June 2003

The Global Impact Of IP Telephony

BY SUDHAKAR RAMAKRISHNA

IP telephony is gaining credibility across the globe. IP telephony today is carrying 10 percent of all international voice traffic -- approximately 18 billion minutes, up from 9.9 billion minutes in 2001, according to research firm TeleGeography. IDC claims the overall IP telephony equipment market is projected to increase at a compound annual growth rate (CAGR) of 45 percent, reaching a revenue base of $15.1 billion by 2007. We are experiencing a tidal change in which circuit-switched equipment and the PSTN are being challenged by the cost benefits and operational efficiencies of IP telephony.

INTERNATIONAL MARKET DRIVERS
For some time now, long haul and global wholesaler carriers have realized cost savings from the use of IP as the transport protocol for international calls. Falling outside the rule of regulatory tariffs, rate arbitrage gained popularity, as evidenced by the increased usage of consumer VoIP pre-paid calling cards that advertise savings of up to 85 percent on international calling.

Traditionally seen as a cheaper but less reliable service, IP telephony has made significant inroads from the early deployment days. Technological advances and methodological approaches to quality-of-service have proven that VoIP is capable of meeting, and indeed exceeding, the quality of circuit voice. IP telephony is no longer viewed as a technology that is too risky for wide-scale deployment. The fact is many of us are using IP telephony today without being aware of it.

Additionally, despite legacy equipment investments, the move toward next-generation replacement is mounting. Infonetics Research says North American small Class 5-switch replacement and augmentation expenditures are projected to grow from $44.5 million to $875.5 million over the next four years. This is attributed to the need for additional switching capacity, the introduction of new services, and the upgrading of equipment to meet regulatory requirements.

In the rest of the world, underdeveloped telecommunications markets present greenfield opportunities for IP telephony deployment. IP networks allowed operators in India to leapfrog the traditional development curve when building out telecom infrastructure. India�s IP telephony market is expected to grow at a CAGR of 119 percent through 2005, according to IDC.

Other factors contributing to the rapidly emerging IP market, as outlined by Deutsche Bank Securities, Inc., include:

� accelerating demand for voice;
� low voice network penetration;
� national broadband deployment policies;
� high voice tariff barriers; and
� tightly regulated circuit-switched voice environments.

INCUMBENT VERSUS COMPETITIVE
Perhaps the most influential factor in global adoption of IP telephony is the pace of deregulation. Telecommunications regulations have evolved at different rates across the globe, though the general trend has been toward liberalization. The 1996 U.S. Telecommunications Act; the deregulation of European telecommunications in 1998; and the break up of China Telecom last year are all examples of this liberalization.

There also are examples to the contrary. In February 2003, the FCC voted to scale back competition rules established in the 1996 Telecommunications Act in the U.S.

In Latin America, VoIP gained commercial traction in 1995 and since has become a threat to traditional carriers. As a result, incumbent operators pressure regulators to restrict IP telephony. Telecommunications in Brazil, for example, did not follow plans to become fully competitive in 2002. Further liberalization efforts are being called for in this region. In the meantime, cellular phone use reveals tremendous opportunity.

One in every four phone users in Latin America now relies on mobile, according to SICE, the information technology arm of the Trade Unit of the Organization of American States (OAS). In Paraguay and Venezuela, cell users outnumber fixed phone users. Trends also show that the Internet and mobility are merging, with the number of combined Internet and mobile subscribers expected to significantly increase. IP is best positioned to serve this union, offering users a seamless network and consistent user interface.

Latin American also presents greenfield opportunities, and competitive carriers will likely bypass the traditional PSTN and introduce next-generation networks directly.

In Eastern Europe, more rapid adoption of VoIP is anticipated due to a smaller legacy equipment base and a less regulated environment. Calling cards, two-step dialing, PC calling, and enterprise VoIP have already penetrated this low teledensity market.

IBC Asia attributes the rapid penetration of VoIP services in the Asia Pacific region to, until recently, the presence in most markets of telecommunications monopolies, which resulted in higher prices than other regions. According to the organization, �With high price sensitivity, Asian customers would be more willing to switch to cheaper VoIP services.�

In addition, aggressive regulatory policies are contributing to greater adoption in Asia. Singapore, for example, promotes VoIP through a lower cost structure and specific dialing codes, such as 019 for VoIP. About a year ago, officials also broke up China Telecom; now there are five licensed carriers operating locally.

REVENUE-GENERATING SERVICES AND PRICING MODELS

Whatever the outcome of the incumbent versus competitive carrier battle, service providers face increasing pressure to add value to their basic voice offering. Aggressive competition, combined with decreasing telecom infrastructure and bandwidth costs, is pushing per minute prices down to a few cents. At this level, the margins that a carrier makes on each call means that every cost element has to be examined and minimized if this traffic is going to be carried profitably. This is reflected in the billing models, which are increasingly oriented to bundled minutes or flat rate calling plans. As one major European carrier admitted, this is driven by the fact that collecting call data and billing by minutes can constitute as much as half the cost of a call.

Online billing, pre-paid calling plans, and direct debiting are just a few of the strategies used by operators to reduce their costs and increase their margins. New offers to consumers, such as AT&T�s $19.95 per month residential flat-rate, unlimited usage pricing plan made last year, are likely to become the norm. These moves will eventually result in the death of billing by minutes for person-to-person calls. As a result carriers have to investigate additional revenue sources.

Content, information management, and productivity services are good examples of new services for which an operator can charge. These can be billed for on a monthly flat rate basis, or based on minutes of use, or by transaction. In addition, voice services can be linked to other non-voice services, such as Web, SMS and e-mail, allowing users to personalize their communications to suit their preferences and lifestyle.

VoIP IN THE ENTERPRISE
Corporate users also are turning to VoIP as a means of simplifying their networks; reducing call and operational costs; and setting the stage for new productivity-enhancing communications services. An immediate opportunity in the enterprise space is to deploy VoIP systems in greenfield sites, to connect small locations where a PBX is not justified, to replace old PBXs, and to augment an existing system that has run out of capacity. A recent survey by the Mitsubishi Research Institute claims that more than 40 percent of Japanese companies plan to begin using Internet calling in the next few years.

In Europe, many service providers -- mostly large PTTs -- are in the process of introducing managed VoIP services for enterprises. Leading providers of VoIP services for enterprises include BT Spain, Cable & Wireless, Capcom International, Colt Telecom, Equant, KPNQwest, Tele2, Telefonica, and Telenordia, according to Frost & Sullivan.

Triple bundling of services is also a growing trend. Almost a half dozen large MSOs in North America are offering voice to their customers. PT Telekomunikasi Indonesia last June partnered with Korean telecom vendor Syspol to deliver embedded multimedia terminal adapters (EMTAs) across 14 major Indonesian cities. The EMTAs provide consumers with VoIP, broadband Internet, and cable TV services.

Service providers need to bundle services. For example, they can offer mobile users the ability to retrieve voice mail from their e-mail inboxes; provide electronic secretarial services with find-me/follow-me capability; and support broadband data and voice service for the SOHO market.

Carriers must also integrate services with existing corporate environments and have a large coverage area or cover popular destinations for international long-distance service.
 

CONCLUSION
Opportunities abound around the world for IP telephony. Greenfield areas with low voice penetration and increasing deregulation, such as Eastern Europe and Latin America, provide an occasion for PSTN bypass. Although more cautious about spending, carriers in North America and Western Europe show the most promise for enterprise VoIP deployment. The greatest prospects for IP telephony are in Asia. There, China is a remarkable success story. Two years after initial telecom liberalization efforts, the country boasts more than 321 cities with IP telephony connections and has the largest market for prepaid VoIP long-distance telephone cards.

There is a bright future ahead for the international telco industry, and IP is taking a front seat in pushing new communication technologies across the globe. Consumers and businesses are on the verge of truly realizing how ubiquitous, convenient, and flexible their communications can be. Carriers who can combine revenue-generating applications with the needs of the local marketplace will deliver a new class of IP service that will come to define the next generation.

Sudhakar Ramakrishna is vice president of IP telephony and wireline data solutions for CommWorks, a 3Com Company. CommWorks supplies network service providers around the world with access infrastructures and IP services platforms.

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