PDF of this tutorialWhile the financial terms and volumes of traffic from clearinghouse operations will vary over time and by geography, simple guidelines of the potential sources of revenue generation and cost savings are provided by the examples in this section and described in detail below. The important ideas to keep in mind are the general categories of financial impact, while the more detailed factors such as number of partners and volumes can be determined by the operator. General guidelines on realistic numbers are provided to aid the evaluation of the business opportunities for clearinghouse operations.
Revenue Sources
Wholesale Minutes Exchange
The model for bilateral minutes exchange is already familiar to most operators, and the growth of high-volume IP minutes contracts advanced rapidly in 1999. Many large service providers have already determined that they will send a percentage of their traffic over IP during the next 12 months, with the volume set to expand steadily in the future. Exact volume will depend on the number of bilateral relationships that a service provider can negotiate, but typical contracts between large carriers consists of one to two million minutes per month to start, with growth to five million minutes per month or more in the second year. To calculate the expected revenue from wholesale minutes exchange, enter the number of partners and the expected minutes volume, along with the typical termination rates offered into the host country. As a general guideline, it is often realistic to expect three to four entry-level partnerships in the first year, with growth to seven to eight partnerships at a higher average in the second year. Table 1 illustrates this calculation.
| Partners | Minutes Volume | Termination Rate | Total Volume | Total Revenue | Annual Revenue |
| 4 | 2,000,000 | 0.04 | 8,000,000 | $320,000.00 | $3,840,000 |
Table 1. Monthly Revenue Sources—Wholesale Minutes Exchange
Refile Growth
Beyond simple termination in one’s home country, clearinghouse operators have a strong opportunity to drive growth of refile and transit businesses. Based on countries where one operates low-cost PSTN refile businesses, one can expand the entries in Table 1 to include additional destinations covered by one’s clearinghouse over PSTN refile hubs. For each destination covered through a refile hub, add the new fields in the same manner as for direct termination. Depending on one’s geography, it is typical to forecast an additional four to five destinations through PSTN refile, at traffic volumes of about 25 percent of direct termination per route. See Table 2.
| Route | Partners | Minutes Volume | Total Route Vol. | Termination Rate | Total Route Revenue |
| Route 1 | 4 | 500,000 | 2,000,000 | 0.05 | $100,000.00 |
| Route 2 | 4 | 500,000 | 2,000,000 | 0.05 | $100,000.00 |
| Route 3 | 4 | 500,000 | 2,000,000 | 0.05 | $100,000.00 |
| Route 4 | 4 | 500,000 | 2,000,000 | 0.05 | $100,000.00 |
| Total Refile Revenue: | $400,000.00 | ||||
Table 2. Refile Minutes Revenue
Clearinghouse Operations
The growth of ITSPs and ISPs continues to exceed forecasts and opens up a large universe of new customers for any clearinghouse operator. Already in 1999, more than 400 new operators have entered the VoIP business. Any ISP, ITSP, or retailer is a potential member of one’s clearinghouse. While minutes volume varies dramatically depending on size, experience, and capitalization of the partner, even small clearinghouses have found it reasonable to expect 12 to 14 partners in the first year, with upward of 30 new members in subsequent years of operation. A small regional operator typically starts with low volumes, but powerful retail tools such as prepaid calling-card capabilities make traffic generation simple for new operators. In addition, termination rates are typically higher for small operators, as the clearinghouse is providing financial and routing services. This means higher margins and greater revenue from clearinghouse operations, as compared to the bilateral model. See Table 3.
| Partners | Average Volume | Total Monthly Volume | CH Ave. Rate | Total Monthly Revenue |
| 12 | 200,000 | 2,400,000 | 0.1 | $240,000.00 |
Table 3. Clearinghouse Operations
Bandwidth and Enhanced Services Revenue
Finally, clearinghouse operators can supplement their minutes-based revenues by offering enhanced services and bundled bandwidth-termination options to their customers. In the short term, bandwidth-based services are a strong source of revenue. New and emerging operators demand worldwide connectivity and peering relationships to provide seamless voice quality and non–VoIP services. High-capacity IP access worldwide is a competitive market but, as it is the core of any communications business, should be factored in as a key revenue source for any clearinghouse operator with an existing broadband business. See Table 4.
| Service Type | Volume | Total Revenue |
| Roaming | 200,000 | $60,000.00 |
Table 4. Services
Value-added services revenue will be minimal for most operators in the first year of operations, but the availability of turnkey and third-party messaging platforms will allow for rapid growth in services revenues.
Cost Savings and Increased Efficiency
Beyond the significant sources of new revenue opened up by clearinghouse operations, carriers can also realize significant cost savings on existing operations by entering the VoIP marketplace. Cost savings—from decreased bandwidth costs to reduced termination rates—should also be factored into the overall business case for entering the clearinghouse business. A few of the most important sources of cost savings are outlined in additional examples.
Increased Traffic over Existing Infrastructure
VoIP products provide for greatly enhanced compression rates over existing transport infrastructure—at voice quality rates much higher than existing techniques such as DCME. Rather than altering voice composition, many IP–telephony gateways use standard industry codecs such as G.723.1 and achieve high-volume compression by eliminating IP overhead along the transport route. Using this advanced compression methodology, IP–telephony gateways can reduce IPLC and bandwidth costs by as much as half. Taking traditional DCME compression rates of 4 to 1, service providers can calculate bandwidth cost savings by adding the overall cost savings from better capacity utilization by entering the reduced bandwidth requirements over key routes, as outlined in Table 5.
| Route | Bandwidth Cost | Compression Factor | Route Savings |
| Route 1 | $25,000.00 | 0.5 | $12,500.00 |
| Route 2 | $25,000.00 | 0.5 | $12,500.00 |
| Route 3 | $25,000.00 | 0.5 | $12,500.00 |
| Route 4 | $25,000.00 | 0.5 | $12,500.00 |
| Total Savings: | $50,000.00 | ||
Table 5. Bandwidth Utilization
Equipment Cost Savings
In addition to bandwidth cost savings, VoIP equipment is typically much less expensive than DCME and circuit-based compression equipment. Using this field, service providers can enter the reduced capital cost of compression based on figures typically encountered in each network. See Table 6.
Expenditure
| Savings Factor
| Total Equipment Savings |
|
| $500,000.00 | 0.7 | $350,000.00 |
Table 6. Equipment Savings
Termination Cost Savings
Beyond basic compression and transport, the single biggest source of cost savings is the reduced cost of termination over IP compared to circuit-switched networks. While the arbitrage difference between IP and PSTN is falling in many markets, the opportunity for short- to medium-term cost savings based on cheaper termination rates is still substantial in many markets and is likely to remain so for several years to come. While the clearinghouse operator is generating revenue by providing termination services into key markets, it is also reducing costs by opening up the ability to terminate existing traffic along the same routes. See Table 7.
| Route | Existing Rate | IP Rate | Volume | Route Savings |
| Route 1 | $0.05 | $0.03 | 1,000,000 | $20,000 |
| Route 2 | $0.05 | $0.03 | 1,000,000 | $20,000 |
| Route 3 | $0.15 | $0.07 | 1,000,000 | $80,000 |
| Route 4 | $0.20 | $0.10 | 1,000,000 | $100,000 |
Table 7. Termination Rate
Although the overall cost savings will be based on minutes volume and varying termination rates, to get a basic estimate of termination cost savings, enter the six-to-eight key routes in your network in the termination section of Table 7. Enter the existing PSTN rates, benchmark IP rates, and volumes expected. A benchmark savings level along these key routes will be generated to approximate overall cost savings based on IP termination.
Management Cost Reduction and IP Buildout
Beyond the quantifiable cost savings of VoIP as a result of compression efficiency and reduced termination cost, the real cost-side benefits are more difficult to qualify with objective measurements. In particular, the reduced cost of managing a single, unified network for all communications types—as opposed to the parallel management and provisioning of mobile, fixed-line, and IP services commonly used today—will represent a major cost savings source going forward. In fact, carriers that can rapidly migrate to a unified communications network will have a major competitive advantage in their ability to add services to all networks through a single interface and to manage the entire transport network through a single set of administrative logic. In addition, VoIP clearinghouse operations will provide the revenue and business drivers to allow rapid expansion of IP capacity and infrastructure, again laying the foundation for enhanced competitiveness in the future. While these intangible benefits are difficult to quantify, they should be carefully considered as core benefits to the deployment of VoIP clearinghouse services.
Cost of Entry: Notes on the Clearinghouse Model
While the benefits of VoIP clearinghouse operations are substantial in terms of revenue enhancement and cost savings, the cost to enter the market is quite low. The exact configuration and equipment requirement will vary based on the service offering and scale of operations, but the basic components of operations are very simple:
- VoIP equipment—Typically the smallest component in operations costs, the VoIP equipment needed to operate a clearinghouse is minimal. Basic clearinghouse operations require only a gatekeeper with a back-end database for data processing and financial settlement. To provide refile and in-country termination, third-party gateways are required, based on the traffic volumes projected from each route.
- bandwidth and connectivity—Clearinghouse operations do not require significant bandwidth. Because a clearinghouse operates only on the signaling level, high-capacity IPLCs or IP backbone connections are not required. Typical clearinghouses can be operated without any additional IP capacity investment. IP access is required only for bilateral engagements and for refile termination and can be calculated according to the traffic requirements and estimates provided earlier.
- management and sales—In most cases, clearinghouse operations can leverage existing network operations and sales channels. Many IP–telephony products are designed to integrate seamlessly with standards-based management systems such as signaling network management protocol (SNMP) managers for simple, low-cost provisioning of the entire VoIP network. And because clearinghouse operations are essentially a new twist on the old market for large-scale minutes exchange, sales and marketing channels for existing businesses can be leveraged to drive partnerships and memberships to the new operations.
