Vonage VOIP Rates
February 9, 2005 3:45 PM   Subscribe

VOIPFilter: How can Vonage afford not to charge a per-minute rate on calls to the PSTN? ($.01/minute to read inside)

I've been trying to work this out in my head for awhile now: just because I pay $25/month for an unlimited residential Vonage line, Vonage's termination costs don't magically disappear. The LECs or RBOCs terminating the call still charge Vonage a per-minute rate that varies based on the location from which the call originates. I know that the location of the termination also makes a difference (e.g. intrastate calls cost more than interstate calls). If I run up a ton of minutes (for the sake of argument, let's say that the purpose of the calls are non-commercial; that is, within the terms of service), Vonage could wind up losing money providing my service.

Does Vonage just blindly hope that its users don't do this? Or that the number of users who use thousands of minutes per month are balanced out by the users who use a hundred minutes per month? Is this whole business based on that blind hope?
posted by schustafa to Computers & Internet (17 answers total)
What makes you think their termination costs are all that high?
posted by mischief at 3:57 PM on February 9, 2005

Or that the number of users who use thousands of minutes per month are balanced out by the users who use a hundred minutes per month? Is this whole business based on that blind hope?

It's more than a "blind hope." During this billing period, I have used, um, 96 minutes for twenty calls. I am happy to pay $25 for this because before Vonage I was paying $45 for it. Enjoy your kindall-subsidized VOIP service!

BTW, if you have Netflix and use that a lot, I'm paying for you there too.
posted by kindall at 3:59 PM on February 9, 2005

mischief: I don't think they need to be all that high for them to be screwed. 300,000 users has the potential to add up.
posted by schustafa at 4:01 PM on February 9, 2005

The last time I had a land line phone (residential rates), I was paying roughly .09 cents (.0009 dollars) per minute just to have the thing. I could easily imagine commercial wholesale being 1/100th of that amount.
posted by mischief at 5:10 PM on February 9, 2005

prepaid voip will run you ~2c/minute. no fees, no taxes, no contract; just the 2c/min.

anyone selling monthly/yearly packages or otherwise unlimited service is just hedging, and most likely making out on it.
posted by dorian at 5:41 PM on February 9, 2005

The most significant reason for the price difference is that Vonage doesn't worry about access. A whole lot of the cost of that home phone line goes into installing and maintaining the copper (or fiber) wire that goes from your home or business, back to your serving office, and then back to the switch. In theory, the installation and maintenance of that line alone, over time, costs the Bell around $10 per month on average. With Vonage, the assumption is that you're paying someone else for access already, whether that's for a cable modem or DSL. You're saving money by piggybacking.

Note, for example, that you can get flat-rate long distance plans for that same $25-30 monthly fee on a conventional phone line as you can with Vonage from many LD providers -- the long distance provider isn't paying for the upkeep of that line, similar to Vonage, the local phone company is. With the LD company plans you piggyback on the local phone service, with Vonage, you piggyback on your broadband.

Also, Vonage uses a softswitch. The legacy switches of yore, the AT&T 5ESS and the Nortel DMS-500 were, let's just say, expensive. Not just in terms of pure dollars, but in terms of space, power, maintenance, and the investment in specialized manpower required to run them. Computers and servers are getting cheaper all the time these days, softswitches offer the power and flexibility of the legacy switches in smaller, less power-hungry, cheaper chassis, and so the kind of cash Vonage needed to set up their network cost a fraction of what those legacy switches cost the Bells, and this adds up to be a couple of extra bucks a month in savings. So, on a base level, it costs Vonage almost nothing on a monthly basis to provide you dialtone (assuming that you buy the telephone adapter box, which I realize they often throw in).

Vonage does indeed pay for interconnection and termination. That can get pretty cheap on a wholesale basis -- from a couple of cents into fractions of cents, as the posters above stated -- but you're right, it's not free. If you picked up the phone and called across the country every minute of every day on your Vonage line, your wholesale usage charges could be more than your monthly fee. But it'd have to be an obscene amount of phone usage for them, more than the average persons' waking hours, to truly lose money on the account, and they are indeed assuming that most people won't spend their life on the phone.

Ultimately, the flat-rate's a marketing thing, not a "true reflection of cost" thing. It's very, very similar to the "unlimited access" you get for Internet service -- if you stay dialed in 24 hours a day, or keep your service pinned up with high bandwidth usage on broadband, you can cost your broadband provider more than the flat monthly rate, too. But most people don't, it averages out, and everyone pays less.
posted by eschatfische at 6:19 PM on February 9, 2005

Man, I wish MetaFilter had an edit function, since there's some poor wording in my response. Assume there's a "than legacy POTS and LD rates" qualifier at the end of the last sentence above; as kindall said, some people do end up paying more per minute with a flat-rate plan than they would on an a la carte plan.
posted by eschatfische at 6:44 AM on February 10, 2005

Vonage actually uses a variety of switching equipment, both soft and hard line. The simplest way to answer this would simply be that the more LD you buy, the cheaper it is. You can get 30+ PRI circuits or an SS7 link into your switching environment and pay < .01 per minute. br>
Eschatfische pretty much nails it.
posted by TeamBilly at 7:00 AM on February 10, 2005

Did you know that the "Unlimited" plan is only worth it if you use more than ~750 minutes/month? The difference between that and the $15/500 minute plan is $10, which covers ~250 additional minutes at $.039/minute.

Think about that- that's about 1/2 hour, EVERY DAY. Sure, some people talk that much, but in a residential setting I'm guessing it's rare and that they're making a nice margin on the Unlimited plan.
posted by mkultra at 7:33 AM on February 10, 2005

mkultra: Yeah, I had done that math, and chalked it up to the freedom of "unlimited minutes" to being a marketing thing.

OK, so, international and long distance are cheap, especially in bulk. I can accept that. But on a normal phone bill, don't intrastate calls cost more than interstate calls? I'm talking about calls from, say, Philadelphia to Pittsburgh (not calls from a suburb of Philadelphia to another suburb of Philadelphia) that cost at least 2 cents/minute.

Based on the above, I can see how Vonage probably covers such costs, but they are taking at least some of a hit, right?
posted by schustafa at 10:34 AM on February 10, 2005

Sure calls from Philadelphia to Pittsburgh cost some amount of money per minute, if they're going over the PSTN. The whole point of Vonage is, they're not.
posted by kindall at 11:04 AM on February 10, 2005

I'm not talking Vonage-to-Vonage calls; I'm sorry if I didn't make that clear. If I'm in Philadelphia (I'm not) with Vonage and I call someone in Pittsburg who still has a PSTN line, that's probably a couple cents/minute, right?
posted by schustafa at 11:09 AM on February 10, 2005

schustafa: yes, certain calls are more expensive than others. Many wholesalers will not just have different tiers for interstate and intrastate, but also calls to the Regional Bell customers versus customers on non-Bell carriers and wireless carriers, all divided by LATA (the divisons of local access areas, usually within states). There can be a maze of different prices that the marketing folk simplify for home use. But the main point still stands -- that in the majority of cases, this still costs Vonage less than $.02/minute (in all likelihood, given industry trends -- I don't work for them or know the specifics of their finances). Personally, I've seen some wholesale carrier rates that would knock your socks off. There's still the possibility of a hit with enough usage in certain high-cost areas to certain providers, sure -- but again, that usage level is would typically need to be pretty high, higher than one would expect from your average user. It's the same principal as the pricing of all-you-can-eat buffets that have, say, crab legs as one of the dishes. (Also keep in mind that the intrastate pricing quirks are part of the legacy business rules -- it's not like it actually physically requires more facilities to route a call to Pittsburgh from Philly than to California.)

Since I'm not familiar with the workings of Vonage's networks, I'm not sure if they're entitled to CABS, which are regulations regarding reciprocal payments from other telcos for terminating long distance calls. That also may bring some additional money into Vonage's coffers to defray interconnect/transport costs.

Also, keep in mind that all costs for Vonage to Vonage calls are essentially free; if Vonage uses SIP like I think they do, the call gets set up between the two peers and just uses Vonage's switches for call setup and teardown. (On preview, this isn't what you're referring to) The LATA distinctions also start getting confusing given the portability of Vonage or other VoIP providers; many Vonage users have area codes and prefixes in LATAs or states other than the ones that they're physically using the service in, so usage patterns for Vonage's customers in regards to inter versus intrastate calls may end up being a bit different than they are for your typical carriers.

But really, if Vonage is losing money -- they're a private company, so we can't go and look at their financials -- I'd be shocked if it were because of access costs. Their pricing is extremely good, and they're cutting it tight, but it's far from unthinkable that they're making money with that product at that price point.

Now, their marketing -- that's GOT to be costing them some serious money. Most likely far more than access.
posted by eschatfische at 11:28 AM on February 10, 2005

I know nothing about Vonage or the workings of the American phone network, but isn't the idea that long-distance calls go over the internet (for free or thereabouts) and the only telco-rate cost would be a local call from a Vonage exchange near Pittsburgh to the person being called. Is this reasonably accurate?
posted by cillit bang at 12:16 PM on February 10, 2005

cillit: the call goes to Vonage's switches via the Internet, but Vonage actually hands the call off to a competitive local carrier to hand off again to the provider of the service where the call is terminated.

While it's certainly possible for a CLEC with a local presence in the terminating market to label a call as originating locally -- even if it isn't, or if it's a grey area -- to obtain lower termination costs, that kind behavior may be considered "call laundering", and when MCI did it, it triggered a Justice Department investigation.

It's actually far more likely that Vonage claims that all of their calls are interstate long distance, given that the FCC (the federal regulator of communications services here in the states) feels that Vonage is an inherently interstate service. However, that interpretation is currently under attack by state legislatures, making it all a very grey area.
posted by eschatfische at 1:59 PM on February 10, 2005

Further info: the FCC is set to make a judgement on whether or not a pure VoIP player like Level 3 is required to pay access charges on March 22nd. Level 3, who doesn't go through a middleman like Vonage does, currently does not pay specific interstate or intrastate charges and instead pays a lower, negotiated rate as an "information services" provider.
posted by eschatfische at 2:43 PM on February 10, 2005

eschatfische: Thanks for the explanations. I think I have a much better understanding now.
posted by schustafa at 5:32 AM on February 11, 2005

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