So what happened to VoIP?

Gartner’s technology adoption curve is a great model for how we treat technological innovations. It describes a “peak of inflated expectations,” followed by a “trough of disillusionment,” and finally a “plateau of productivity.” It’s a good lens to look at what has happened to voice over Internet protocol (VoIP).

I first experienced VoIP back in the mid 1990s. As the dot-com bubble expanded, VoIP became both the bogeyman of every telecom executive and every journalist’s nail in telecom’s coffin. The “peak of inflated expectations” was that VoIP would kill off the telecom business, and their world would come to a crushing end.

Clearly, somewhat inflated predictions and the great promise VoIP once held seems to be waning. A recent article in the (London) Times quoted a report by British communications regulator Ofcom stating that the percentage of adults using VoIP was just 14% in the first quarter of 2008, down from a peak of 20% in 2006.

To add further insult to injury, there are rumors floating around that eBay is looking to unload VoIP giant Skype, which it purchased just four years ago for around $2 billion. A recent quote from Skype’s CEO said that “it’s a great standalone business” - a huge clue about what’s about to come.

The empire strikes back

This interesting turn of events is pretty unexpected, in my opinion. Back in the 1990s when VoIP was being touted as the next big thing, we imagined it would make significant inroads among multinational businesses and even among individuals who want to call far-off places where circuit-switched calling was cost-prohibitive.

So, did the evil empire strike back? It looks like telcos have put a nail into VoIP’s coffin rather than the other way round. How did they do that?

First, rather than being about technology, it’s all about where telcos are in the capital depreciation cycle. Since most circuit-switched voice traffic is running on platforms that are long since fully depreciated, they can price calls how they want because other than using a bit of electricity and labor to run them, the capital costs of these switches have largely been written off.

On the Internet side, however, providers are still paying to put in technology. The end result is that circuit-switched voice providers have been able to price calls very aggressively – mostly at a flat rate these days – so there actually isn’t a huge margin between the cost of traditional calls and Internet calls.

Then we get into issues of quality, which is still a concern with VoIP even after all this time. With a circuit-switched approach, you get your very own path end-to-end, but with VoIP, your call is going into this big cloud with no packet priority whatsoever. That’s just fine for email or downloading a video, but on a real-time call, delay and jitter can really screw things up.

And then there’s the convenience factor. When you do PC-to-PC calling, you’re anchored to your desk. And if one party is coming into the call over a raw IP connection, or there’s a mix of people on the traditional voice network and IP, all bets are off on what kind of call quality you’ll end up with.

The key things for VoIP to take off just haven’t happened. VoIP does not have the price advantage over traditional calling, particularly when to save a few dollars you have to compromise on sound quality and the inconvenience of being stuck at your PC.

What happened to VoIP?

There’s an interesting bit of Darwinian Theory that dinosaurs evolved into birds. I think that’s what happened to VoIP. Digitizing and packetizing voice calls, just like any other traffic – video, e-mail and so on is just fine provided you know what you are doing. The digital backbones of virtually every telco are based on IP these days– even circuit-switched calls. The core of those calls is all fiber-based packetized technology, but managed and dimensioned in a way that retains call quality.

It’s really only the last mile where there’s a discrepancy and where analog still holds sway. Most mobile calls and the vast majority of fixed line calls still get to their central office in an analog format before getting digitized to get to the other side of the world, and then reconstituted on the phone at the other end. Using VoIP as a bypass means that although the call is digital from end-to-end, it also gets routed in with all of the other Internet traffic and takes its chances on getting delayed with all of those video downloads happening.

What it comes down to is that quality does make a difference. I liken it to the adoption curve for cell phones. When they first came out, the quality of the calls was appalling. You’d have dropped calls left and right, and sometimes it sounded like the other party was in a tunnel or deep underground. It was truly awful. But, as with most new technology, the novelty and utility outweighed the annoyance of bad calls, but after a while that shine wears off. Today, cell phones work from just about anywhere, and dropped calls are thankfully few and far between.

Consumers have demanded, and received, higher quality, but that’s exactly what the Internet hasn’t been able to achieve for voice. They simply cannot match price with quality.

It blows apart the myth that people don’t care about quality if something is free. According to that Ofcom report, 73% of broadband users are aware of Internet phone service, yet only a small fraction is actually using it.
But I’m actually a big fan of Skype. Skype-to-Skype is not only free but is hi-fi quality, which is great and something way ahead of telcos. And because it uses a peer-to-peer approach, the quality isn’t bad either, unlike some other VoIP services I could mention. But I have to wonder how much eBay can get for selling this business - probably nowhere near the hefty price they paid – but what a great bolt-on to Facebook!

So what happened to VoIP? Just like Gartner’s curve, it’s alive and well as a plateau of productivity in the core of (grown up) networks and will soon be happily running end-to-end once Mr. Obama’s billions have put fiber to American homes and 4G wireless takes to the air.

Keith Willetts is chairman and CEO at TM Forum