What is VOIP?
• VOIP is a next-generation protocol that delivers voice via IP
Internet Protocol (IP) instead of Time Division Multiplexing
(TDM). The public switched network telephone network (PSTN)
is a hybrid, using both.
• Applications include
• computer-to-computer
• computer-to-phone
• phone-to-computer
• phone-to-phone
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How does VOIP work?
• The VOIP carrier supplies a telephone number and a
network translator device.
• The customer speaks into a telephone or computer
microphone.
• The customer’s voice is encoded by the network
translator device into packets and transmitted over the
broadband connection.
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How do ‘packets’ fit in?
• The voice packets are routed within the customer’s
intranet (LAN or WAN) or to the PSTN, or
• Voice packets are sent through the Internet to the
VOIP carrier’s facilities and transmitted to the PSTN.
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Comparing VOIP and POTS
• Functionally, whether making a VOIP call or an ordinary local
exchange call, there is no net change in customer protocol.
• By the time a VOIP carrier takes the call, the voice signal will
have already been transformed twice,
• First, from analog sound into electrical impulses, and
• Then into the synchronous format used by the PSTN.
• Similarly, the “digital protocol interface” of two decades ago
enabled existing customer telephone equipment to transmit
under a new and different protocol.
• Then, as now with VOIP, there was no net change in form or
content and no net protocol conversion.
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What the Market Leaders are Doing Now
• RBOCs, AT&T, MCI and Global Crossing as well as wireless
carriers routinely use IP packet switching in long-haul networks-
it is inherently more economical than circuit switching.
• MCI now moves 10% its calls over an IP backbone, and expects
25% by the end of 2003 and 100% by the end of 2004.
Source: Interview with Vinton Cerf („father of internet‟), MCI VP, CNET News.com, September 10, 2003.
• AT&T is testing VOIP with customers through February.
Source: AT&T website.
• Regional carriers – Frontier and Citizens – describe
“an enormous economic incentive to follow the same path…would offer…circuit switches with IP-based
packet switches as quickly as possible… would not charge sales taxes or 911 fees and would no
longer… comply with CALEA…would stop contributing to the Universal Service Fund... Every other
telecommunications carrier would have no reasonable economic choice but to do the same.
Source: Comments of the Frontier and Citizens Telephone Companies, In the Matter of Vonage Holdings
Corporation WC Docket No. 03-211 Petition for Declaratory Ruling Concerning an Order of the
Minnesota Public Utilities Commission, pp. 11-12
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Cable IP Telephony
• Time Warner – Has filed an application for a CPCN to begin
providing VOIP service throughout California.
• Comcast - will begin offering VOIP service by 2005. Source: Comcast
• Cox - is pilot testing VOIP. Analysts expect it to begin offering
retail VOIP services in 2004 or 2005.
• Cablevision - is now offering unlimited local and long distance
VOIP service on the East Coast to its 4.4 million customers.
Three-fourths of its broadband customers and over 23% of all its
customers have signed up. Source: Cablevision press release, November 11, 2003
• Industry experts say within 2 to 3 years of a cable company
offering VOIP, 20% to 30% of its customers will switch. Source: CLEC
technical expert in meeting with TD staff, October 9, 2003.
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Business is Migrating to IP telephony
• RBOCs - SBC, Bellsouth – began in 2002 to migrate business
PBX customers under intrastate tariffs to IP telephony services.
• Nemertes Research recently (2003) surveyed 42 large
companies on IP telephony use
• 62% use it now
• 19% are running trials of it
• The rest plan to implement it in 1-2 years
Source: Nemertes Research, (in) “VOIP by the Numbers”, Network World Fusion (nwfusion.com),
November 3, 2003.
• 10 percent of business systems have been replaced with a form
of VOIP. Source: Washington Post, “Is it Phone or Internet…?”, October 26, 2003.
• VOIP equipment accounted for 46% of US enterprise telephone
systems sales in 2002, up from 24% in 2001.
Source: In-Stat/MDR, from “Has VOIP‟s Time Arrived…?” The Globe and Mail, May 21, 2003, on
net2phone.com website.
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Effect of IP Telephony on Universal Service
Programs in 2008
• Total effect on Universal Service Programs may be a reduction in
revenue of $200 to $400 million in 2008, compared to authorized
appropriations for years 2003-2004.
• If only providers such as Vonage, 8X8, serve the market, fund
revenues are likely to decline by about one percent.
• If Cable providers and ILECS enter the market in 2004-2005, fund
revenues may experience declines from 25% to 40%. This effect on
revenues is split about evenly between residential and business
customers.
• Assumptions
• No change in the number of effective residential or business access lines.
• Based on industry and financial community sources.
• Penetration rates for cable and ILEC business from 5-10%, and for ILEC residential
from 2.5-5%.
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Potential Effect of IP Telephony on Universal Service Programs
by Fund in 2008
FY 03-04 2008
Subsidy Program Appropriation VOIP Effect
Total $939
• California High Cost Fund A (small LECs) $ 62 Potential for
• California High Cost Fund B (large LECs) $522 revenue
• Universal Lifeline Fund (Lifeline discount) $246 reduction of
• Deaf & Disabled 25-40%
Telecommunications Fund (DDTP) $ 69 over all
• California Teleconnect Fund $ 40 programs.
(schools, community based organizations, libraries)
Note: The lower impact estimates occurs if providers are limited to Vonage
capturing residential customers and ILECs converting business customers only.
The higher estimates are the result of cable providers and ILECs entering the
residential market as well.
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Currently IP Telephony does not do the following
• Contribute to
• California High Cost Fund A (small LEC subsidies)
• California High Cost Fund B (large LEC subsidies)
• Universal Lifeline Fund (Lifeline household discount)
• Deaf & Disabled Telecommunications Fund
• California Teleconnect Fund (schools, community based organizations,
libraries)
• Provide E911 service
• Pay access charges
• Provide access to traffic for law enforcement
• Obtain telephone numbers under the North American
Numbering Plan
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