VoIP has existed as an enterprise technology for over a decade now, but only in the past few years has it gained serious traction among business and home users. This shift has occurred fairly rapidly, with VoIP now becoming the de facto standard for business.

The possible surprise here is that more and more businesses are opting to use VoIP wholesalers, such as IDT, rather than traditional providers. Less surprising is that larger wholesalers are substantially more competitive than smaller wholesalers.

Here are a few of the reasons why smaller providers and wholesalers have struggled, and why larger enterprises are succeeding.

Peering: How the Providers Keep Costs Down

Providers are broken down into three general tiers. Tier 1 providers control vast networks and infrastructure, so much that they can ‘trade’ cost-free access to their network with other Tier 1 providers. This enables them to access the entire internet cost-free in a practice called reciprocal peering.

Tier 2 providers are smaller providers, such as ISPs, who do not control sufficient infrastructure for a Tier 1 provider to offer them cost-free peering; they need to pay for peering instead. Specialist Tier 3 providers run almost no infrastructure and therefore need to pay for carriage on even the smallest network.

This explains quite simply why smaller providers find it difficult to succeed: the larger your network, the greater the number of networks you can enjoy cost-free access to via peering. If your network is small, no one will be willing to reciprocally peer with you and you will have difficulty competing on price.

What About VoIP Wholesalers?

The price competition is similar for wholesalers as for providers: the larger the enterprise, the better the deal others are willing to give them. This is analogous to buying in bulk versus buying from a retailer: the bulk sale will be far cheaper per unit for the same product, often becoming less expensive the more you buy at once. As with any sector, successful traffic wholesaling relies upon achieving economy of scale. The time and effort required to close a deal is the same regardless as to the number of products: one purchase is one purchase.

Wholesalers such as IDT can buy vast volumes of minutes at once, knowing that they have the customer base to use them. This means that the tiered providers are far more open to reducing price points, knowing that the quantity will more than make up for it. This means that, in turn, large wholesalers can provide more services in more regions than a smaller provider can ever hope to compete with – unless they have substantial capital to risk.

This doesn’t mean that small providers and wholesalers will disappear. As with any other product, smaller businesses can find ways to compete on service quality or specialist products.

Tier 3 providers, for example, will offer enterprise internet connections and data centres, akin to a specialist coffee shop offering a great product and environment. Neither one can hope to compete on price, but they can find a niche if they try hard enough.