IP Telephony in FT:
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TELECOMS: Big shake-up for suppliers
With the prospect of cheaper calls, Internet telephony will transform the economics of telecommunication services for business users, reports Paul Taylor
Until about a year ago, Internet or IP telephony - the technology that enables voice calls to be routed over data networks - was mostly dismissed as not a viable business option. Handicapped by its low speech-quality and complexity, it was seen as little more than a hobby for computer 'nerds' or a way for impoverished students to make cheap calls home.
Now, however, spurred on by privatisation, liberalisation and deregulation in the telecoms industry and the emergence of a new breed of 'data centric' network operators such as Qwest, IDT and Delta3, IP telephony it is set to enter the mainstream as a low-cost alternative to traditional telephone services for both individual consumers and big companies.
For example, Qwest, the fast-expanding US-based fibre network telecoms upstart launched a cut-price IP telephony service aimed at the US consumer market in December. Users dial into the network with a local number, then enter a 10-digit authorisation code and the telephone number they are calling. Long distance calls cost 7.5 cents a minute - considerably cheaper than traditional call charges.
"These are exciting times for IP telephony," says Mark Purdom of Ascend, the communications network equipment specialist. But like most other industry insiders, he believes that while consumer Internet telephony applications grab most of the headlines, it will be corporate demand for IP services that will ultimately drive IP telephony - not least because most large companies already have dedicated data lines or virtual private networks.
"This is going to be a big year for IP telephony," agrees Patrick Fetterman, director of IP Telephony at US-based Natural MicroSystems, a technology leader in the field of advanced telecommunications. "From the traditional 'telco'infrastructure to advanced applications in call centres, IP telephony is creating new markets, opportunities, and revenues," said Natural MicroSystems in a recent report.
In the US, the market for IP telephony services is expected to be worth about $30m this year, but by 2004, annual spending on Internet phone calls will rocket to $2bn, or more than 4 per cent of US long-distance telephone revenues, according to Forrester Research, a market research group. "Internet telephony is about to get respectable," says Christopher Mines, a telecoms analyst with Forrester and the author of a recent report on the subject. Another study by Frost & Sullivan predicts that the total IP telephony equipment market will have a compound annual growth rate of nearly 150 per cent for the next few years, reaching $1.89bn by the year 2001.
Most industry analysts think it unlikely that IP telephony will replace the traditional voice networks in the foreseeable future, not least because of the huge levels of investment tied up in the 'plain old telephone service' and the relative sparsity of Internet access. But there is no doubt that IP telephony is already creating dramatic changes in the traditional telecommunications industry forcing big telecoms operators to alter their strategies and in some cases, to set up their own IP telephony operations.
In technical terms, IP telephony represents the convergence of circuit-switched networks, such as the traditional Public Switched Telephone Network (PSTN) and leased lines, with packet-switched networks, such as the Internet or intranets, local area networks and other data communications technologies.
Instead of being handled as an analogue signal over the circuit-switched networks of the telephone companies, voice calls over the internet are cut up into digital 'packets', compressed, transmitted independently to their destination over the internet and are then re-assembled into speech. Because these packets can be packed tightly together, they do not waste space on the silences and pauses that make up a typical conversation, they make much more efficient use of network bandwidth.
"The driver has been to make better use of the most expensive resource - wide area bandwidth," say Richard Frawley and Paul Shreeves, experts on IP telephony with Cisco, the network equipment market leader. Using compression it is possible to squeeze up to 10 times more voice down a digital IP link than the equivalent analogue line.
What is more, from the user point of view, an Internet telephone call costs the same, no matter how far the distance. In addition, by treating voice as another form of data and sending it over the same network as data, IP telephony is enabling new applications that use the best characteristics of voice communications and data processing.
These applications can include PC-to-PC connections, PC-to-phone connections, and phone-to-phone connections. Example applications include voice over the internet or corporate intranets, fax traffic (both real-time and store-and-forward), unified messaging via the web, web-enabled call centres, internet call waiting, and much more.
Companies will seize the opportunity to cut their phone bills by using new Internet services once sound quality issues are resolved, predicts Forrester.
International calling, fax and intra-company phone calls are identified as three types of communication most suited to IP telephony. The economics of fax transmission over the Internet are particularly compelling, because it does not matter if a fax is sent in the form of packets, is bounced around the network and then reassembled, with a few seconds delay, before being forwarded on to the recipient's fax machine. UUNet recently launched a service called UUFax which takes fax transmissions that would have travelled over expensive long-distance telephone connections, and re-routes them over the Internet.
"The Net will provide the next generation of fax technology allowing more companies to cut crippling communications costs," says Rony Homossany, in charge of sales and marketing at Ralinx whose PASSaFAX products enable companies to route faxes via their existing data network or the Internet.
Voice conversations are more demanding because network delays (latency) or lost packets can lead to an unacceptable deterioration in quality. Indeed, much of the scepticism surrounding voice over IP services reflects the limitations of the first generation of Internet telephony software, launched in 1995, which provided a means to talk only to people with the same software. Sound quality was often poor, and intermittent delays forced users to adopt CB-radio style procedures.
But the technology underpinning IP telephony is advancing quickly. The big breakthrough has been the introduction of 'gateway servers' that link data networks to traditional telephone networks. In the 'gateway', analogue voice signals from a telephone are converted into digital packets based on the IP standard, or vice versa. This enables PC users and companies with Internet links to place calls to anyone with a telephone.
Sales of gateway servers supplied by companies such as VocalTec, the Israel-based IP telephony specialist, are expected to rise dramatically over the next few years to reach more than $1.8bn by 2001, according to Frost & Sullivan, the market researchers.
Meanwhile, the sound quality of Internet phone calls is also improving. "The quality is already better than cellular phones," says Elie Wurtman, founder and president of Delta 3, one of the market leaders. Indeed, Delta3 claims its service can actually offer better quality than existing lines from many developing countries - at a fraction of the cost.
One way open to corporate users to further improve quality is to route voice calls over a private Internet-style network where bandwidth requirements can be effectively managed.
An alternative is a concept called tag-switching, devised by Cisco and being evaluated as a standard by the in Internet Engineering Task Force. With tag-switching, the first packet carries the equivalent of the pass that allows business passengers to go through a fast lane at customs. It clears a path for subsequent packets.
This type of technology will enable IP telephony service providers to offer quality of service (QoS) guarantees and provided tiered tariffs to their business customers.
This ability potentially poses a serious threat to traditional phone companies. Phillips Tarifica, a UK consulting group, estimates that US phone companies stand to lose $900m a year in revenues by 2001 and predicts that leading European carriers would also lose hundreds of millions of dollars.
However, a growing number of traditional telephone companies including AT&T in the US and Germany's Deutsche Telekom are rising to the challenge.
"The Internet is a major force for change and the key to huge new market opportunities for telecoms companies which have to decide whether they embrace the new Internet economy and take a lead in creating the future, or fight a rearguard action against it," says Analysis, the Cambridge-based telecoms consultancy. Indeed, with IP voice traffic projected to rise from virtually zero last year to more than 45bn minutes - or more than 25 per cent of the total - in 2003, there is little doubt that the migration of voice to the Internet will transform the economics of telecoms services.
Nortel, the telecommunications equipment manufacturer, says that "voice over IP is the opening shot in a battle that will break down the barriers between voice and data carriers and reshape the industry."
In the process, business users as well as consumers, should reap the benefits of competition in the form of broader range of services and reduced costs.
"In a few years, people will look back to an age where voice and data traffic were carried on separate networks with the same mixture of puzzlement and humour with which many regard the stand-alone PC of the 1980s," says Nortel.
"Certainly, the logic behind integrating the two types of traffic is inescapable.">>> |
