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To: Secret_Agent_Man who wrote (11419)	6/6/1998 1:45:00 PM
From: Secret_Agent_Man	Respond to of 50264

June 08, 1998, TechWeb News IP Telephony: Is It An Answer To A Prayer? By Michael Elling Will IP telephony drastically reduce the cost of operating a telecommunications network and lead inevitably to lower prices for users? Supporters say that IP telephony will cut 30 percent off carriers' transport and switching costs. But 30 percent savings on 30 percent of the telecom business model translates into only a 9 percent cost savings, which hardly amounts to a revolution in communications. The savings is so minimal because telecommunications today is more than just technology. The underlying network now represents around 30 percent of the cost of service. The remaining 70 percent is split among marketing and operating costs and, it is hoped, taxes and profits. Unless IP telephony companies can get by without marketing and customer support, their cost structures mirror the companies they are supposed to make obsolete-major interexchange and local exchange carriers. Behind the IP telephony craze is the notion that packet switching will make the circuit-switched world obsolete. But store-and-forward data technology has yet to perform well in a real-time, two-way world for applications that can't afford latency: in other words, voice on narrowband networks or video and multimedia on broadband networks. Moreover, it remains to be seen whether the distributed world of router switching is better than the centralized world of circuit switching. What grew up in the private networking world may not be scalable to the demands of the highly complex public carrier market. In addition, IT managers also will demand quality-of-service guarantees on the increasingly popular intranets and extranets. As the mission-critical nature of these networks increases, telecom managers likely will want no latency and will buy a service that has a dedicated amount of bandwidth available over a certain period of time between two or more points. But isn't this the same, in effect, as circuit switched? Some communications companies promise a new future, but quickly will end up emulating the very carriers they are trying to make obsolete. These new communications companies are raising a lot of capital on expectations that might not be met. One thing for certain is that this process will result not only in much more network capacity, but a lot of marketing and operational overhead as well. What is not clear is whether there is enough demand to soak up this incremental capacity. Over 10 years I would say yes. But in the near term? That's the big question. Michael Elling is a managing director at Prudential Securities Inc. He can be reached at 212-778-4768 or Michael_Elling/RSCH/PSI @ccmail.prusec.com. Copyright r 1998 CMP Media Inc.