February 1999

On Becoming A Next Generation Telco

BY DAVID GREENBLATT

The telecom industry is undergoing some exciting changes, as Internet telephony initiatives become a reality. Many of the barriers that prevented service providers from entering this business are no longer there, and now is the time for providers to make the leap to the next generation of service.

First, it is important to understand that generally opportunity needs a catalyst. Just like the advent of the personal computer gave the "upstart" Microsoft an opportunity to compete against companies such as IBM and Digital Equipment, etc., service providers need some catalyst to give them a foothold as a telecom company. This catalyst is Internet telephony, which can enable the small service provider to compete with large existing telecom companies.

TECHNICAL CONSIDERATIONS
It is ironic that the technical effort to become a service provider is probably the least daunting of all that must be done. The key piece of necessary equipment is known as the gateway - dedicated PC-grade equipment specially outfitted with the hardware necessary to do Internet telephony. The responsibilities of the gateway include providing prompt voice stream to the user (i.e., "Welcome to the BlankBlank IP Telephone Service, Please Enter Your ID and Pin"), validating that the user is authorized to the service, converting the voice to many small IP packets, and sending these packets to the appropriate receiving gateway.

Just as there is a gateway that must create the packets from the voice, there must be a gateway at the destination that recreates the voice from the packets. The type of gateway that accepts the originated call is sometimes called an Originating System Server (OSS), and the gateway that receives the IP packets and converts them back into voice is the Terminating System Server (TSS). Some companies choose to have one dual-function gateway, while solutions designed for large-scale applications do not require a dual-function gateway.

The service provider must purchase several originating or terminating servers to assure the ability to handle both sides of the call. If the provider has partners or associates with similar gateways that can interoperate with each other, then the provider can arrange to have the minutes terminated at the partner's location by working out some kind of settlement arrangement.

It is necessary to find gateways that in fact can code and decode the IP packets with a minimum of distortion. This can be verified by testing the vendor's gateway or by seeking the recommendations of satisfied users. The service provider should know that the scale of most gateways on the market today is between 24 and 120 ports (one to four T1 or E1 cards). As major switch providers enter this market, we expect the availability of DS3-capable gateways (28 T1s), likely next year. Cost is in the range of $800 per port, while a T1-capable gateway could cost around $20,000.

In addition to gateways, the service provider must also purchase gatekeeper software, which generally runs on a separate system and monitors and controls the state of the gateways. Many service providers entering the market are learning that the real core of the system is the gatekeeper. A well-running IP solution can have a significant number of gateways and a tremendous number of calls running through it. However, without the proper management of a gatekeeper, havoc can quickly ensue. Unfortunately, the gatekeeper software can add significantly to the cost of the solution.

SECURING BANDWIDTH
There is a feeling that the entire secret of Internet telephony is in the network itself and its management. The bandwidth that connects the gateway and the networks is vital, and choosing the proper source of bandwidth is important. The public Internet would be one choice for bandwidth, although testing has shown that in many areas it delivers generally unreliable quality. The alternative - running your own IP - can be costly. A T1 from the US to South America for example, could cost in excess of $50,000 per month!

Many service providers are in a fortunate position, however, and can either utilize their own network for IP traffic or negotiate favorable rates for IP-only minutes from associates. Additionally, satellite and cable providers as well as emerging telcos will be able to leverage their relationships and connections to ensure toll-quality IP networks.

REGULATORY CONSIDERATIONS
Geographic regulations in the areas that the service provider wishes to originate and/or terminate traffic need to be examined carefully. It is recommended that the service provider solicit the advice of legal counsel familiar with telecom regulations early in the startup process.

The regulatory issue is primarily related to IP services that originated from regular telephones, although there are countries that restrict even PC-originated phone calls. Unfortunately, there is no clear rule on Internet telephony, and except in a few countries where it has been outlawed, it exists very much in a "gray" regulatory area. Geographies of the world are divided into two types of locales, although there certainly are many countries that fall somewhere in between.

Deregulated Region
Many countries in the free world economy are included in this category. Note that deregulation means that licenses are granted - not that everyone can do as they wish. These countries are generally open to forms of Internet telephony, but they tend to have lower phone settlement rates and higher usage rates.

Regulated Region
In regulated countries it is difficult to legally initiate Internet telephony, and generally, a single phone company is tightly connected with the government and has the ability to stop Internet telephony on a whim.

Many small efforts are successful in these regulated countries, although it is unlikely that any large-scale effort could succeed without being terminated. Remember that any effort to solicit originating traffic would be a red flag for the service organization.

Some companies with high-level carrier relationships have established communications with various agencies and phone companies around the world. This has enabled them to build large IP networks that are an exciting benefit to service providers who wish to enter the Internet telephony world.

MARKETING CONSIDERATIONS
This is probably the most difficult area of Internet telephony to succeed in. The service provider must decide which IP telephone services (debit cards, private gateways, etc.) they wish to sell, and how to cost-effectively reach the target audience.

It is important to note that the cost of gaining and retaining telecom customers is significant. Because of the adolescent nature of IP technology, many inexperienced service providers are not able to deliver high voice quality, and they lose customers they have worked hard to acquire. This "churn" effect is quite prevalent in the Internet telephony world, as well as in the ISP dialup business.

In a regulated economy, it is unlikely a provider will be able to advertise services openly, and this severely impairs success. One choice is to use a discreet "agent" type (word-of-mouth) marketing program. Certainly, this also limits a company's reach when compared to traditional advertising efforts.

Once again, service providers - particularly ISPs - are in an enviable position. First, they probably have a solid customer base. Second, ISPs are always on the prowl for value-added services that will distinguish them from their competition, and routing voice over their current networks is a no-brainer.

ISPs can easily sell pre-paid Internet telephony cards to their customers in a number of ways: (1) Bundling phone cards in start-up kits, (2) Signing users up online on the ISP's Web site, (3) E-mailing promotional invitations to current customers to sign up.

Additionally, as high-technology companies, ISPs know about the importance of speed-to-market. By becoming a next-gen telco with few start-up costs, ISPs can easily market Internet telephony solutions quickly to both their customers as well as their business partners, whether they be portals, online services, or gaming companies.

It is certainly advisable that service providers solicit the help of an experienced marketing firm before getting deep into an Internet telephony implementation project.

Now is the time for service providers to make the leap into the telecom business. Internet telephony is a good catalyst for this jump. By becoming educated about the technical, regulatory, and marketing considerations, the service provider can help ensure success!

David Greenblatt is the chief operating officer of the Net2Phone division of IDT. He has helped make the Net2Phone service and its technology a well-known brand in the exciting and exploding world of Internet telephony. Net2Phone routes millions of Internet phone calls and faxes each month. He welcomes your feedback at [email protected].

BY ROBERT H. SCOTT

A world of heightened competition will light up the telecom industry with the advent of the new millennium. In preparing to meet that new competition, service providers are transforming themselves from present generation telcos into next generation telcos. The world is continuing to evolve the competitive consumer marketplace, and telcos are adapting. Just as early humans used their survival instincts to craft tools and utilize fire, some innovative service providers are realizing they need to arm themselves with an array of enhanced services in order to survive. The new telco world they will face awards no points for second place.

What does the world of heightened competition look like? A key feature is certainly growing use of the Internet in all its forms. People are utilizing the Internet for everything from researching vacations to shopping for the holidays and of course e-mail. Anything and everything via the Internet is hot and why not? Ease of use and accessibility can't be challenged.

Evolving telcos are beginning to offer Internet and enhanced services such as audio conferencing. Those services are key for the next generation to survive. Within three years, what are the chances that carriers will be able to compete without offering businesses Internet-related enhanced services? There isn't a single telco market space in which all of the potential competitors have arrived. When they do come, they'll be armed to the teeth with competitive pricing and multiple services. Will present-day service providers be ready?

PREPARING FOR CHURN
What will happen to customer loyalty when the average office manager receives a call from the competition presenting a greater package of offerings than the current service provider - enhanced audio, data, and video conferencing, as well as Internet, local, and long distance service - all on a single bill? Chances are, customer loyalty just went out the window. If the office manager can get more services from fewer sources, he or she will. Churn. Churn. Churn.

That is, of course, unless the current providers beat the new competitors to the table with the next generation of offerings. If they offer more services and better prices than the newcomers, then they've taken ownership of the competitive edge.

PRICE + SERVICES=CONVENIENCE
The prepared telco will be making judicious equipment purchasing decisions tempered with foresight. Those decision makers will also know the maxim: Business customers will switch from the incumbent to a provider with better prices, as long as price is the only point of differentiation.

But what happens in the same customer's mind when the current provider offers a better package of services? Suppose the incumbent also offers an attractive package, such as audio, data, and video conferencing? Will an office manager take the time to research a whole slew of providers, just for the sake of making a switch and saving a few pennies? No way. Conversely, what happens when a newcomer offers enhanced services that the incumbent does not? You bet - churn.

IMPORTANT FACTORS
Transform yourself into a next generation telco - one that is prepared to incorporate and deploy selected services in demand in your market. That means you need equipment now that can easily make the leap to new applications and can support add-ons. If you don't have it, you'll lose time-to-market later.

However, choose wisely when building yourself into the next generation telco. You must choose equipment that affords you carrier-class protection against overuse, have redundant systems, and be ready to change or be compatible with a variety of new services, so that when the time comes, you can readily deploy.

There are no crystal balls out there for telecom. We know the Internet will play a role in the next generation of telecom service. That is why the next generation telco must now incorporate into its network the equipment that can support Internet-related technologies. When tangible consumer demand arrives, it can be deployed. Time-to-market is a key determinant in preserving customer loyalty and reducing churn, and having equipment that can support Internet-related services and collaborative applications is critical. Competition - in the form of the next generation telco - is arriving.

Robert H. Scott is president and CEO of Octave Communications, a leading provider of telephony platforms that enable collaborative applications to telecommunications providers worldwide. For more information on Octave Communications and its products, call 603-894-6110, or visit the company's Web site at www.octavecomm.com.