VON Visions: Phoney Economics
VoIP (and ENUM) make it difficult for the carriers to sustain the illusion that their prices has anything to do with real costs.08-Jun-2005

VoIP draws attention to the absurd nature of service pricing models.

There’s no cost for placing a call over the Internet – at least no cost above what you’re already paying for the Internet connection. It doesn’t depend on where the other endpoint is.

The phone network is the same internally– the costs are not sensitive to distance. At least not within the US. But unlike the Internet, the telephone network charges according to a call’s distance or, at least, that’s the story presented to customers.

Any business needs a pricing scheme that makes sense to their customers. In practice there is no simple mapping of the price and costs because the cost of delivering the service has both fixed and variable costs and even these are not easy to compute. What is the value of a wire in the ground when you are not sure of its lifetime costs?

What makes the telecom companies unusual is that their services’ actual costs are rapidly decreasing thanks to the same advances in technology that have made the Internet so inexpensive. The actual costs are thus increasingly dominated by overhead. To cover these expenses they have to synthesize billable units. They’re still paying for expensive gear that’s been replaced by computers.

As other costs have decreased, the billing system itself represents an increasing portion of the overhead. In fact, if we separate out the cost of the Internet connection itself, the phone call itself has no cost and we are left with just overhead!

What happens when the cover story unravels? What happens when the cost of a phone call is either zero or a lot of money? This is about to happen because of ENUM.

ENUM is very simple – a phone number becomes just another Internet name. Thus 1-800-555-1212 would be looked up as ENUM.18005551212 (to be precise 2.1. Instead of using special purpose computers in the phone network the numbers are looked up just like any other domain name. The costs are much lower and the lookup is faster than in the current phone network.

An ENUM entry tells the system how to handle the call. It can route it via the Internet, the PSTN, or the call can be connected to a messaging system. If I call via the Internet and the ENUM entry routes the call via the Internet there is no charge. If that entry changes to point to the PSTN, the next call to that number might be very expensive. Today’s pricing is actually more complicated. If I forward a US phone to Europe and then call the US number from Europe I pay for multiple international calls. It’s even more expensive if I use cellular phones or even just cellular numbers.

Calls that stay within the Internet are outside this billing regimen and are free. The flip side of ENUM is that there’s full connectivity with the PSTN. This means that any “Internet phone” can reach and be reached by any other phone. It is only necessary to subscribe to a bridging service to reach phones on the PSTN.

For VoIP callers the ENUM country code doesn’t really matter since it doesn’t affect the cost. After all, it’s just another domain name and we don’t charge differently for a .US entry vs. an .RU entry. For the PSTN user the country code determines the price but the cost of a call to most countries in Europe is relatively low. I can hide this cost from a caller by forwarding a local number to the ENUM number.

This is a leakage problem–as long as ENUM becomes available anywhere it can be used by anyone who can get an ENUM entry in that country.

Because the ENUM entries are easy to change and will likely point to Internet destinations, a call’s actual price will be unpredictable because you won’t be able to tell by simply examining the phone number. That makes it hard to pretend that distance matters. In fact, it becomes hard to explain why some calls are expensive and others are free even when the called number doesn’t change.

The real importance of ENUM is that I get real control over my phone number. Number portability is a major issue today – it requires special paperwork and is not always feasible. With ENUM I’m in control.

No wonder the Telcos have worked so hard to fight ENUM–they lose control of their story.