September 1999

Signs And Portents: READING THE FUTURE FOR NEXT-GEN TELCOS

BY SEAN PARHAM

Recent market research estimates that the worldwide market for IP-based telephone service will reach $60 billion by 2005. This trend has bolstered the emergence of Internet telephony service providers (also known as next-generation telephone companies, or next-gen telcos). Several issues come into play in establishing a next-gen telco, including the market, regulatory changes, international competition, and technology changes. These issues make the business case for the next-gen telco both exciting and challenging. However, there are two primary drivers that can make or break a next-gen telco's competitive edge, and they deserve emphasis: economics and value-added service offerings.

THE FUTURE AND ITS CHALLENGES
The emergence of next-gen telcos is only the beginning of the IP communications industry's potential. However, the industry has arrived at a point where the technology, while good, introduces additional challenges to the organizations that use it. Of all the issues in the Internet telephony industry today, the forces driving today's next-gen telcos are economic and service-oriented. Staying competitively priced while offering new services is paramount.

DOLLARS AND SENSE: The Economic Challenge
The main reason for next-gen telcos' success is their ability to provide the same quality of service while charging less than anyone else. Since the backbone of a next-gen telco is a data network instead of a voice network, these companies must ensure that the quality of the voice that goes through their system is at least as good as the voice quality obtained with a traditional telephone system. If a service provider cannot provide the same quality or better, customers will not buy. This issue is Quality of Service (QoS).

VoIP works, but the QoS is inconsistent. Even as network performance improves and the price of sending bits through a data network decreases, the quality is not easily controllable. Even when VoIP is used over a private IP network, where QoS can be monitored, still, the quality is not necessarily stable.

At this point, when using a general purpose or multi-use IP network, organizations have little to no control in setting QoS and priority standards for their data and multimedia packets. The concept of the "active network," where the network quickly responds to the content of a packet, rather than passively routing or switching packets, has become a reality in some respects. However, as VoIP becomes more and more the standard, and as service providers offer not only VoIP, but video conferencing and other multimedia services over their IP networks, true quality, prioritization, and intelligent routing need to be applied to all levels of IP networks. This is especially true with next-gen telcos. But where is it most reasonable to manage QoS?

Core Versus Edge
Core changes cannot occur quickly — they need to be planned, subsidized, and approved before action can take place. It does not make sense to ask the core to do more than fast tag switching. Removing the intelligent QoS function from the core and moving it to the edge is the solution to the fast-changing IP industry requirements. This makes sense because the edge of the network is meant to provide revenue-generating services.

The edge is where the service provider and the customer meet. The customer?s perception of QoS largely depends upon the performance of the edge. Moving intelligent QoS to the edge not only gives organizations more control over their IP networks, but it also decreases the costs of responding to the demands of multimedia services.

Future communications will require an intelligent multimedia device to coordinate and optimize the mixed audio, video, and data traffic across IP networks. The device must easily accommodate value-added multimedia services based on customer demands.

WHAT’S NEXT?
The Value-Added Services Challenge
First, corporations found out how to rip off telephone service providers. Then, service providers found out how to rip off other providers. What happens once everyone is done ripping off everyone else? This is where the true future of next-gen telcos lies.

We must build IP networks that support QoS and then build new and different applications on the existing IP telephony infrastructure, such as: Web-based call centers, software PBXs, voice/data/application conferencing, video, and anything else our innovative minds can think of.

How can we do this? Our IP networks should be built with smart edge switch routers (providing QoS), fast core switch routers, IP-to-PSTN gateways, and IP-based software and services.

NEXT GEN = FAST CORE + SMART EDGE
Traditional IP routers and switches were designed to switch packets rapidly through data networks. Next-gen communications will require the addition of quality, applications, and multimedia services. Such a change to core networks is prohibited by the current technology, due to structural or processing power constraints, high cost, and long development cycles. Although current IP routers are capable of transporting voice, video, and data packets efficiently over carefully engineered networks, they lack the flexibility to deal with the dynamic nature of fast moving multimedia services. The solution is to keep the core operating as a fast switch and add a smart edge device that can respond to the demands of IP communications.

Using this structure, next-gen telcos may offer a suite of services that enable them to create new revenue sources for consumers and businesses. These include:

• Virtual Private Networks (VPNs) and access control.
• Policy management.
• Intelligent traffic management and prioritization.
• Tiered service levels and offerings — Data coming in to an edge device will be classified, and appropriate QoS policies will be applied to the packets. Then, the smart edge device will allocate core bandwidth in relation to the company’s service plan. Finally, the device will label packets for appropriate treatment by the core. (Note: The core devices remain responsible for bulk transport, switching and routing of traffic. Core devices take no part in delivering elements of a service.)
• Retail long-distance — Less expensive long distance to customers, using intelligent centralized routing of telephone calls with call records and an interface to a billing system and less expensive long distance to customers using prepaid/postpaid calling cards.
• PC client-to-phone — Allows access to discount long-distance telephone service via the Internet, an integrated billing solution supporting prepaid and postpaid billing, and a browser-based customer interface.
• E-commerce — Next-gen telcos provide a service allowing voice communications with customers accessing company Web pages without disconnecting from the Internet.
• Encryption.
• Firewall service.
• Accounting.

There are many forces driving the next-gen telco industry these days. However, regardless of changes in regulation, other market demands, international competition and other technology advancements, the main issues for these organizations today continue to be economic and service related. Those who provide quality on their IP network will gain customers and market share. Those who offer more services and capabilities at good prices will enjoy increased success. Both of these issues are basic, but huge.

The solution lies in the edge.

Sean Parham, Director and General Manager, Internet Products Operation for Motorola’s Internet and Networking Group. Motorola’s Internet and Networking Group combines Motorola’s Internet, data networking and software capabilities to develop servers, applications and Internet solutions. For more information, please visit their Web site at www.motorola.com/internet

The advent of VoIP created a frenzy in the telecommunications industry. Large businesses could use their corporate intranets to carry long distance voice and fax calls (known as toll bypass), and what once cost $3.00 now cost about 30 cents. Private IP networks (intranets) were already pervasive when the technology came about, so there was no need for major equipment purchases.

The fact that voice traffic is lightweight means a small incremental bandwidth investment for companies. VoIP equipment is drastically cheaper than traditional voice equipment, and the Return on Investment (ROI) could be measured in a few months.

VoIP technology introduced vast cost savings. It also introduced unprecedented opportunities in the telephony industry.

Motorola recently conducted a study comparing the costs of certain file types being transferred over a regular voice network versus an average internal IP data network. An average ten-minute international phone call may be transmitted over a voice network for $4.00, or 40 cents per minute. The same phone call over the private IP network costs 14 cents, total. Likewise, a 10 MB international file transfer via modem on a voice network would cost about $68.27. Transferring the same file over a private IP network can cost as little as $2.40.

This is the reason corporations started building and expanding their own IP networks to support voice. This is also how next-gen telcos came into being. A next-gen telco can charge one dollar, instead of four dollars, for a ten-minute international phone call. Customers are happy because they receive the same service for a quarter of the cost. The next-gen telco is happy because they are making 86 cents on the dollar.

More of these aggressive service provider companies have begun to emerge, taking advantage of deregulation and the cost difference between traditional long-distance and VoIP to offer drastically cheaper phone service. While in the past the next-gen telco field has been largely dominated by entrepreneurs serving niche markets, traditional phone companies like Earthlink/Sprint, MCI Worldcom, Worldnet/AT&T are now joining in, and this promises to be a dynamic market for the future.