Voice over IP in the Local Exchange: A Case Study

There have been a small number of cost studies of Voice over IP (VoIP) in the academic literature. Generally, they have been for abstract networks, have not been focused on the public switched telephone network, or they have not included the operating costs. This paper presents the operating cost portion of our ongoing research project comparing circuit-switched and IP network costs for an existing local exchange carrier. We have found that (1) The operating cost differential between IP and circuit switching for this LEC will be small; and (2) A substantial majority of a telco's operating cost lies in customer service and outside plant maintenance, which will be incurred equally in both networks in a pure substitution scenario. Thus, the operating cost difference lies in the actual cost differences of the switching technologies. This appears to be less than 10%-15% of the total operating cost of the network. Thus, even if the cost differences for substitute services were large, the overall impact on the telco's financial performance would be small. But IP has some hidden benefits on the operations side. Most notably, data and voice services could be managed with the same systems infrastructure, meaning that the incremental operations cost of rolling out new services would likely be much lower, since it would all be IP.