An industry update on VoIP carrier equipment published by Mercator Capital, a privately held investment bank, reveals that the main driving force behind the present growth in VoIP is Voice over Broadband (VoB). According to the report, many VoIP equipment vendors stand to gain from the proliferation of VoB in countries where mature broadband markets already exist.
Based on a survey of 30 vendors, Mercator Capital established market revenues and line shipments in VoIP equipment segments including Softswitch, IP Centrex, Session Border Controller, and Media Servers.
Broadband operators, including ISPs, are not generating much revenue from Internet access alone. In order to maintain and improve their revenues, they are beginning to bundle services. Many Broadband service providers are now providing voice as a standard service on top of their Internet access, as the prices for DSL and Cable services decline.
In Europe, for instance, it is almost impossible today to buy a naked DSL or broadband service for just data. In a few months, voice services will likely be bundled with most broadband offerings at very competitive prices. This environment will make it hard for ASPs like Skype and Vonage to remain competitive because customers will be able to get the same pricing that Vonage offers from operators that also provide broadband access and control service quality - because the operator controls the broadband connection.
One particular area in VoIP carrier equipment where VoB has triggered growth is the softswitch. Once relegated to deployments in long distance networks, softswitches have made a major impact at the edge, thanks to the VoB phenomenon. As a result, softswitches continue to account for the majority of revenue for the VoIP carrier equipment industry. Revenue from VoIP equipment that enables enhanced applications (and contribution from other allied equipment sectors in VoIP such as Session Border Controllers) continues to be modest in comparison to the softswitch.
Softswitch in Q3
In Q3, VoB accounted for the majority of Class 5 shipments. Carriers believe that VoB is much more cost effective than Class 5 replacement/augmentation and easier to implement. With VoB, service providers believe that they can attract customers and penetrate markets quickly.
Only about one-tenth of Class 4 traffic in the world is IP. As such, there is a tremendous amount of potential growth ahead in migrating Class 4 from circuit to packet. However, in Q3, Class 5 seems to have overtaken Class 4 deployments (by volume of lines) for the first time. The majority of Class 4 deployments in Q3 have taken place in the US. Class 4 deployments continue to be confined to Greenfield implementations, and those led by regulatory developments whereby established carriers are being allowed to set up new networks in territories that have traditionally not been within their geographic domain.
The combined contribution made by Class 5 lines, Class 4 lines and Media Gateways (i.e. the Softswitch solution) in third quarter 2004 was $169 million. Once relegated to deployments in long distance networks, softswitches have made a major impact at the edge.
Session Border Controllers in Q3
In terms of product architecture, separation of signaling and media processing is a trend that is gaining ground in the industry. Several softswitch makers have included some elements of border switching in their products. These include Veraz, Sonus, Vocaltec, Tekelec, Nortel and others.
There has been a movement in Session Border Controllers (SBC) towards line side (i.e. access related) VoIP services through IP Centrex and VoB type deployments in the enterprise and residential sectors. Peering applications continue to be a significant source of revenue for SBC vendors. There has been some activity in Q3 related to scalability features of SBCs.
According to our estimates, in Q3, there was an aggregate total shipment of 2,559,350 concurrent sessions of SBC capacity shipped generating an estimated $15.5 million in revenues. In terms of revenue split, North America leads followed by Asia-Pacific and EMEA regions.
IP Centrex in Q3
Over the past quarter, there have been broad advertising campaigns for IP Centrex services in the US. Another major theme in Q3 was the imminent launch of consumer VoB offerings, where IP Centrex vendors are trying to compete with other VoIP infrastructure vendors. It seems that VoB offerings will commoditize very quickly at the current low-end feature set such as Caller ID and Call Forwarding. Most VoB service providers are offering these features as part of a flat rate package. Therefore, vendors need to develop interesting, disruptive feature capabilities such as portal based approaches. That is where IP Centrex vendors could have an edge over other VoIP infrastructure vendors such as softswitch providers. The portal based approach to provisioning and integration with desktop applications could prove to be a significant competitive advantage.
According to our estimates, in Q3, there was an aggregated total shipment of 169,000 IP Centrex lines generating an estimated $7.7 million in revenues. North America accounts for the majority of IP Centrex line shipments.
Said Rod Hackman, Partner at Mercator Capital, VoB appears to be the main market driver for VoIP in the immediate future. This will in turn drive business for several VoIP equipment segments. As VoB offerings proliferate, Softswitch and IP Centrex vendors will be providing the voice feature set, Session Border Controllers will address the inherent security risks, and Media Servers will be the hardware on which enhanced applications are deployed. The need to interconnect with PSTN (since IP-to-IP calls in VoB offerings are a very small portion as compared to IP-to-PSTN calls) will drive the demand for Media Gateways.
The research report is the first of its kind addressing and tracking segments outside of the softswitch in the VoIP market. Within the softswitch segment, the Mercator report also provides a breakdown into Class 5 and Class 4 lines shipped during Q3 2004. Nortel (NYSE: NT) and Sonus (Nasdaq:SONS) dominate the Class 4 market. Nortel and UTStarcom (Nasdaq: UTSI) were the leaders in Class 5 business in Q3. The leaders in the Media Gateway segment were Nortel, UTStarcom, Cisco (Nasdaq: CSCO), and Sonus.
About Mercator Capital
Mercator Capital is a privately held investment bank committed to helping its clients achieve superior results. Mercators success stems from a focus on providing clients with quality advice and developing creative solutions.
With decades of Wall Street leadership and extensive industry knowledge, Mercator prides itself on a culture of excellence that promotes intellectual insight and rigorous analysis. The firm focuses on building long-term relationships with clients rather than pursuing individual transactions. For Mercators clients, the approach means a much greater understanding of their business and markets, a more thoughtful and committed effort and an unmatched degree of senior-level service.
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