The following text is copyright 1998 by Network World, permission is hearby given for reproduction, as long as attribution is given and this notice is included.

Is there reality behind the hype?

By Scott Bradner

Network World, 10/12/98

IP telephony is the "in" thing these days. It seems as though most
pundits, other than the dyed-in-the-wool "the telephone companies are
the answer, whatever your question might be" pundits, are now
predicting an inexorable movement to running all possible
telecommunication services over IP. As with many pundit predictions
in the network area, this one has been made questionable by the
mixture of frequent hand waving and an occasional clear
misunderstanding of technology.

The two areas in which the most hand waving has been done are the
ability to provide a quality telephone product over the best-effort
Internet and the possibility that providing telephone service over IP
might be economically feasible.

Technologies that let an IP-based telecommunications provider offer
IP telephony services commensurate in quality to the traditional
switched circuit providers, or at least as good a quality as cell phone
providers can offer, are now getting close to being finalized by the
Internet Engineering Task Force. These technologies still face a
number of significant challenges before they will be ready for prime
time, but the direction seems clear.

Finding a concrete, believable economic analysis that shows that an
IP-based telephony company might have lower costs than a traditional
telephone company has been very hard indeed. Most investigations of
the issue seem to bog down when they start talking about the effect of
existing telecommunications regulations and fees.

In an article in the August issue of Business Communications
Review, Bart Stuck and Michael Weingarten undertake to provide a
different type of analysis. They assume a future in which all
regulatory differences between IP-based and traditional
circuit-switched phone services have been eliminated. They also
assume the costs for sales and general administration would not
change just because the transmission technology was different. They
then analyze how the remaining major cost components, switching
and transmission for both types of networks and interconnecting with
the switched circuit network for the IP-based networks, change with
the change in technology.

Their conclusion is that the switching and transmission costs for
IP-based telephone networks are much lower than for switched circuit
telephone networks. So much so that the extra cost of the gateways
that will be needed between the two telecommunications worlds do
not bring the costs up to the same level as the costs for switched
circuit telephone networks.

I assumed IP-based phone providers would provide spirited
competition to traditional telephone providers - mostly based on the
current baroque regulatory environment and the lethargy with which
traditional telephone providers react to technology changes. But this
analysis means there may be some degree of economic pressure as
well. Predicting the future of traditional telephone companies is
getting harder every day.

Disclaimer: Harvard understands the concept of baroque regulatory
environments, but the above is my own understanding.