Vonage, Hacks & Arbitrage The way Joi and Gen are using Vonage is a new arbitrage method for international long distance. International telephony has always been about arbitrage (risk free profit). Technology driven cost reduction outpacing regulatory regimes that prop up prices. Here's a brief history of international long distance arbitrage and a suggestion for a next stage.
International telephony was originally governed by the ITUs Global Accounting Rate system. A body of national PTTs that would convene and negotiate bilateral settlement rates. For example, the US and German would tally up the traffic imbalance as measured in minutes and agree on a settlement rate. Problem was, country code #1 had significantly greater amount of outbound call volume. With the Public Switched Telephone Network (PSTN), to this day, calls are paid by the originating carrier to transit and teminating carriers. The US negotiated volume discounts that were significant for its outbound calls.
When the PC came around some smart entreprenuers realized an arbitrage condition existed and the technology to take advantage of it was affordable. They invented Call-Back. An individual customer living abroad calls to a PC in the US, enters the country code of the final destination number (the hub country or another) and then hangs up. The individual is called back by the PC while the PC calls the destination country and recieves a dial tone for the destination country. The settlement fee is paid from the hub country (the lower outbound US rate).
Next came Refile, which turned this arbitrage method from a consumer service to a wholesale operation. Competitive carriers in foreign countries (many were cropping up because deregulation was taking place at the same time, first in the US, then the EU and culminating with the Uraguay round WTO accord that liberalized 90 countries) sent calls in aggregate over International Private Lines to the US. A re-file carrier re-originated calls from the US to foreign countries, initially saving in most cases over 500%.
Calling cards allowed re-file carriers to provide consumers a way circumvent originating carriers and get to their re-file hub.
Next came Internet Telephony. Initially it was used for transit on private lines to take advantage of compression. Then some carriers used the public Internet for transit with some sacrifice for quality. Some new businesses like ITXC leveraged redundancy in transit to increase quality.
Consumer Internet Telephony didn't prosper until now because of the variable quality of transit as well as the interface at the ends. Vonage has changed that with some success (just reached the 25,000 subscriber mark). But its primary focus is domestic long distance. It probably doesnt provide the service internationally both because of the quality of transit, complexity of serving diverse markets and potential regulatory backlash in foreign countries.
What's interesting about Joi & Gen's use, and they aren't the only ones, is they are setting up their own arbitrage method -- originating calls abroad, transiting over the Internet and terminating through Vonage's network (mostly over the Internet) and re-file agreements. Vonage's greatest value is a persistent circumvention of local monopoly carriers (where most of the cost of a call resides because of the above driving efficiency in international markets), but its value for international transit is worth consideration.
It will be interesting to see what Vonage hacks arise. There are a few options created by its bridge feature -- If you're on the phone with party A, you can flash, dial #90, dial party B's number, # and hang up. It then calls party B and the call continues between A and B. A hack that allows you to call to your Vonage box from your wireless phone and have it bridge you to an international destination seems tantilizing.
A hardware hack to make the box more portable would be invaluable (I would rather pay for a dedicated DSL connection from a hotel room and then use Vonage to bypass their telephony toll trolling). Particularly with WiFi support.
When arbitrage conditions exist, as with wireless carrier rates compared to terrestrial or hotel customer capture, the market ultimately converges upon it. Vonage has the potential to be a platform. But if regulators try to stem its diffusion another call delivery method will just take its place.
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