Global Recession and Its Impact on the International VoIP Business

The opening up of the telecoms market in the past decade or so has seen the international voice market change significantly from its traditional structure of bilateral connections and agreements between PTTs. In those early days, each national operator had to manage a relatively straightforward set of relationships around the world in order to deliver international calls.

But the industry isn’t as simple as that any more. There are thousands of operators, fixed, mobile and VoIP, and their customers all expect to be able to dial a number and connect to a distant telephone at a low cost anywhere in the world.

This change, driven by deregulation and technological advances, has fueled the growth of the wholesale industry, much of it VoIP based. Today, more than 50% of all international voice minutes go through one or more wholesale operators rather than through a direct bilateral route. More complexity and — as prices fall — less revenue and margin per minute. It’s a tough challenge for these operators to deliver the services their customers expect and to do so profitably.

The rapid advances in VoIP technology have made it easy to get into business as an international wholesaler. While obtaining a direct interconnect into a hard-to-reach country is still difficult and may require good local contacts, the growth of the wholesale business has enabled many companies to buy or lease a softswitch and negotiate deals with others to buy a little more cheaply than they can sell. It isn’t unusual for a single international call to transit through three or four VoIP wholesalers before finally reaching the distant country. Each wholesaler is trying to make some margin on the call, and this financial pressure, although not the subject of this article, results in some of the more unscrupulous companies adding a little fraud into the mix to maximize the margins.

The rapid and escalating decline in the global economy has caught much of the world by surprise and it is having a major impact on the international wholesale business. To understand the impact, we need to start with the larger PTTs who still originate most of the international traffic. They are increasingly focusing on their core business, which is meeting the needs of their end customers – residential, mobile and business. Trading international minutes is not a core business and it is low margin, so it’s increasingly under the spotlight for cutbacks. As some of these large carriers back away from the buying and selling of international termination, it will reduce the volume available for VoIP wholesalers.

The next piece of the jigsaw is the reduction in call volume from the end users themselves, who see international calling as an optional expense. There is a lot of evidence that pre-paid card providers, who generate a large percentage of international calls, are experiencing a big reduction in demand as temporary workers return home and others lose their jobs. Business users – long the source of much international calling – are cutting back.

Residential users could take the option to cut back on fixed lines and migrate to lower cost VoIP or mobile service, but that, in itself, doesn’t significantly impact the amount of international traffic.

The end result of these various factors is problematic for the smaller VoIP wholesalers. The refocusing of the larger service providers on their core business will cause them to reduce the number of wholesalers they do business with. The overall reduction in traffic will reduce revenue without reducing the fixed costs of the wholesalers – i.e. their margin will be hit badly. The lack of availability of credit will hit the larger wholesalers who have debt to service, and the overall focus on managing credit and credit exposure will reduce the number of carriers willing to work without full prepayment for services. If that isn’t bad enough, the failure of several wholesalers does not result in more traffic for the others (because each call is already handled several times), and their defaults on payments makes it harder for the remaining ones!

So what is the recipe for success in these troubled times? Have the most efficient platform and systems that you can manage, have credit management systems that prevent you from being exposed to large, unexpected volumes of expensive calls, have good operational approaches to detect and stop fraud, and a balance sheet that provides a cushion and comfort to your partners. If you don’t have these attributes then look to partner with a company that does – for instance, an organization that can manage the credit on your behalf. The successful wholesalers will be the ones that have interconnects directly into the destination countries as that is the hardest part of the termination puzzle to solve. In any case, it is likely that we will end 2009 with fewer wholesale carriers than we started with.

Steve Heap is chief technology officer for Arbinet. He can be reached at sheap@arbinet.com.