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
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
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
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. Indiaï¿½s 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:
ï¿½ accelerating demand for voice;
ï¿½ low voice network penetration;
ï¿½ national broadband deployment policies;
ï¿½ high voice tariff barriers; and
ï¿½ 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, ï¿½With high price sensitivity, Asian
customers would be more willing to switch to cheaper VoIP services.ï¿½
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&Tï¿½s $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
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.
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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