In these troubled economic times, telecoms operators are looking at whatever growth they can find to sustain their business. And for all the buzz over new sources of revenue, one of the sector's oldest businesses - international voice calls - is still growing.
Even as competition gets heavier and prices drop, international traffic volumes are on the rise. Stats from telecoms research firm Telegeography indicate that projected international voice traffic at the end of 2008 will hit 385 billion minutes - compared to 343 billion minutes the previous year.
Interestingly, a growing chunk of that is being driven by VoIP and mobile networks. Mobile alone is a key growth driver for IDD these days, thanks to heavy mobile growth in emerging markets and the recent trend of cheap international mobile price plans.
By 2007, according to Telegeography, almost a third of IDD calls originated from mobile phones, and 45% of them were terminated on mobiles. At the current rate, 2009 will be the first year that people will place more IDD calls to mobile phones than fixed lines.
Meanwhile, last year TDM-based international voice accounted for 69% of international voice minutes, compared to 73% in 2007. VoIP (including Skype) accounts for the rest.
That's the good news.
The bad news is that the rise of mobile and VoIP as voice-traffic generators has made the business of actually routing and connecting voice calls a much more complex affair that traditional bilateral agreements aren't equipped to deal with, and is fast reaching nightmare proportions for service providers. Termination prices vary widely between service providers, and things like number portability make it even harder to find the number where the call needs to be terminated.
What's at stake: millions in lost revenue and fraud, and more frequent dropped calls (and thus unhappy customers). And with things expected to get worse before they get better, voice service providers now face a choice: sort it out themselves, or outsource their voice routing so they can get on with the business of selling services to customers.
Everyone has a price
To get a sense of just how complex voice termination is these days, it's worth looking at the Golden Age of bilateral agreements between monopoly telcos on which the IDD system is based.
'History teaches us a lot here,' says John Currie, VP of product management at Pacnet. 'In the old days, international calls could be routed simply based on the country code. If you knew that the country code for the UK was 44 or the code for China was 86, that's all you needed to route that call, and typically you only had to route it to one telco that handled the domestic and international calls. It was a very straightforward process.'
'Thirty years ago, termination was based on two things: price and quality,' adds Steve Heap, CTO of Arbinet, the bandwidth exchange company that also does plenty of international call routing and termination for both TDM and VoIP traffic. 'Both were simple metrics to work out. Price was, 'How much does it cost to terminate a call from AT&T to BT‾', and the quality was either it worked or it didn't.'
Nowadays, most markets are far more competitive, with several landline carriers, including cable TV operators, and mobile operators all originating and terminating calls domestically and internationally, and often at different terminations rates.
Mobile has been a significant game changer in this regard, on a couple of levels. For a start, new 2G mobile operators were typically assigned higher termination rates than fixed-line telcos as compensation for the millions spent on spectrum licenses and infrastructure. And such rates aren't always uniform, says Telegeography analyst Stephan Beckart.
'For example, in some European countries, regulators permit second-tier mobile operators to charge interconnection rates that are a few cents per minute higher than the rates charged by the market leaders,' he says.
As 2G subscribers and traffic volumes grew, many regulators lowered the termination rates for cellcos. But then 3G came along, and with new licenses, regulators set a new batch of higher terminations rates for 3G players that, unlike their 2G predecessors, had to compete in a market where mobile users already existed.
The end of blending
Variant pricing is nothing new, of course - as markets liberalized in the 90s, competitive carriers were often allowed by regulators to charge more for termination than the incumbent PTT to encourage competition. Traditionally international carriers simplified the process by blending termination prices in a given market to one a little higher than the going PTT rate. That was an easy and manageable solution as long as PTTs were originating and terminating most of the calls, but now that competitive telcos, cellcos and VoIP players account for more calls than ever, blending isn't as viable an option anymore, says Heap.
'People know the cost is different, so now you have two choices,' Heap explains. 'One is to cherry-pick new entrants to send them the higher-cost calls instead of a normal blend, which impacts termination costs in low-cost or low-margin destinations, or you can pick apart the cheaper bits and try to send them directly to someone who can terminate at that price. Either way, it's a much more complex process than before.'
Even quality isn't so straightforward anymore because of VoIP, says Heap - which isn't to say that VoIP calls are crap quality, but that quality depends on who owns the VoIP switch.
'If you had a Nortel DMS switch 10 years ago, you couldn't really alter how it worked. The software is incredibly complex and hard to modify. But nowadays if you're using a VoIP switch, you can do all sorts of alterations to the way the switch behaves,' says Heap.
That opens the door for all kind of trickery, Heap goes on, from manipulating the way calls are released to make performance seem better than it is to returning a busy signal as congestion, which then forces the call to be routed to the next carrier, or create a false answer signal that allows the VoIP gateway operator to boost their answer seizure ratio (ASR) and bill the originating carrier even though the call wasn't really terminated. Meanwhile, the end-user is trying to get through and frustrated that their call is going nowhere.
Heap doesn't go so far as to say that all or even a majority of VoIP players engage in such shenanigans - but that enough of them do to make voice termination much more of a challenge than it used to be.
And it's one that will only grow more complex with time as VoIP becomes more commonplace, says Telegeography's Beckart. 'As consumer VoIP grows - and by mid-year 2008, 48% of French households had a VoIP phone line - interconnection will get more complex.'
Taking it with you
An even bigger challenge, however, is the issue of number portability, where customers keep their phone numbers when they switch carriers. While some markets allow number portability for fixed-line customers, the practice is far more prevalent in the mobile sector, and it's making voice termination even more of a challenge.
'In most countries, specific dialing prefixes are used to denote each mobile operator, which makes it possible for carriers to charge appropriate wholesale rates for calls terminated to each carrier's network. However, mobile number portability messes things up good,' says Beckart. 'Now customers can switch from say, Vodafone to a smaller, and presumably less expensive mobile operator, but keep their old telephone number, including the mobile prefix that denoted a Vodafone phone line. As a result, mobile dialing prefixes are becoming less reliable indicators of a carrier's potential interconnection costs, making it hard to price appropriately for termination to mobiles.'
This is especially problematic when a customer churns from a lower-cost 2G network to a higher-cost 3G network, says Arbinet's Heap. 'If the difference between 2G and 3G is 12 cents a minute versus 20 cents a minute, the operator's mobile code tells you which is which. But with portability, that 2G number that was terminated at a lower rate now has to be billed at the higher rate, but the code doesn't tell you that. So we now route calls based on who owns the customer and the network as opposed to set of codes.'
The portability issue, of course, isn't insurmountable - if you have access to the portability database in a given market, you know what numbers are on which network, and thus know what its termination rate is going to be.
However, that requires a lot of legwork, as does establishing relationships with new service providers (like VoIP operators), and building a routing platform intelligent enough to sort through all the routing options and terminate the call in the most cost-efficient way possible. It's at this point where service providers may be asking themselves why they're going to all this trouble when wholesale players from global carriers like Tata Communications, VoIP specialists like iBasis and bandwidth exchange platforms like Arbinet have done it for them.
That, at least, is the pitch from wholesale providers that already interconnect international voice traffic.
'We have relationships with all the major carriers, as well as mobile providers, ISPs and broadband operators,' says Marie-Josee Mathieu, senior product manager of global voice solutions for Tata Communications. 'We can better manage off-net traffic as well as on-net, so there's no need for them to worry about handling things like that.
On the VoIP side, another option is peering federations like those touted by London-based XConnect. A peering federation enables VoIP providers to interconnect to a central ENUM registry (ENUM, for the uninitiated, being the protocol that links a phone number to an IP address), effectively multilaterally connecting VoIP islands, while the federation host does all the intermediation work with rates, settlements, etc. XConnect has established peering federations in Brazil, the Netherlands and, at the end of last year, South Korea via a deal with Korea Internet Neutral Exchange (KINX).
Mathieu says that peering federations have value within a given market, but are still limited when it comes to international traffic. 'You do need some peering federations where carriers within a country can hook up nationally, but globally, there's no true federation solution.'
Heap is far more dismissive of the idea, saying he was once a big supporter of voice peering as a solution, but has since soured on the idea which he feels has been too slow to catch on for a simple reason: it's too hard.
'I know, because we've enabled it on our platform and it's very difficult, but it's also our core business,' Heap says. 'For service providers, whose core business is selling voice and other services, the effort to enable peering from the originating service provider to the terminating service provider has become so complex that no one's really doing it, apart from the odd attempt like XConnect peering within Korea. But as a global phenomenon, it's not really going anywhere, because commercially and operationally, there's no reason for anyone to do it. It's too complex to be worth solving.'
CFOs take notice
All that said, Heap allows that another reason service providers aren't in a hurry to shift to voice peering is because, at least for now, international voice isn't so complex to the point of being broken. 'There's a lot of inertia from service providers, because it works so people won't change it.'
Indeed, most of the world's international traffic is still terminated via bilateral agreements. Despite counting many of the world's biggest incumbent telcos as its customers, Arbinet's platform only terminates at most 3% of international traffic. 'Most of what we don't handle is bilateral traffic between the biggest telcos in the top 20 markets,' says Heap. 'It doesn't make sense for us to get in the middle of that. Guys like us are who you turn to when you need to get to the other 190 smaller markets.'
However, Heap says that telcos are under more pressure than ever to stay focused on customers, and with added economic pressure on keeping costs down, more and more telcos are seriously looking at the money and effort they sink into maintaining international termination operations. 'So instead of maintaining bilaterals, many of the bigger companies are saying it costs too much for the benefits they get.'
Whether that means more business for the wholesale carrier space or IP federations is unclear, but Heap predicts that the termination issue will be at the top of the agenda for many operator CFOs in 2009.
'For a start, there's the issue of losing money to fraud or incorrect billing, because today every cent matters,' says Heap. The other issue is that wholesale businesses are already under pressure for being a low-margin business, he adds.
'When the CFO looks at the performance of the company and their international business has dragged the group down, the stock market looks at that, so you have to increase yr margin, which is hard to do, or drop it,' Heap says. 'So the signs are there that the industry is evolving, and the current financial crisis will push that more quickly.'
They can just leave it for us to do.'