phoneplusmag.com
Major Carriers Ready as Internet
Telephony Prepares to Soar
By Gary Kim
Only a small portion of today's $71.2 billion of domestic U.S. long
distance phone calls are made using Internet Protocol (IP) software.
Quality and ease of use are clear problems, so far. So most observers
don't think IP-based telephony will be that big a deal in the near term, at
least in the domestic U.S. market, where pricing already is competitive.
Over the next four to five years, the potential impact of IP voice and fax
is valued at a few billion dollars, according to industry analysts.
But that isn't the case for international communications, where the
opportunities for pricing arbitrage are much higher. As the growth of the
international callback market suggests, there's significant room for
lower-cost calling options. The international fax market alone is estimated
at $25 billion, according to Arthur D. Little director Martyn Roetter.
Last May, for example, VocalTec, Ltd. announced that Taiwan
Telecommunication Network Services Co., Ltd. (TTN) would be
offering an Internet telephony service between Taiwan and the United
States. TTN is the fourth national communications company--following
Telecom New Zealand, Dacom Corp.'s Dacom International subsidiary
in South Korea, and Telecom Finland--to offer Internet telephony
services based on VocalTec's products, says Elon Ganor, VocalTec
chairman and CEO. "TTN customers spend 10 million minutes per month
calling the United States," says Joseph Chou, TTN president.
Watch for the four largest U.S. long distance carriers to move cautiously.
They will be in no hurry to promote a technology whose effect will be to
put greater pressure on profit margins. Nevertheless, all of the major
carriers are positioning for IP voice and data.
IP voice and fax will siphon off about $3 billion a year in long distance
revenues by 2004, or about four percent of U.S. long distance revenues
in total, says Christopher Mines, senior analyst for Cambridge,
Mass.-based Forrester Research Inc. Of that amount, about $2 billion is
IP telephony revenue paid to carriers, while another $1 billion represents
avoided cost for U.S. companies, says Mines.
In terms of traffic volume, "the Internet will pass by the phone network
sometime around 2000 or 2001," says MCI executive Vint Cerf. "Pretty
quickly thereafter, voice will really just be ancillary traffic."
The Internet telephony market could grow to 16 million users by 1999,
say International Data Corp. analysts. Though Internet telephony market
revenues stood at only about $3.5 million in early 1996, revenues could
skyrocket to $560 million by 1999, IDC analysts predict. Analyst Jeff
Pulver, Pulver.com owner, also believes that Internet telephony software
and hardware will be a $500 million business in 1999, up from $80
million in 1997.
What all this means for the largest tier of carriers is:
An expedited shift to fast-packet transmission as business
customers put voice and data onto a single infrastructure, using
either IP voice or voice over frame relay and asynchronous
transfer mode (ATM) networks.
Increased pressure on carrier service revenue margins.
Mileage-insensitive tariffs.
Wider use of IP for store-and-forward applications, especially fax
and messaging.
Look for a move to IP faxing before IP voice, especially by firms with
heavy international fax traffic, says John Wilson, vice president at
Toronto-based brokerage concern Bunting Warburg Inc. "Fax may
represent 20 percent of the bits carried over the wide area network,"
Wilson says. "Corporations will move their data traffic over to IP, and
then it'll make sense to put the fax traffic on the same network."
IP voice, on the other hand, will be slower to develop, primarily because
of latency and delay issues which now afflict IP networks. Innovations
such as the Resource Reservation Protocol (RSVP), which will offer
quality-of-service guarantees, will be a major development in that regard.
"We're at least three years away from cost-effective offerings and much
longer than that before IP voice can be rolled out on a large scale,"
Wilson says.
Most of the IP telephony activity will be driven by businesses who "see
broad possibilities in connecting their PBX systems to IP networks," says
Mines. While few big companies are making major commitments yet,
close to half of 50 companies interviewed by Mines expect to experiment
with IP voice and fax within the next two years.
Domestic U.S. calling patterns probably won't drive the market,
however, in large part because rates already are fairly compelling and
look to get even more attractive. But three types of traffic seem
especially well-suited for IP transmission:
International traffic, to arbitrage artificially high tariffs;
Fax, because it is tolerant of transmission delays;
Intracompany traffic (internal networks can manage quality more
predictably).
Hilary Mine, Cedar Knolls, N.J.-based Probe Research senior vice
president, is a bit more optimistic, suggesting that by 2000 the U.S. IP
voice market could amount to 5.8 percent of the total minutes of use.
That would represent about 32.2 billion out of a total 555 billion minutes
of use. By 2001, IP voice could represent 7.1 percent of the market, she
says. By 2005, the percentage could skyrocket to 30 percent.
But IP voice and fax are just part of a larger shift of voice traffic to fast
packet transport, such as voice-over-frame relay, Mine says. "End users
don't want to manage two separate networks (voice and data) and
voice-over-data works," she says. With new international standards
being settled, equipment should be in place within two years. Once that
happens, the major U.S. carriers will roll out IP voice over their own
networks. "AT&T has built the models," Mine says. "They know how to
do it and what it'll cost. They'll deploy when they have to." Moves in the
IP telephony direction already are underway. In late July, for example,
AT&T and VocalTec Communications Ltd. announced an agreement
with ITXC Corp., a new company that will provide interexchange
services to Internet telephony service providers (ITSPs). ITXC, stands
for Internet telephony exchange carrier, and its new CEO is Tom Evslin,
the AT&T vice president formerly in charge of AT&T WorldNet, that
firm's Internet service provider business.
MCI earlier had announced VAULT, its architecture for providing
Internet fax and messaging, collaborative multimedia and integrated
Internet and voice capabilities. VAULT converts communications traffic
into IP packets and then sends the packets over MCI's Internet
backbone using a single line, rather than using separate lines and
networks for data and voice.
Like MCI, a major underlying carrier for Internet traffic, Sprint stands to
gain from an upsurge in Internet traffic and is itself working on integrating
IP voice, audio and call center applications into its existing network.
WorldCom, partly on the strength of its UUNet and Metropolitan Fiber
Systems acquisitions, has announced a major IP fax initiative. The idea:
detect fax transmissions originating on the circuit network and route them
to the Internet. Messages then are routed to a WorldCom point of
presence (POP) and converted back to standard fax format for delivery
at the destination location.
Lucent Technology, for its part, is developing a new Internet telephony
server SP (service provider) that is scheduled for general availability this
year. The system is in field testing by MCI and France Telecom. Lucent's
new server will enable service providers to offer customers the option of
placing voice and fax calls using either the public switched network or IP
networks, including the Internet.
In addition to Lucent's new entry, Siemens Stromberg-Carlson, Boca
Raton, Fla., is developing Internet telephony servers for carrier/ISP
networks, in conjunction with networking firm 3Com. A similar
partnership unites Alcatel and Cisco Systems.
Nortel, for its part, is developing IP voice capabilities for integration with
its family of private branch exchange (PBX) products, says Phil Edholm,
Nortel business development director. In one configuration, a standard
Meridian PBX is connected to an enterprise local area network (LAN)
using an IP voice gateway. IP voice then can be sent out over an IP
network using a Magellan ATM switch.
Lucent, Nortel and Siemens also are working with the Electronic
Messaging Association to set standards for sending voice mail and fax
attachments over IP networks. This would save companies money by
moving their voice mail systems to the Internet or private IP wide area
networks.
Others are less certain IP fax or voice is an immediate concern. Pacific
Bell Chairman David Dorman, for example, believes IP will emerge "as
the de facto standard of business communication." But Dorman doesn't
think that necessarily translates into robust IP telephony usage. He does
acknowledge, however, that "it could be a threat, eventually."
Still, PacTel executives acknowledge the IP market's potential.
According to Michael Fitzpatrick of Pacific Telesis Enterprises, traffic
through the West Coast network access point grew four-fold in 1996.
Fitzpatrick estimates that MCI's backbone traffic grew 15-fold in 1995.
In 1996 the number of commercial World Wide Web sites grew by an
order of magnitude, from 23,000 at the end of 1995 to 220,000 by the
end of 1996, according to IBM Chairman Louis Gerstner. SBC Vice
Chairman Philip Quigley is even more bullish, estimating there are now a
minimum of 4.5 million Internet host computers, and more than 100
million electronic mail (e-mail) addresses in use in the United States.
All of that leads some to project that the number of U.S. consumers using
IP networks (primarily the public Internet) will climb to 40.8 million
households by 2000, says New York-based consultancy Jupiter
Communications. That would represent no less than a third of U.S.
households. Cisco Systems executive Mike Heller says the number of
worldwide Internet users was 45 million in 1996, with a growth rate in
excess of 200 percent.
To be sure, not many consumers will want to mess around with
PC-based calling. But that isn't the point. IP calls initiated and terminated
on a standard telephone set is where IP telephony is headed. Look for IP
telephony companies to emerge in 1999, say researchers at Forrester
Research. By 1999, 28 million U.S. consumers and 800,000 businesses
will be using the Internet.
Theoretically, at least, IP telephony offers new competitors a lower-cost
way to enter the long distance market. IP telephony ought to cost less for
several reasons. Signal compression and packetizing, for example, can be
used to reduce the raw bandwidth needed to transport voice and fax
signals. Montreal-based Voice and Data Systems, for example, says it
can send 16 simultaneous faxes on a standard telephone line, reducing
costs by 90 percent.
IP bandwidth also can be bought in bulk, as DS1s rather than 64 kbps
circuits, for example, and shared. And though the ultimate resolution of
the access charge exemption for ISPs is unclear, any access fees
probably would only add a penny or so a minute to the cost of an IP
telephony call. America's Carriers Telecommunication Association
(ACTA) estimates the average long-distance phone call comes to 22
cents per minute, while the average Internet call costs 3.3 cents per
minute. |
