The Truth About VoIP
or What Vonage doesn't want you to know
Part 2 – by Jim McNally
In The Truth About VoIP - Part 1 we looked at the basic differences Voice Over Internet Protocol (VoIP) makes in the Telephone industry today. Now let's take a look at some other major changes VoIP is making today.
Long Distance is also muddied by the same issues as local VoIP – the Internet is everywhere, so what's Local and Long Distance really mean? Most providers break down their calling areas into “tiers” made up of major metropolitan areas, secondary areas, rural areas, and true “Long Distance (which really means “we have to pay someone else to get the connection through”). By making Tier 1 be most metropolitan areas, most of the phones you can call in the US are at the cheapest rate. Rural areas may cost 30% more, but fewer people are calling them, so the increased cost as a percentage of all the traffic is low. Most of North America would be non-Long Distance from the US; Africa or Europe would be charged a higher rate (the highest we've seen is to make a call via satellite to ships in the Pacific – over $5.00 per minute!)
But how do companies like C-beyond and Vonage end up giving their customers “unlimited” long distance in North America for a flat rate? They can do it because they are aggregating all the calls from all their customers together and spreading the costs out across all the users. With 10,000 users (10,000 lines), some will use lots of Origination minutes. Some will use more Termination minutes. Some will hardly use the lines at all on some months and then use them heavily on Mother's day... The end result is that the larger your number of customers / lines, the less the usage will vary month to month. In years worth of studies, the average business line use is 1100 minutes per month. Residential drops to about 500 minutes per month. So at 1 cent per minute plus $1.00 for the initial DID number, a residential line should cost Vonage $6.00 per month on average, and a business line $12.00. So if they sell them at $24.95 and $49.95, they're way ahead.
Another little secret is that for most VoIP companies unlimited isn't really unlimited. Somewhere in the fine print of the contract there is usually a provision which limits the customer to 1500 or 3000 or 5000 minutes per month. After that, they are considered to be no longer within the “acceptable use” provisions, and they are billed at a much higher rate. But wait, you ask, what about a company with people who are on the phone all day long? Won't they exceed that really fast? Yes, some of the phone lines in to a customer will use up lots of minutes. Bit there's always other lines just sitting there waiting for a new call. Most companies actually have almost 50% more lines than they “really” need to operate. Who figured that out? A Danish mathematician named A. K. Erlang who, in 1917, figured out “Trunking Theory” (where the name Trunk comes from) and said an acceptable phone system will have less than 2% of it's calls “blocked” (can't get through) in the busiest hour of each day. So for a “properly” sized system, you should routinely (once a week or so) be unable to place a call because all your company lines are full. Remember the last time that happened? (I don't). Since it's not a huge expense in the scheme of most businesses, and to keep employee complaints to a minimum, most companies have way more lines than they really need. So even with lots of people making lots of calls, there are still lines idle, so the “average minutes used per line per month” still comes out to 1100. (That may be far more than you ever really wanted to know about how phone systems are designed – try working for a phone company where this is just the tip of the proverbial iceberg...)
So ultimately, what have we got with VoIP? We've got a system where you can make one or 5 or 500 calls at the same time on “one” phone number. Where the actual “cost” of the system is billed in time used at less than 1 cent a minute (actually far less if you're a big enough user), and then flat rated to the customer by averaging lots of user's calls together. Where the majority of the infrastructure costs associated with making it all work have been moved from a expensive centralized network (Phone Company and wires on poles) to a more de-centralized system (local VoIP phones or PBX, Internet provider, upstream VoIP operator, etc.) with the costs of the “network“ covered by all these different companies (and ultimately the consumer, although it may not be obvious to them). A much more efficient system which can handle many more calls over the same bandwidth than the old phone network can. And one which will ultimately change the nature of phone systems forever.
Why doesn't Vonage want you to know this? Because the service that they sell you for $24.95 (residential line) is a fabulous deal for them. They pay less than $1 per month for your number, and all the incoming calls you receive and your outgoing calls are billed by the minute. So if they were to pay 1 cent per minute (they actually pay a lot less), their cost is about $6 for what they charge you $25, and their other costs are really low because they send you the phone adapter to use, which they have already set up before you get it, and get paid every month on your credit card. For businesses, it's even better for them: their cost only goes up $5 and they charge you $49.95, a 380% markup
So where does this leave us? For the average customer or small business, a fixed rate of $24.95 or $49.95 may be just fine compared to what you would pay the local phone company. It's not a bad deal, and you get lots of neat features thrown in. That's why Vonage and their ilk are getting so many customers right now.
The Truth About VoIP - Three part article series
The Truth About VoIP - Part 1
The Truth About VoIP - Part 2
The Truth About VoIP - Part 3
