Wednesday, February 11, 2004

The economics of VoIP

I spoke with two companies last week that are in the long distance VoIP telephony business and it made me start thinking about the economics of VoIP telephony. My conclusion -- it really doesn't take that much money or work! We should all build our own long distance companies.

Here is some back of the envelope economics:

Variable Costs

There are three kinds of variable costs -- bandwidth, co-location facilities, and the cost of the T1 PRI from the phone company, allowing you to interconnect with the PSTN (public switched telephone network -- the analog stuff).

Bandwidth will cost you about .0001 cents per minute.

Co-location space works out to be about .00004 a minute

Finally the monthly fee for the local T1/PRI is about .00035 per minute

Total cost at maximum efficiency for your VoIP telephone network -- approximately .0005 per minute

No one can reach maximum efficiency -- but if you assume a bell curve for utilization against the capacity you need to build the variable cost is still less than .001 per minute of talk time. There is a minimum scale you have to be at to get to this rate... about 7 million minutes a month.

Now that is a lot of time on the phone, and one person isn't going to talk that much. A good comparison point -- common nationwide long distance deals are available for about $0.05 a minute.

To get to that price you'd need to use your VoIP circuit at least 70,000 minutes a month... 2333 per day... 97 minutes per hour... If you think about the average customer as having 2 hours of long distance calls a week, this is less than 150 customers for your phone service... of course they all have to want to call the same single destination if you only install one circuit...

Equipment and software

You will need a little bit of hardware for this exercise

First you need to get Linux based Intel machines. You can get solid machines for $2,000.

Then you need to download and install Asterisk -- an open source hybrid TDM/VoIP PBX.

You'll also need a card for each PCs to manage the T1 PRIs -- A company called Digium sells cards for Asterisk at $1500 each.

And you'll need at least one of these machines on each end of your connection.

$8,000 in capital investment to be a phone company.

Of course there is your time, or the time of a technician that you hire.

Still, if you could build a clientele between two points -- say India and the US -- you could probably offer them $0.02 a minute phone service and make a solid profit. And save your customers an enormous amount.

The traditional phone companies have to be worried.

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