Vodafone is responding aggressively to the rise of VoIP by launching a low cost, flat rate phone service of its own, using capacity on its 3G network. Echoing similar moves by its US joint venture Verizon Wireless, Vodafone’s plan reflects the main defense that cellcos have against the non-3G operators that seek to steal their voice markets using voice over Wi-Fi or, in future, WiMAX.
The plan is to exploit the superior spectral efficiency of the 3G networks to bring voice prices crashing down and remove the main advantage of VoIP. This could have far reaching implications for the 3G business plans though. UMTS networks allow operators to deliver voice minutes far more cheaply (for about one-third of the cost), and so are valuable in keeping margins stable even as voice prices fall.
However, the efficiency of 3G was expected, by most carriers, to deliver a net increase in voice margin for some years as, before mass market wireless VoIP loomed on the horizon, they were predicting gradual erosion of voice rates, rather than a need to compete with flat rates and even, in future, voice services bundled for free.
The battle against VoIP
One of the key trends putting pressure on the 3G operators’ business plans is, of course, the rise of low cost voice over IP services, increasingly to be offered by wireline and multi-network carriers over wired and wireless links as part of their convergence strategies. Users will increasingly use VoIP, usually over Wi-Fi, when in range of an access point, falling back to cellular only when that is the only connection available. Combined handsets that can support both links and also connect to the landline are starting to come to market, and towards the end of the decade, mobile WiMAX could make it even less necessary to rely heavily on cellular networks.
Vodafone is taking the lesson that combinations of services and bundling will be the key to margin, ARPU and customer loyalty in future, rather than single ‘killer applications’ or simple price cutting. Thus, while offering flat rate voice services could have a dramatic effect on its margins, given that voice still accounts for the vast bulk of cellco revenue, it is also expected to drive up customer numbers and retention, and therefore to generate higher uptake of added value data services, some of which are less easily emulated by the non-cellular carriers, at least until they have mobile WiMAX to play with.
It will also, Vodafone hopes, accelerate the move for subscribers to dump landlines altogether and in some markets, it may be able to claim such migrants for itself before a commercial VoIP alternative has been launched. "We have to move fast," said incoming CEO of Vodafone Germany, Fritz Joussen. "If we don't, fixed line usage might move to broadband."
Increasingly, substitution of fixed lines for mobile is driving the business model for 3G, even more than boosting data usage, and as operators like BT fight back with converged services using Wi-Fi, the cellcos are likely to start to follow Vodafone’s lead and use aggressive pricing tactics to retaliate.
The value of a flat rate service, according to the cellco, is that it generates renewable subscriptions and customer satisfaction and delivers a higher margin than the wireline operators command for charging by the minute – lessons the cellcos, which have prospered from their higher per-minute margins, are only just starting to learn from the VoIP carriers like Vonage.
The Vodafone ZuHause service
The Vodafone flat rate phone service will be rolled out first in Germany, under the brand ‘Vodafone ZuHause Zone’, and will then be extended to other countries, said CEO Arun Sarin. ZuHause (At Home) offers 1,000 minutes of local and national calling for a flat fee of €20 ($24) per month, with extra charges for calls to mobiles and international lines, when the user is at home or within adjacent cells, giving a normal range of two kilometers radius.
Initially, the service will be offered as a separate subscription with a dedicated handset that only works in the home zone, but from the fourth quarter, it will be available as an optional add-on to existing mobile subscriptions and handsets. The choice of Germany for the initial launch is largely because its mobile tariffs are among the highest in Europe, and so the service will be highly attractive. Vodafone Germany has also launched a home zone 3G data card service for a flat fee of €34 ($41), providing 5Gbytes of data usage per month. When the subscriber moves out of the home zone, the tariff is increased to the standard mobile rate of €1.6 ($1.9) per megabyte.
The cellular operators need to face up to a world of open, flat rate IP access and one where they will no longer be able to charge the huge premium that came with owning the only mobile communications platform in the market. Instead, they will need to adopt innovative pricing and bundling techniques to keep their own systems more attractive than those of the pure IP-based networks, even as these start to acquire mobility.
True mobility over IP remains a promise for 2007 and beyond, except in niche areas where a technology such as Flarion or Navini may have been built out. It will be well into the next decade before operators have deployed mobile WiMAX, for instance, on a scale to offer the global coverage of the cellular networks. But voice over Wi-Fi, with all its limitations of coverage, is already impacting the cellular voice model, and WiMAX will accelerate this, even in its early years. This is because there is no need for global coverage to support mobility if Wi-Fi and WiMAX can hand off to a cellular connection when one is available, something that technologies like Unlicensed Mobile Access (UMA) are making ever more practical.
The "IMS tax"
The days have gone when the cellular carriers could respond by keeping Wi-Fi and WiMAX connections off their networks altogether, especially as they themselves move towards all-IP and convergence. Instead, they will look to learn lessons from the IP carriers and adapt their business models to remain competitive. Certainly, one of their key advantages is that it is so much cheaper and more efficient to carry voice over 3G than IP. For at least this network generation, before the cellcos have all-IP networks too, they can milk that advantage.
By contrast, mobile carriers that move from traditional voice calls to delivering VoIP on their 3G networks – as Verizon Wireless is doing - will find themselves slapped with an "IMS tax" because running voice packets is four times as bandwidth hungry as circuit switched voice. Of course, the move to the IP Multimedia Subsystem and the huge range of applications and bundles that it can support will bring many other revenue opportunities, which will hasten the cellco’s shift to IP, but they will incur higher voice costs as a result. Striking the balance between moving rapidly to advanced IMS services or milking the advantage of cheap 3G voice for as long as possible will be a critical calculation for many operators and will have a key influence on their success in the coming years.
Steve Shaw, director of marketing at convergence start-up Kineto Wireless, which created much of UMA, told Unstrung: "For all VOIP services (SIP, IMS, H.323, UMA) there is overhead associated with IP transport. It will certainly not be more efficient from a pure bandwidth per call perspective to use IP versus the highly optimized GSM voice. In today’s GSM voice network, the bearer (voice path) traffic uses about 12Kbps. With that same codec, it’s fair to assume the 'IP tax' will increase call data rates to about 45bps.”
This is a possible weakness for CDMA2000 carriers. Qualcomm has defocused on its planned EV-DV (Evolution Data and Voice) release of its 3G platform because it says operators are more keen to avoid a two-step upgrade. So it now offers a new revision of its current EV-DO (Data Only) release to offer greater spectral efficiency and support voice through VoIP.
Verizon Wireless, one of the most advanced operators in rolling out EV-DO, is also the first to trial VoIP over CDMA, possibly as part of a longer term convergence strategy with its co-parent, wireline telco Verizon, which aims to deliver a mobile triple play of voice, video and data over broadband and cellular lines in future. But while the strategic benefits in the medium term are clear, in the short term, the ‘IMS tax’ could rob 3G operators of one of their chief advantages against the VoIP brigade, their low costs of delivery. As such, the Vodafone approach of harnessing that spectral efficiency to support flat rate pricing – the main attraction of VoIP to the consumer – over its circuit switched network, rather than moving to rapidly to all-IP, may prove a canny one, especially as, in a couple of years’ time, we can expect significant codec improvements to make VoIP more efficient.
Background info: VoIP over WiMAX
VoIP will not be an out-of-the-box application for most first stage WiMAX equipment, but progress is being made rapidly in this area. We have already seen Airspan acquiring Arelnet in order to incorporate VoIP into its equipment without the need for expensive add-ons. This week saw some more interesting moves, including a collaboration between Soma Networks and Broadsoft. Soma makes a broadband wireless platform that can support W-CDMA or WiMAX, but is increasingly focusing on the 802.16 market. Its system is now interoperable with Broadsoft’s Broadworks, giving it a VoIP function.
Broadworks is a VoIP application platform that manages call routing and provides a number of core web-enabled telephony services including voicemail, call waiting, conferencing, and autoattendant functions. Soma will offer a fully integrated VoIP wireless broadband gateway, which combines a SIP User Agent, analog terminal adapter, wireless broadband modem and Wi-Fi route into a single unit. The BroadWorks solution is already being used by some pre-WiMAX service providers including Azulstar in New Mexico, NextWeb in California and WisperTel in Colorado. The last two offer VoIP through partnerships with CommPartners, whose service is hosted by BroadWorks.
Another prominent US pre-WiMAX ISP, TowerStream, has formed an alliance with Bandwidth. com, a nationwide provider of VoIP services, which will distribute the TowerStream wireless service in major cities. TowerStream has focused its direct sales on enterprises looking for T1 alternatives in core metro areas like New York but has always planned to broaden its reach to new territories and VoIP, and eventually consumers, through resellers, once the technology and economics were right.
“Our partnership with TowerStream will enable us to offer customers our first pre-WiMAX solution that provides an extremely affordable option for those looking for an alternative broadband solution,” said David Morken, president of Bandwidth.com.
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