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Industry Insight
May 2002

Jim Machi

IP Telephony Is Here To Stay


The original, industry-creating, killer application for IP telephony was the phone call. It was an irresistible, and ultimately workable, premise. A phone call made using the Internet was cheaper than other calls. Companies could enjoy the rate arbitrage advantage of making a long distance call for the price of a local call, plus the ability to use the Internet or some other IP backbone as the long distance infrastructure.

In last month�s Industry Insight column, Analyzing The Shrink, we turned a critical eye to past, present, and future IP telephony analyst reports. As I researched that column, it struck me that even though historically the entire IP telephony industry has been floating on hype, this original killer app has become a boring story flying below the radar. (I guess an expected compound annual growth rate of more than 125 percent just isn�t news anymore.)

I think one reason for the waning excitement is that many industry pundits have said that if we don�t find a �real� killer application, IP telephony will eventually just disappear. It�s not too hard to imagine telcos reducing their rates to be equal with IP telephony rates. Since the quality of the traditional time division multiplex (TDM) phone call will, to some people, always be perceived as �better,� who would want to use IP telephony?

Bad IP telephony news has also caused some to wonder about the industry�s future. One cause for concern is that some of the �free� PC-to-phone offerings have been discontinued. Another is that some of the early innovator companies have gone out of business. But I look at this as a typical business cycle. When any innovative industry moves to adolescence, it sees shake-ups and shake-outs. This only makes the industry stronger. And that�s where we are now in the IP telephony industry.

Nevertheless, some have started to worry, and to search for the next big thing � the app that will strike fear into the hearts of traditional telcos. Most of the talk (even in this column) has centered around innovations and applications that are easier or more efficient using IP telephony, and even some that are impossible using traditional TDM. Applications like instant messaging, voice portals, contact centers, true (really � this time we mean it) unified messaging, and IP PBXs, plus standards and call control issues, are all getting ink. And they probably deserve it, since they show the full extent of convergence and change that IP telephony promises.

But I think that without the resolve of the original killer app, the rate arbitraged telephone call, the industry today would be limping along instead of looking ahead to tremendous growth opportunities. So let�s take a closer look at that original IP telephony application. The debit card and calling card companies first brought IP telephony to consumers. The growth of the industry was fueled by the promise of making simple phone calls less expensively. Typically, areas with less competition from traditional telcos � and thus higher rates � were the prime markets segments for IP telephony. This means we�re not talking about U.S. domestic service. Instead, we�re talking about Asia and South America, with maybe someone from the U.S. on one side of the phone. Since the world isn�t yet fully telecom deregulated, these rate arbitrage opportunities still exist.

The traditional telco now knows these new applications could mean potential business loss, so they don�t want to fully endorse them. Why give up revenue stream if you don�t have to? But what we�re seeing is some kind of d�tente and coexistence � and possibly even telco participation with IP telephony providers.

The Call Is The Basis To It All
Also, in the beginning, IP telephony meant Internet telephony � that is, getting out to the true Internet (whatever that is). Now it also means using a packet backbone. Additionally, an IP telephony call was originally made with a computer on at least one end of the call. Today, the caller and the called party don�t even need to know that IP telephony is involved as a transfer mechanism since they�re still using the same phones.

To learn more about this original application and how it�s faring, I visited a SuperPop of one of the biggest IP telephony wholesalers, ITXC. Aside from seeing a showcase of open systems when I saw racks and racks of gateways made from open system building blocks, I learned that the rate arbitrage business is indeed alive and well. Mary Evslin, vice president of Marketing and Customer Success, told me that as of the fourth quarter of 2001, ITXC was averaging about 6 million minutes of billable traffic over its network per day on average, with a network that connects over 135 countries. Each is growing. And, as I suspected, the business has moved beyond just calling cards to include relationships with traditional telcos as well as multinational companies. That�s certainly a big business � and one that will continue to grow.

So I know that cool new applications will help drive the industry forward. In fact, if someone finds an application that just isn�t possible without IP telephony, it will probably leave the mark that ensures the industry�s long-term success. Even so, it�s comforting to know that that the original application is still alive and well.

Jim Machi is director, product management, CT Server and IPT Products, for Dialogic Corporation (an Intel company). Dialogic is a leading manufacturer of high-performance, standards-based computer telephony components. Dialogic products are used in fax, data, voice recognition, speech synthesis, and call center management CT applications. For more information, visit the Dialogic Web site at www.dialogic.com.

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