The PhoneBoy Blog

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How do VoIP providers provide “unlimited” calling?

This is based on a posting I made to the Voxilla Forums, where there has been a rather lively discussion on the business practices of BroadVoice, an ad that was being run advertising “a billion minutes,” and whether or not any provider of PSTN access can offer “truly unlimited” service.

At the end of day, each minute of calling that terminates to a PSTN number costs money. It may be anywhere from a fraction of a cent to dollars per minute. The provider must pay those costs. Based on the countries being called, costs, and average usage, the providers that provuide unlimited service work it out so that even if a certain percentage of their users make “heavy” use of their service, they make money.

For the purposes of discussion, let’s assume “heavy” means more than 5,000 minutes a month within the US, which is where Qwest and several other companies claim their “excessive usage” clauses kick in. And let’s assume we’re using an unlimited US and Canada plan on Vonage, which is $25 a month.

There’s costs involved with providing that service that are relatively fixed: cost of DIDs, infrastructure (both VoIP and web), cost of customer service, and so on. Let’s assume about $5 goes to pay that overhead. With the $20 you have left over, you could buy 5,000 minutes wholesale (in sufficient quantity) for $0.004 a minute. That is your “break even” point for a given customer.

Let’s use the 1,000,000 number that Vonage has thrown out for “number of customers.” For the sake of argument, assume that all customers have the $25 plan. I realize Vonage has customers on a variety of plans, but for the purposes of discussion, let’s keep it simple. Let’s also assume that a “normal, non-excessive” customer uses an average of 1,000 minutes a month. Furthermore, assume that 1% of the the customers are “excessive use” customers and use an average of 10,000 minutes a month.

At $0.04 a minute, 1,000 minutes cost the carrier $4. Add $5 to cover the other expenses, and you have $9 a month. If the carrier is making $25 a month from the customer, that means the average customer earns a profit of $16. That 99% of customers brings in $1,584,400 in profit.

For the 10,000 customers–1% of your customer base–that use 10,000 minutes a month, that’s $40 in minutes and another $5 to cover costs. Each one of these providers cost the provider $20 a month, or $200,000 total.

It’s clear that despite the users using “more than their share”, the company still makes money. Of course if you change the numbers here–either number of users using more than their share and/or the costs–you will get very different results. The question is: whether the provider has picked a sustainable model.

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