The Cost of a Phone Call Drops to Near Zero

The title of this post is true, under certain circumstances. Last week’s e-mail brought word from Michael Robertson of Backdoor Dialing – Free Calling to Millions of U.S. Phones. By using Gizmo, the freely available, no-spyware computer-based telephony application, it is now possible to call about 10% of the mobile and land lines in the country for no per-minute charge. This looks like another chink in the armor of the traditional voice telecom way of doing business, on their way to being disrupted out of existence (as they are known today).

First, let’s work through some assumptions. Gizmo is a internet application (using a suite of protocols called Voice-Over-IP, or VoIP) for mimicking what the traditional telephone company does for us now. Rather than using your telephone connection to make the call, you use your computer and its connection to the internet to call other computers or even mobile and landline phones. So it isn’t necessarily “free” — one is still paying for the computer and the internet connection — but the call that you make from your computer has no per-minute charges and is not sensitive to distance.

Image of two Chicago Daily News telephone operators sitting at a switchboard in Chicago, Illinois.
Chicago Daily News negatives collection, DN-0003451. Courtesy of the Chicago Historical Society.
via Library of Congress American Memory Project

Second, let’s also work through a little bit of telephony background. The traditional phone system uses a technique called “circuit switching,” meaning that there was one continuous wire, or circuit, between you and the person you were calling. Switchboards, such as the one pictured here, used plugs to complete the entire continuous connection between the parties. It worked, but it also meant that no one else could use the same piece of wire, even if there was just silence on the line. The internet, by contrast, works using a technique called “packet switching.” The voice is digitized and broken up into bundles called packets, and those packets all share a common connection. The packets are really small when there is silence on the call, so you can fit many more of them onto the common connection. The telephone system as we know it today is a hybrid of these two techniques: a circuit between you and your telephone companies local phone switch, packets between your phone switch and that of the person you are calling, and then a circuit to the person you are calling. This is oversimplifying things immensely, but the concepts are all there.

Packets are much cheaper than circuits — you know this because your long distance telephone bill has dropped to nearly nothing and the mobile telephone companies can offer free nationwide calling at no additional charge. The mobile telephone companies can do this in part because mobile phone technology has eliminated the costly per-person dedicated circuit between the phone company and the user: mobile phones already use a form of packet switching as they communicate with radio towers. Gizmo works in a similar way by exchanging the circuit between you and your telephone companies phone switch for a computer program and the packet switching mode of the internet.

For reasons that are too complicated to explain here (but that you can read about in the Wikipedia article on the Public Switched Telephone Network), the way the telephone companies move voice packets over long distances is different from how the internet moves data packets. The telephone company method is predictable, very reliable, and expensive. The internet is cheaper, but also is a best-effort method that may mean some packets are lost in transit. Here’s the disruptive (in the Clayton Christensen sense of the word) part, though: the best-effort method is becoming good enough and is starting to compete with the predictable, reliable method based on price.

The innovation that Gizmo Backdoor Dialing brings to telecommunications is a private peering relationships with major telecommunications companies. Gizmo uses the “best effort” internet for all but the last bit of the connection with the person you’re calling, where it hops of the internet to the other telecommunications company (presumably, somewhere close to the end destination of the call). The effective cost of that call, once you have paid for your computer and internet connection, is effectively zero.

But is “best effort” good enough? Perhaps. Many users are switching to VoIP as a way of getting their telephone service. Neither my home nor office numbers are served by carriers that have joined the Backdoor Dialing program, but my cell phone number is. In a quick test yesterday, the quality was not noticeably different from a traditional call. When the Gizmo software called my mobile phone, the caller-id showed a number in the 580 area code. My mobile phone can even use that number to call back to the Gizmo software on my computer! (Although that sounds neat, it isn’t all that great because it is a number that only my mobile phone can use to call my computer. It is tied to the caller-id of my mobile phone, and when I tried to use the number on a different phone I got a recording that said my caller-id wasn’t recognized. Gizmo has a service, though, where you can pay for a real live phone number for your computer running Gizmo.)

So, although there is a large up-front investment in the infrastructure (computer plus broadband internet connection) to make Gizmo work, if you already have those pieces and if you make a lot of calls to people who’s phone numbers are part of the Backdoor Dialing program, you would stand to save a great deal of money with this scheme. That is a lot of “if’s” but the theory of disruptive innovation tells us that the caveats will fall away as the technology improves and gets cheaper. This is definitely something to watch…

(This post was updated on 07-Nov-2012.)