Hot new technologies for 2000: VoIP
Wednesday January 05, 2000 - 12:30PM
By Jason Grunberg for money.net
Online retailer stocks are so yesterday. And it won?t be long until B2B stocks take the same path to has-been obscurity. The next "new thing" is already functioning and just months from adorning your portfolio with gains.
And you probably haven?t even heard of it yet.
Voice Over Internet Protocol (VoIP) is the technology that allows phone conversations to occur over the Internet. If it sounds like just another techie gadget, it?s not. The technology was developed by VocalTec Communications VOCL and Dialogic (now owned by Intel INTC) in 1996 and will work over any regular analog phone as long as an Internet connection exists on each end of the conversation (a not-so-small hitch considering there are still plenty of folks who live in areas without Internet connectability). The ramifications for consumers and existing telecommunications companies are huge.
Let?s start with the customer. Right now when you dial a long distance call it is placed through circuit switches positioned at your local phone service provider, your long distance carrier, and their counterparts at the recipient?s end. VoIP will transmit that same conversation over the same wires but will convert voice information to data packets that are then reorganized into a voice message that is received at the other end. The benefit to the caller isn?t in the delivery, but the prices. VoIP technology stands to drive the cost even lower than today?s 5 cents a minute, possibly as low as one cent per minute, says Michael Neiberg, telecommunications hardware analyst at Hambrecht & Quist.
Corporations will enjoy the same cost savings, but on a larger scale. "Using the IP server the cost of routing information across the country and internationally would be significantly cheaper than using a circuit switch," says Steven Toteda, vice president of marketing at Komodo Technology, a private company based in Los Gatos, Calif.. He expects the popularity of the technology to skyrocket, as a transition to IP telephony takes place within the next five years. "When you talk about the enterprise, the cost of maintaining separate networks is huge, especially for small companies. The cost of managing this system is less difficult because you can monitor everything. Even monitoring phone calls becomes easier through a Web interface."
Today, VoIP is most effective for corporations with large national and international bases that need to stay in contact, including AT&T T, Bell Atlantic BEL, Colt COLT, GTE GTE and Qwest QWST who employ VoIP for through carriers like the privately held Dialpad.com .
Will today?s phone companies suffer?
Margins are already slowly eroding in the long distance service sector, where telephone companies have already seen a large fraction of their traditional long distance service revenues vanish as e-mail has replaced the need, in many instances, to pick up a handset and dial long distance. The flat price of using the Internet, albeit through a telephone connection, has diminished the need for voice communication already. (AT&T T, for example, saw consumer services revenue decline by 4.7 percent for the 3 months ended September 1999. However, those numbers represent just consumer services and telecommunications companies as a whole are thriving?despite increased competition?as people use their phone service more frequently for Internet connection and cell phone calls.)
Companies that are working on advancing the technology so that it can be packaged and made available to all businesses and homes, include Lucent Technologies LU, Cisco Systems CSCO and Clarent CLRN, says Toteda. In fact, last February Lucent teamed up with Ascend (whom they later purchased) to offer trial VoIP services in Dallas/Fort Worth, Houston, San Antonio, and Austin, Texas; and Denver, Colorado.
Quality, Quality, Quality
Making calls for a fraction of the price would of course be a near perfect situation. But with the present state of VoIP technology, you can't have your cake and eat it too. Your long distance bills may go down, but you'll be spending the extra cash on throat lozenges as you scream into the phone, and in some cases, into your computer.
While the companies that use VoIP are focusing on the advantages of the technology, namely immediate cost savings, efficient use of Internet bandwidth, a more streamlined network, and simplicity, the system faults are keeping it from winning over the market right now.
There are glitches that must be overcome before the service becomes popular for the home, says Paul Langmeyer, director of new voice infrastructure at Ryan Hankin Kent, Inc., a telecommunications industry analyst company based in San Francisco. The poor quality of the service (some claim calls sound like they?re placed from a war zone, with a lag time in hearing the other person talk) and the limited services companies have to offer with a VoIP package make it unappealing for a home user right now. Langmeyer also stresses that a better encryption system must be developed to ensure the security of private data networks, while not adding to packet latency problems.
These problems are the primary reason why the technology has not swept the industry, agrees Neiberg. Even though an IP network costs less to providers because it's cheap to build and cheap to use, the quality and reliability don't compare to the more expensive traditional telco system. The advantages of the technology are clear when making long distance calls, but using VoIP on the local level doesn't make sense yet. Why would you use Internet telephony if talking to your neighbor through an aluminum can and yarn yields better results?
When the technology is refined, Toteda claims, telecommunications companies such as AT&T and Bell Atlantic will no longer use circuit- based voice technology. Instead, there will be a fundamental shift to IP-based networks. And the infrastructure changes can already be seen in the traditionally voice companies, he says. They are beginning to incorporate VoIP in their services, but customers do not realize it because the change in quality is not significantly different. "I think we are on the verge of a very important paradigm change. It's not evolution, it's revolution," Toteda says. "An entire infrastructure is being removed and replaced."
The Market place
The new breed of company that offers data versus voice communication is already making its way through Wall Street. Shares of Clarent, a company that makes technology that permits the simultaneous transmission of voice, fax and data over the Internet, grew 220-plus percent since their offering late last summer, despite reporting just $29.2 million in net revenue for the nine months ended September 30, 1999. (For comparison?s sake, in that same quarter nearly half of Lucent?s was directly related to traditional circuit-based boxes.) And VocalTec, an Israeli-based company had just $12.2 million in revenues for the six months ended June 30, 1999 and its stock price is up about 100 percent this year. NuEra, Sonus Networks are two of the more promising companies expected to go public in 2000, say analysts.
Level 3 LVLT, Qwest, Global Crossing GBLX, and Williams Communications WCG have all entered the fray, digging their own ditches to lay lines for long distance service (they don?t provide local service but gain access to customers by renting lines from the Baby Bells), and building IP-based networks. Those companies will likely offer VoIP services at the lowest price as their costs to build a network are significantly less than the incumbents like AT&T, and they need traffic (read: customers), says H&Q?s Neiberg.
But the company that stands to make the most money from VoIP is Cisco , the worldwide leader in networking for the Internet. They?ll benefit any time any box is purchased for Internet communication.
The ability for a company to compete for the position of primary provider of Internet telephony will be determined by the applications and common services a carrier can provide, said Langmeyer. Those services include call waiting, conference calling, and others that aren?t even offered by local telephone companies now, including follow-me services and advanced, intelligent networking capabilities, he says. "Residents are looking for reliable voice and faster Internet conductivity."
In order to provide the services, companies are relying on resources that are readily available. Cable companies naturally offer services via coaxle-cable wire, while telephone companies choose to provide connections to businesses using fiber-optic cable, and to residential zones using a copper connection. "They are taking advantage of using the leverage they have because of their infrastructure," Langmeyer said. "It comes out of trying to take full usage of the legacy of transmission that has been established."
It?s difficult to predict the future of the technology because telecommunications reform has given the advantage to the local exchange carriers and the new start- ups. But the larger incumbent telephone companies have the facilities and customer base. "It will become a survival of the fittest type of scenario," Langmeyer says. "It?s who can deliver a profitable, reliable service and also comply with the regulatory boards."
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