The cost of telephone service

by Matthew Gast

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Last Wednesday, Andy Kessler wrote in the
Wall Street Journal that telephone service costs 1.6 cents per month to provide:

A phone call is just 16K of data bandwidth. The math is easy. Based on current gigabit fiber line monthly fees, the value of phone service is 1.6 cents per month. That's it. Amazingly, SBC charges $18-$22 per month and complains that's below their costs! (By the way, that's what AT&T does for business today--runs data lines of fiber to bypass SBC and lower corporate phone costs.)

Although it is quite attractive to be told that I should be paying cents per month instead of dollars, there are a few basic problems with this line of argument, which should be easy for any network engineer to appreciate.

The Gigabit Volume Discount

Comparing voice bandwidth to gigabit fiber bandwidth is like comparing the per-unit cost of something at Costco to a restaurant. Smaller packages cost more in every other business, Internet service included. Gigabit fiber is buying bit transmission service at wholesale rather than retail. The argument is that bit transmission service costs 0.1 cents per Kbps. (If 16 Kbps is 1.6 cents, then 1 Gbps is $1,000.) To get the wholesale price, though, you have to buy the whole package. I'd love to get phone service for 1.6 cents, but not if I have to pay $1,000 for the privilege! Companies can afford gigabit fiber, because they can use the entire capacity.

Voice bandwidth & QoS

With the digitization of the telephone network, telephone calls are carried as bits. Calls made using traditional telephone service take 64 Kbps, not 16 Kbps. Compression techniques may squeeze that 64 Kbps into something smaller, but voice quality suffers as compression ratios increase. Many VoIP service providers are using codecs that use more than 16 Kbps. (Once, VoicePulse, allows you to change your codec, which is a neat feature.)

Providing acceptable service quality is also a non-trivial task. Comparing gigabit data service with best-effort delivery to a smaller guaranteed channel is facetious. At low loads, the gigabit network will be able to offer quality service simply because it is massively overprovisioned. As load increases, though, it is harder to assure that voice traffic will get the high-priority treatment it deserves. Network equipment can make efforts to improve service quality, but it costs more money. It is relatively easy to build network equipment that moves data fast. It is much harder to have that equipment move traffic in a particular order.

Furthermore, prioritizing voice in both directions is quite difficult. I expect that I'll have more problems with my VoIP service in the downstream direction because I have no control over traffic priority flowing down my DSL line to me. (My firewall can prioritize traffic in the upstream direction.) Speakeasy offers a VoIP service called OneLink, and one of the key selling points is that they can provide that quality down to you.

Start-up Costs

I don't know what the price to start up a gigabit fiber link is. Gigabit fiber equipment is relatively expensive, especially compared to the alternatives. Telephones are cheap. Gigabit interfaces cost hundreds of dollars, and the switches they live in cost thousands. Again, business that can use the entire capacity of the gigabit fiber are in a much better position to bear the cost.

Taxes & Fees

Finally, it's only fair to note that of the $18-$22, only about half actually goes to the phone company. My telephone bill comes out to approximately that much because my advanced services come from providers other than the telephone company. The cost of my line is $10.69 per month, with the remainder of the $20 as taxes and fees. Admittedly, I don't know what portion of the taxes and fees go through to the phone company's bottom line, if any. The penchant to saddle utilities with taxes and fees is a separate issue from whether or not the bill is highway robbery, though.


2005-02-09 04:30:39
there's more
there's people to pay as well, not just bandwidth.
Any telco has a support department (even if they're not the most competent), sales staff (those often ARE competent), complaints department (those are probably large :) ), financial department (to come after you if you pay your bills and never notice if you don't), etc. etc.
Not to forget the people who crawl into the ground to repair broken cables and lay new ones.
2005-02-09 05:19:58
A few counterconsiderations
First, while a phone call may use 16 or 64 Kbps (as the case may be), that's not the fraction of the Gigabit link it requires. Noone talks on his phone 24×7. Witness traditional POTS networks have an order of magnitude less capacity than they'd need to serve all phones connected to them at once. It's almost never, ever a problem. So if providers used Gigabit and actually reserved a fixed bandwidth of 16Kbps per subscriber, most of the capacity would be idle most of the time.

Second, it sure is silly for single customers to buy a Gigabit fibre connection just to replace their POTS line, but that doesn't mean it's silly for a phone company to consolidate a neighborhood's worth of phone lines into a Gigabit fibre. Actually, it's probably worth the effort to collect an appartment building's worth of phone lines into a Fast Ethernet fibre.

Third, assuming the Gigabit link is dedicated to voice traffic, latency and routing issues should be easy to sort out.

Of course the problem with all this is it requires infrastructure that currently doesn't exist and would be expensive to install. The running cost would be quite low, though. Figuring out an ingenious way to deploy a minimal necessary amount of infrastructure cost-effectively would be a disruptive innovation in a market which will otherwise probably continue to plod on in the current direction.