November 1, 2000

12 Min Read
Prepaid VoIP: The Final FrontierPrepaid VoIP: The Final Frontier

By Tara Seals

Posted: 11/2000

Prepaid VoIP: The Final Frontier
Enhanced Services Bring Prepaid
into the Future
By Tara Seals

Prepaid providers have been chugging along in their earthbound, PSTN-switched
way since calling cards emerged in the early 1990s. But things appear ready to

In the last year, VoIP technology has appeared in the market. The result has
been a lowering of the barriers to market entry and an opening for prepaid
providers to seek out a new universe of value-added services and products.

VoIP technology is not a product. It’s a form of transmission seemingly
custom made for a convergent telecom market because of its ability to integrate
with Internet functions.

As a bonus, it enables the once thought to be sci-fi applications such as
voice-to-text and speech recognition.

Most consumers don’t know whether their calls are transmitted on a PSTN
network or are converted into IP packets. However, providers are well aware of
their choice, and with good reason, because inexpensive deployment, competitive
rates and differentiating features make VoIP a savvy choice.

Why VoIP?

The advantage to VoIP is that using the Internet lowers the barriers to
entry, says Steven Chou, general manager of the Americas for iSoftel Inc. (
For example, iSoftel’s Millenia Prepaid/Postpaid Management System (PPMS) offers
an outsourced solution for billing and reporting, all manageable online. A
provider only needs to point its Internet gateway to iSoftel, and it’s in

"One beauty about the prepaid application is that we definitely see
tremendous growth in that market," Chou says. "You look at the
carriers today, and there are a lot of VoIP carriers that have several gateways.
So they can simply deploy our application, for example, and in turn offer
prepaid to their customers. It’s a source of additional revenue."

Senior product manager at iBasis Inc. (
Wingkay Leung adds that implementing a VoIP gateway is significantly less
expensive than deploying a traditional PSTN.

iBasis is a carrier’s carrier, and offers Internet telephony hosting,
transmission on its network, and back-office tools to ISPs and telcos.

"There’s definitely advantage in voice over IP," Leung says.
"There’s a cost advantage first of all. A switch requires a lease line that
connects you to the telco, and then there’s normally a long-term agreement
required for that link, and that’s all up-front investment cost to the provider.
Whatever billing system they get has to attach to the switch also."

Because the cost is less, a provider gets the chance to test the waters
before taking the plunge.

"They can easily go in and put 48 ports in a couple of large cities and
trial it," says Chou. "The barrier to entry, costwise, is extremely

Customer service also benefits. With PSTN, the operator sits next to the
switch, says Leung. A provider can dial in to the switch to program it remotely,
but the operator still needs to be close, and the process is slow and tedious.
However, by using IP, in most cases a standard web browser is all that’s needed
to access a management system.

"If you are a very big provider with, say, 100 customer service reps
answering phone calls, all you need is a web browser and they can all access the
database to set up new accounts, do accounting and so on," he says.

In addition, data providers using VoIP can garner an additional source of
revenue by offering voice, according to Dean Geist, iSoftel’s technical

"There is a possibility that the ISPs could have debit card platforms
themselves and generate revenue on their existing network," he explains.
"Profit margins are lower. We’re trying to encourage people to think
outside of the box a little bit, to expand IP service offerings from standard
data to a voice platform."

Leung concurs. He adds that the idea is particularly attractive in regulated
markets overseas, where a VoIP provider can go under the radar.

"ISPs who want to be ITSPs [Internet telephony service providers] …
everyone’s moving in that direction. And if you offer prepaid calling cards over
an existing switch, that can be illegal in some countries because it’s
regulated," he says. "But if you go in as an ISP doing data [a less
regulated sector], you can avoid getting into trouble with the monopoly telco.
VoIP looks like data; I can connect it so that the PBX is sending me the phone
calls as data. I now can send that traffic anywhere, and the customer saves a
lot of money on long distance. I cannot do that using PSTN."

Leung says getting in is a simple, Internet-based process if a provider
outsources the back office to a company such as iBasis.

"Cost is more or less linear, so there’s reduced risk and investment and
a greater ease of setup," he says. He cites the traffic volume iBasis
carries as creating discounts for small providers they couldn’t get on their

"No need to negotiate contracts, buy equipment, wait out lead time, pay
for someone to install it, integrate everything, and three to six months to pass
before they can get the first call through," Leung says.

Stellar Rates

An Internet telephony gateway converts voice to IP packets. Once that occurs,
the packet is transmitted over the public Internet or a private IP network to
anywhere in the world.

For a provider, the simplicity translates into cheap traffic transmission and
a chance to offer highly competitive rates with low access charges.

Clariti Telecommunications International Ltd. (
offers local access for VoIP phone cards in 120 cities, as well as dial-around
access. Calls come in with IP telephony to a Clariti switch, then go out on
another carrier’s backbone.

In addition, the company offers VoIP international calling over its own

Clariti’s vice president of marketing Jim Bowen explains, "The access
cost comes way down with VoIP. The local access versus 800 access is certainly a
lower cost, then when you add to the fact you’re using IP telephony it’s even

"It’s just one of the routes that [a provider should consider], but the
cost savings will continue to increase. And that will allow you to be highly
competitive in the marketplace and build up market share."

International calling is the best application for a basic VoIP calling card,
says David Span, vice president of marketing for Net2Phone Inc. (

"What VoIP enables you to do today is bring the rates down. Retail
pricing for long distance has gotten so that you save a penny or two, but when
you call internationally, some of the rates are 80 [cents] to 90 cents a minute,
and you can save a lot more true dollars internationally," Span says.
"When you’re talking about Net2Phone Direct, which is 3.9 cents a minute,
with local access, it’s very competitive in that part of the market."

Lower rates also mean fewer fees for consumers.

"A number of calling card providers have cards at very attractive rates,
but all the various fees, some of which are not clearly disclosed, can really
chew up the available time, whereas we can give a clean, attractive rate,"
Bowen says. "We’re not giving a good rate because it’s built up with a lot
of fees, it’s based on the fact that our access cost is so very low."

Span adds having a "clean" product is crucial in the VoIP market.
Net2Phone has no connection charges or activation fees. It has a monthly service
charge of 99 cents.

"We’re trying to differentiate with a clean, basic card," he
explains. "I think one of the issues in the calling card industry, and I
think the industry itself will turn to predominately VoIP because it’s so rate
driven, is clean products. We need a clean product out there to really enable
the market to be able to grow."

Enhanced Services Bring Prepaid into the Future

In a fiercely competitive marketplace, providers look for ways to
differentiate their products. In addition to making it feasible to market clean
cards, VoIP technology allows prepaid providers to offer enhanced, value-added

"If I go out and buy a switch to do prepaid, at the end of the day, I
still have a prepaid platform, but that’s all I’ve got," says Leung.
"But people are moving into other services–for example unified
communications. If I’ve got a voice gateway, a connection to an IP network, I’m
in a position to offer additional service … so I’m not stuck with PSTN, the
old technology. It’s a foundation for future Internet-based, value-added
service. It makes more sense to move in this direction."

Geist offers a scenario: In the future, a parent could give his student-aged
child a credit card that ties in the IP information from the card swiper to a
telco. If the credit card is swiped at the wrong store, that telco could place a
call to the parents for approval.

"We all have a need to control our finances a little more," says
Geist. "If you have a teenager or college student, you may give them a
credit card because you want them to be well clothed and well fed, but you don’t
want them spending the money on CDs and so on. You could, via VoIP, get a
message to [parents] on a cell or home phone saying, ‘Can you approve?’ So
[they] could say yes or no."

Chou says the opportunity for creating enhanced services is limitless, and
could include unified messaging and one- number service.

"With the IP backbone, you see a convergence between data and IP as well
as existing VoIP applications," he notes. "Other than competing on
price alone, you want to look at anything that can increase your profit margin
and add revenue. From our point of view the best thing to do is offer
differentiating services that your competition is not offering."

Enhanced speech recognition is one option.

"A barrier to using calling cards are the extra digits, the requirement
of a PIN," says Span. "But we can use speech recognition technology to
reduce the number of digits used. Those are the types of features that create a
product that’s no longer just differentiated by rate–but also by feature

In the past, prepaid long-distance providers chased a largely anonymous,
retail-based demographic. With the advent of value-added services and Internet
management tools, the ability to grow customer relationships explodes.

For example, Net2Phone offers retail cards as well as Net2Phone Direct, a
rechargeable prepaid account. An online account center allows customers to view
call details in real time, review a billing history and make use of a reverse
number look-up feature.

"We’re leveraging our existing relationship with our customers, and look
to provide them added services and added value," says Span. "That’s
why if you have that customer base, you can provide those services to them
because they have a calling card account, they didn’t just go and pick up the
card at retail based on rate."

Span also says Net2Phone offers customers a unified account for its
PC-to-phone product as for Net2Phone Direct. Soon the provider will offer
unified messaging, which integrates voice mail, fax and e-mail with
speech-to-text and text-to-speech technology.


If there’s a stumbling block in VoIP, it’s quality. However, even that has
improved in most cases, and VoIP calls within the United States virtually are
indistinguishable from standard voice calls.

The newer technology still hasn’t shaken the stigma of garbled,
impossible-to-understand transmissions reminiscent of the ham radio.

When a user clicks on a web page, it doesn’t matter whether it comes up in
two seconds or three. With voice, however, packets must be in the same sequence
or the result will be choppiness and missing words.

iSoftel’s Geist identifies the quality of the public Internet as
"something to take a look at in getting into this," and makes the
suggestion to the would-be ITSP of leasing network space. Today’s public
networks were designed for data networking, so there are delays and the latency
issues which become important in sending voice packets.

"Voice is not receptive to the delay on any of the transmission
media," he says. "But if a carrier wants to provide VoIP services,
there are ways to rectify these issues–get into more of a managed type of IP
services, via a VPN or leasing of a private network, to assure quality."

Net2Phone, which has its own network and gateways, does not use the public
Internet for transmission. Span says the company works on quality issues
continuously, with labs dedicated to improving the gateways and testing the

"We focus on it because two years ago people did not expect to get the
same quality out of a VoIP call as they do today," he says. "People
expect it to be just as good now. Because you’re taking voice and turning it
into packets, there’s going to be some compression … but not necessarily
noticeable to the ear."

iBasis maintains a combination network. Much of it is virtual, or public,
Internet based. Quality is not an issue. A round-the-clock NOC monitors the
network itself and all endpoints. The carrier offers assured quality routing (AQR)
as a way to ensure calls are of good quality.

"If one route is not good for whatever reason, we’ll reroute the call to
an alternate route with good quality," says Leung. "One phone call may
travel partially over the Internet and partly over private IP–it all depends on
where it makes sense. I believe we are the only IP provider out there offering

Leung also notes that international calling is in particular need of

"In some countries the public Internet is not [great], so the only way
to do it is using a leased line," he says. "If there’s someplace they
want to originate out of–a country–we’ll go in and test and make sure we can
carry the traffic from there before we start service. If it’s not good, we don’t
sign them up."

Clariti’s Bowen also warns that the partner in the other country may have
quality issues.

"It’s a network. You have to monitor it and upgrade things," he
says. "If they have not yet done that on their end, you could have quality
issues. Since you have to have a partner in these international markets, they
are pretty much controlling their end of the deal."

Tara Seals is agent channel editor for PHONE+ magazine.

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