March 2003

VoP -- Hype Or Hope For Voice Communications

BY ROBERT ROSENBERG

As industry pundits examine the detritus of the telecom implosion, the slow deployment of converged networks is often cited as an important factor in the industry�s crash. The telecom industry was banking, quite literally, on continued strong growth of packet networks to handle the burgeoning growth of Internet traffic, and to provide a platform for creating new multimedia services. However, unlike the �fiber glut,� where network capacity literally outran the amount of traffic generated by revenue-bearing services, voice services over packet networks (VoP) was a success. Increasing amounts of revenue-generating voice traffic are migrating to packet networks -- making the very success of VoP a problem with which the telecom industry must now deal.

VoP encompasses all voice that is packetized at any point during its transmission across the networks; this includes VoIP, voice over frame relay, and voice over asynchronous transfer mode (ATM), plus combinations (e.g., IP over ATM transport). Converging voice with data on a single network means that carriers will ultimately be able to reduce operating expenses, even as they create new multimedia services. Yet the data-centric nature of today�s converged voice traffic is displacing carriers� larger circuit-switched revenue stream before such new multimedia services can be offered.

The rationale behind converging traditional circuit-switched, voice-oriented networks with the new packet networks is as strong as ever. There are many ways to measure communications volumes, such as connections, lines, bits, and dollars. All of these measures are subject to interpretation and dispute, but there is no question that data communications is growing much more rapidly than voice. Voice traffic has been growing at 10 to 15 percent per year, and this growth rate is slowing. Data traffic, on the other hand, has been growing at an annual percentage rate in the triple digits since the early 1990s. Over the same period of time, the cost of transporting a megabyte of data has declined.

If the cost of transporting data declines as volumes increase, why is voice still handled as a separate form of media requiring its own network, rather than as just another form of data? The answer to this question is a surprise to no one -- the investment of hundreds of billions of dollars sunk into the embedded circuit-switched infrastructure cannot be migrated overnight. It is difficult to justify investments in new converged technology when that technology will deliver the same services (at least initially) that are already offered.

Moreover, the price erosion of voice service makes it even more difficult to achieve the required return on investment in the short time periods required by the economic environment of 2002. For some service providers, such as established interexchange carriers (IXCs) in North America, total voice revenue has even been shrinking. Only in regions of the world where there is still unmet demand for basic communications services can packet solutions for voice be applied in a �greenfield� situation; that is, a network designed and built from scratch with no need to accommodate a legacy architecture.

So given these challenges, why should VoP still be considered a success? Depending on your point of view, the glass can be viewed as being half full or half empty.

The glass is half full if you are a service provider that can generate new revenue, or improve your cost structure by deploying VoP technology in selective portions of your network. For example, Verizon is looking to packetize its trunk network as it expands into the long distance business, and many IXCs are using VoP technology to deliver large portions of their international traffic. VoP technology is also an attractive option for the enterprise with sufficient data network capacity and voice traffic patterns that permit them to put voice and data on a single network, allowing them to avoid separate service charges while implementing conferencing, messaging, and other enhanced services.

The glass is half empty for another class of established service providers. Since the newer services and enhanced revenue opportunities associated with VoP are just beginning to be defined, most of the VoP revenue for these carriers is currently displacing a larger amount of circuit-switched revenue, given overall pricing declines for voice. In addition, service creation and delivery can be executed in data centers consisting of server farms running service applications. Customers can choose to bypass the service providers that supply them network access, local, and long distance services. This will further �commoditize� these services, depressing price points even more.

VoP TECHNOLOGY
Telecom equipment vendors are actually accelerating the rate of technological change -- especially in VoP -- as they introduce architectures that allow enterprises and service providers to retrofit old equipment and provide gateways between data and voice equipment. This is part of their survival tactics, as demand for traditional products wanes, and service providers become more reluctant to invest in technologies that can quickly become obsolete. A pronounced example of this effect can be seen in the private branch exchange (PBX) market. According to the Multimedia Telecommunications Association, sales of PBX equipment slowed and eventually contracted while enterprises waited for the arrival of IP-PBX equipment.

The data networking and personal computer industries continue to be instrumental in driving the convergence of networks. For example, as the dominant player in software and operating systems for PCs, Microsoft bundles many new multimedia capabilities into each new release of Windows. Windows XP includes NetMeeting, a voice and data conferencing product, and NetShow, a video streaming product. Moreover, Microsoft�s Real-Time Communications clients are now based in Session Initiation Protocol (SIP), allowing the computers to work with a variety of communications applications and telephone systems. As millions of these SIP-based clients are deployed, it will further accelerate the adoption of packet technology for real-time communications (e.g., voice and video).

The rate of change will also be affected by the fact that the best minds in the data and voice equipment industries are now focused on improving the performance of converged networks, with the goal of using the �best of both worlds� in converged networks.

A WORLDWIDE MARKET
Continued deregulation and opening of markets worldwide will stimulate the spread of VoP. The prime drivers of VoP growth are:

� Cost savings for the end-user;

� Initial infrastructure savings;

� Ongoing infrastructure savings on a single converged network;

� New standards for VoP simplifying implementation (such as MGCP and SIP);

� Technology advancement through softswitches and similar solutions designed to separate signaling and service creation from the routing and transport infrastructure, helping to actualize the ancient promise of advanced intelligent networks (AIN); and

� Enterprise networks already based on packet technology interface better with packet-based wide-area network (WAN) transport for voice and data.

The ability to be profitable in voice is essential for the success of almost all service providers, since revenues for voice services are still expected to exceed data services revenues by a wide margin for years to come. Voice will help pay for data, not the other way around.

Over the next five years, VoP technologies will garner an increasing share of the world�s telecommunications service revenues. From a mere $13 billion in 2002, VoP-based services will grow to just under $197 billion by 2007. While $197 billion seems like a huge number, it only represents a small portion of the voice revenues received by service providers. If the major IXCs migrate their core infrastructures to ATM or IP more quickly, VoP service revenues will grow even more rapidly than forecast. The upside potential for VoP is enormous, especially since data traffic now exceeds voice traffic volume.

Likewise, expenditures on operations support systems (OSSes) used to maintain these VoP-based services will increase from just over $1 billion to $10.3 billion over the forecast period, making VoP services and VoP OSS equipment among the fastest-growing segments of the telecommunications market.

But the underlying question remains -- can traditional service providers create and deploy new voice services based on packet technology that will counteract the overall decline in voice pricing, and become the engine for new revenue growth? Although each carrier�s answer to this question will be unique to its operational and business models, the industry as a whole must respond in a timely fashion to the challenge, or risk prolonging the current turmoil.

Robert Rosenberg is president of The Insight Research Corporation, a New Jersey-based consultancy providing comparative market research and competitive analysis to the telecommunications industry. Insight�s recent work includes studies in the areas of IP telephony, broadband access, Web hosting, OSSes, and private line services.

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