Here Comes Trouble: The Future of Free

Imagine a world where Internet usage was billed the same way as telephone calls, where visiting a web site on the other side of the world costs more than visiting a web site hosted on the other side of town, and the bill that shows up each month reflects a charge for every link followed. This unthinkable scenario remains a fact of life in the telephone business, thanks to the usage-based financial arrangements involved in network interconnection.

Incremental progress toward flat-rate billing that started with AT&T Wireless’s Digital One Rate in 1998 have always proven successful. T-Mobile’s HotSpot @Home represents a recent example in which a dual-mode phone is utilized to get free calls wherever Wi-Fi Internet access exists. Most wireless carriers offer flat-rate pricing for calls between customers (e.g. AT&T Unlimited Mobile to Mobile) and calls between a short list of friends independent of network (e.g. Alltel MyCircle). The question remains, however, whether the expansion of these plans will ever produce Internet-like, flat-rate global calling.

There exist a lot of practical reasons for carriers to embrace flat-rate calling. Adding capacity can prove far less expensive than trying to keep track of usage. Complicated bills add to customer support costs. Deploying network infrastructure involves very few variable costs, so flat-rate pricing actually simplifies the return on investment calculation. But as long as government regulators play referee between various warring parties, the debate around reducing interconnection fees could go unresolved for years.

The Internet’s 300 million consumer broadband connections remain the best opportunity for unlimited global calling. Skype created a nice business voice-enabling PCs. Cisco’s Linksys and several dozen consumer electronics companies hope SIP-based broadband phones turn the Internet into the world’s largest unlimited calling zone. The future on the telco side will be shaped by the prospect that an emerging infocom industry might actually make this happen.

As with efforts to unwind net neutrality, competition represents a last resort for most telcos. Net neutrality keeps the dream of counting bits like minutes on hold, because as long as a voice bit costs the same as a video bit or a Facebook bit, metering bits doesn’t offer much promise. Club telco enjoys near monopoly control of Internet backbones. Cogent Communications is the only operator of a top ten Internet backbone without a legacy telecom business to protect. The hand-wringing about video-congested Internet backbones represents the precursor of a campaign to unwind settlement-free peering and increase transit pricing. Embarq recently petitioned the FCC to increase the rates associated with terminating VoIP traffic even as Vonage gets nothing to terminate traffic arriving from Embarq.

The Internet will either turn into the telephone network or the telephone network will turn into the Internet, but the conflicting pricing models seem unlikely to coexist forever. The volume of data traffic exceeded voice traffic in 1999 because of the varied applications made possible by global flat-rate connectivity. Voice traffic remains the dominant source of telco revenue nearly 10 years later, so not everyone views the development as an occasion to celebrate.