperative system in the future in which all VoIP-carrying ISPs freely exchange calls on a reciprocal basis and bill each other accordingly.

It's hard to see that happening in the short term—although, as we'll see in a future column, there are ways for local/regional ISPs like World Presence to band together and create wide area networks.

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