Excellent Economist article. Internet Telephony Growing Up
Excerpt: "As an executive in one big telephone firm
confessed to Cisco Systems, the data networking
giant which provides the routers and switches that
power the Internet: "When I look at our current
network, I see the valley of death. When I look at
IP, I see the mountain of hope.""
[And into the "valley of death" go the shorts of CSCO and ASND...]
economist.com
Voice over the Internet was once just a minor
inconvenience for incumbent telecoms
companies. It is now threatening to reshape
their businesses
ONCE upon a time (about 18 months ago), Internet
telephony was the sole preserve of miserly geeks
who delighted in "beating the system". Tooled up
with a PC, a modem, a sound card, a microphone
and some special software, a determined nerd could
talk with a similarly equipped soul-mate on the other
side of the world for the price of a local telephone
call. The call quality was dreadful and the whole
business had the user-friendliness of camel-riding,
but the miracle was that it worked at all.
But now Internet protocol (IP) telephony is growing
up, and incumbent telecoms companies have some
unpleasant choices to make. The potential of voice
over the Internet has been transformed by the launch
this year of services by newcomers such as Delta
Three, USA Global Link and Qwest that require only
an ordinary telephone. They make it easy to
use-just open a credit card account, dial an access
number, give your personal identification number
and then make the call to your destination-and call
quality is at least up to cellular-phone standards.
It is also cheap. In America it is now possible to
make long-distance calls for between seven cents
and ten cents a minute and international calls for
about half the average 89 cents a minute charged by
traditional carriers. The Internet's indifference to
distance threatens to put a time-bomb under the
carefully worked out framework of charges that
underpins the telephone companies' most lucrative
business.
Getting voice to work satisfactorily over the Internet
has been no mean technical achievement. Ordinary
voice networks are based on connections. The
connections at each end create a channel reserved
for the duration of a call. The Internet, by contrast, is a connectionless network designed for routing
packets of data. Every packet contains the address
of its destination and is individually routed through
the network. Computers have little difficulty putting
data files back together again in the right order, but
speech is altogether trickier. The sound signal is
digitally coded and sent in packets, but the packets
must arrive within 20 milliseconds to prevent horrid
noises and within 250 milliseconds or the call will go
down.
Improvements in voice quality using the public
Internet are due to more sophisticated software, but
the big change has been the increasing use of private
networks. These allow the operator greater control
over quality by cutting down the number of router
hops the packets have to pass through and managing
traffic flows to avoid congestion. The other
development is the spread of gateway servers that
link the standard telephone network to the IP-based
network.
One of the companies that has been quickest to
exploit these technological developments is Delta
Three, a subsidiary of RSL Communications, a
fast-growing new telecoms firm. A customer using
the Delta Three network to call Singapore from
Ohio will have his call routed by the local telephone
company to a gateway in America. The gateway
then translates the voice into digits and sends the
data packets across the Internet backbone,
terminating at another gateway in Singapore. That, in
turns converts the data back into voice and sends
the call down local telephone lines to the recipient in
Singapore. This week, Delta Three launched its
service in Europe.
Is IP telephony poised to rule the world? The
Yankee Group, a telecoms consultancy, predicts
that in America, IP telephony minutes will grow from
0.4% of consumer long-distance today to about
15% in seven years. Analysys, another consultancy,
reckons that by 2003, 25% of international call
minutes worldwide will be made over the Internet,
resulting in revenues for service providers of around
$7 billion. However, because IP minutes are
replacing more expensive minutes, revenue loss to
incumbent telecoms firms is likely to be much more
severe-about $10 billion a year by 2001 if
Analysys has got its sums right. Although voice gets
most of the attention, a high proportion of IP traffic is likely to be fax, which WorldCom's John Sidgemore
describes hungrily as "the low-hanging fruit" for
Internet telephony.
This is not to say that IP telephony firms will have
everything their own way. One cloud on the horizon
is regulatory. In America, the Federal
Communications Commission (FCC) has been toying
with the idea of making Internet telephony providers
contribute to its universal service fund, a sort of tax
to subsidise services for the poor levied on normal
carriers. Last week, the FCC stayed its hand, despite
howls from incumbent carriers who would like to
see the Internet upstarts forced to raise their prices.
In Europe, the EU's competition directorate is
holding off similar pressure for the moment. But in
less developed countries, the promise of cheaper
calls may be outweighed by the desire to protect the
revenues of state-owned incumbents.
Another constraint is capacity. Companies who are
building their own managed intranets, such as Delta
Three and Qwest, with its ultra-high capacity fibre
network, will avoid congestion. But Internet service
providers who want to bundle telephony to their
customers using the public Internet will have to
invest heavily in bandwidth if quality is to be
acceptable. As more voice minutes are switched to
the Internet and traditional telecoms firms react,
marketing and service costs are likely to rise,
narrowing the price-gap over time.
The incumbents are also developing strategies to
"manage" the growth of IP telephony. Most appear
resigned to the gradual loss of high-margin
switched-call revenues and are gambling that it is
better to cannibalise your own revenues than to
watch others do it for you.
Companies like AT&T and Deutsche Telekom [nice ASND customers] are introducing their own IP voice services, exploiting
their bandwidth, switches, customer base and
well-known brands to gain a share of the new
market. They hope to weave IP services together
with their traditional products, using the Internet to
offer low prices for unfussy voice customers, while
earning new revenues from advanced services that
integrate data, voice and video.
Analysys argues that in the medium term the main
impact of IP telephony will be to force the pace of
competition and thus lower prices, especially in
countries that have dragged their feet over
liberalisation. However, in the longer term, IP
telephony will be just a part, albeit an important one,
of the digital revolution.
In time, packet networks will almost entirely replace
more expensive and less capable circuit-switched
networks. As an executive in one big telephone firm
confessed to Cisco Systems, the data networking
giant which provides the routers and switches that
power the Internet: "When I look at our current
network, I see the valley of death. When I look at
IP, I see the mountain of hope."
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