Yesterday, Comcast came by to install their digital voice package at my apartment. Comcast has a special deal going on now: $24.95/month for 6 months, unlimited long distance. Skype’s even cheaper — $3/month for outgoing calls and $5/month for incoming (when they’re up). But here’s what I’m wondering: why’s it so cheap? Why is VoIP cheaper than a traditional plain old telephone service (POTS) line? Or, put another way, why is a POTS line more expensive than a VoIP line?

Let me take a moment to clarify. I understand why VoIP is cheaper for enterprise applications. Network convergence lowers the fixed cost of infrastructure, and commodity TCP/IP telecommunications equipment is a lot less expensive than specialized Public Switched Telephone Network (PSTN) equipment. What I’m wondering is why a single, residential POTS line (where fixed costs are already sunk, and there’s very little marginal cost) costs more than a VoIP connection.

In the beginning there was voice

Usually when I bring this up the first response people have is “duh, it’s the Internet — everything is cheaper online.” Competition, low overhead, etc, etc. But these people usually don’t know much about the history of the telcos, their relationship with computer networks, and the way data actually gets around the Internet. Even I had to go back to the books for some of this stuff. But keep reading: understanding this history is critical to fully appreciating the mystery behind the VoIP vs. POTS pricing riddle.

Long before computer networks became important, telephone companies were using digital communication. The first digital voice circuit was used in Chicago in 1962 (ARPANET, the predecessor to today’s Internet, wasn’t up and running until 1969). The telcos used these digital circuits to send lots of voice connections over long distances — something that analog circuits were no good at — and they continue to use them for this purpose today.

Voice communication has a few special characteristics. For one thing, it’s inherently real-time. You’d get annoyed if phone calls consisted of long periods of silence followed by several seconds of high-speed playback to catch up with the conversation on the other end. To prevent this from happening, digital voice circuits provide guaranteed Quality of Service (QoS). Once a connection is provisioned, you’ll always get exactly the amount of bandwidth you need. It’s not just bandwidth though, latency and jitter are also carefully controlled by using small, fixed sized data packets. The point is, these networks were specially designed to facilitate voice communication.

Then along came the Internet

When computer networks began popping up in the 1980s, the telcos wanted in. They already had a lot of infrastructure so they started looking at how they could send data over their existing trunk lines. They came up with a number of technologies with varying levels of success. But there was (and is) a problem: data networks are fundamentally different than voice networks.

First, data doesn’t have the same real-time constraints voice has. Computers can handle bursty connections, so latency and jitter aren’t a big issue. Packets can arrive out of order, long after they’re requested, without causing problems. And in most cases bandwidth guarantees aren’t needed; it makes more sense to let a single computer consume all available bandwidth if it’s the only one active.

With these things in mind, the Internet Protocol (IP) was designed to provide best effort delivery. That means it doesn’t guarantee bandwidth, data frequently arrives out of order (or not at all), and latency and jitter are accepted. Sending real-time data (like voice communication) over IP is very inefficient, and a huge pain. But it’s great for sending normal data like web sites and email.

Despite these differences, the telcos had infrastructure in place, so there was a lot of incentive to use it. After a few misses, Asynchronous Transfer Mode (ATM) was designed as a compromise technology that could carry both voice and data. But, in reality, it’s much less efficient than a pure data network. The overhead for data transfers on ATM is more than 10%, compared to about one percent for an ethernet link running full-throttle. While gigabit ethernet is challenging the technology, to this day ATM is used on most Internet backbones. And here’s the clencher: long distance telephone calls go over the same lines.

Wrapping things up

So in the end, PSTN and VoIP phone calls go over the same network. Yet, for some reason, the technology that makes more efficient use of existing network resources (PSTN) is more expensive. VoIP layers voice on top of IP, which is not ideal for transmitting real-time data (no QoS, high jitter). IP is then layered on top of ATM, which is not ideal for transmitting data packets (high overhead). Despite all that inefficiency, VoIP providers still manage to charge less than their old school telco counterparts. What gives?