Surveying The Year Ahead

VoIP, Video Offer New Hope for 2004

Moving into the new year, it appears that the “nuclear winter” in telecom has passed, with most people believing that industry stabilization has begun. Conventional wisdom is that additional consolidation — and probably bankruptcy — are still to come. But, in general, although capex is expected to remain flat in 2004, and the job outlook remains grim, most people seem convinced that this industry is finally on the right track.

The service providers’ push to be lean operators continues, but with all the talk and activities around service bundling, the success of DSL, adding video to telco portfolios, expanding managed service offerings and new-generation wireless, there also seems to be a clear understanding that public network operators need to expand into new areas to drive revenues going forward. And there’s even some actual excitement in the industry — this time around VoIP, PON and video — the likes of which we haven’t seen in many moons.

An upstart called Vonage Holdings Corp., which offers best-effort VoIP service to residential and small business subscribers, has whipped up a frenzy around VoIP in recent months, having created what looks like a resurgence for this fallen-star technology.

“Vonage came along and essentially made the market real,” says Tom Valovic, program director for IP telephony at research firm IDC. “The big buzz about Vonage is it fulfilled the promise that has been talked about in the industry for many many years: the potential to essentially disintermediate the telcos — cut them out of the loop.

“In response to Vonage, now large carriers are talking about a response,” he adds. “I know AT&T is.”

Vonage, which just raised $35 million in new financing, as of late last year had more than 70,000 lines in service in 100 U.S. markets and says it is adding more than 10,000 lines per month to its network. A handful of other VoIP upstarts, including 8x8 Inc.; Skype, a peer-topeer- based free Internet calling service founded by the guys who started file sharing software company KaZaA; voiceglo, which offers a phonebased service more in line with what Vonage is doing; Cbeyond Communications, which sells VoIP services to small businesses; and Kancharla and Volo Communications, which offer wholesale IP voice services to other service providers, are also helping to keep the VoIP fires burning.

The incumbent telephone service providers have also begun to make moves both big and small into VoIP, driven by the threat of the newer service providers, the popularity of IP PBXs in the enterprise and their own desire to expand their managed service portfolios.

For example, Qwest Communications International Inc. last month expected to launch a small, free trial of residential local IP voice service; and in November, it had announced separate plans to use Lucent Technologies Inc. equipment to aid in its eventual migration to deliver IP-based voice services. The carrier had planned to do a small residential trial of local IP-based voice service in Minneapolis — where Vonage is already offering VoIP services. Between 100 and 200 subscribers will receive the service for free, according to Claire Maledon, spokeswoman for Qwest.

More significantly, SBC Communications Inc. expects to deliver hosted VoIP services to businesses in cities across the country by the end of this year. The new, nationwide hosted VoIP business product — which effectively replaces the more limited IP Centrex SBC has been selling the past few years on a by-request basis — is now available in select markets and will be in cities nationwide by the end of 2004.

Valovic says SBC “has definitely been the most aggressive [RBOC] with respect to hosted voice.” IDC is predicting 2004 “will be breakout year for VoIP in the enterprise, with continued deployment of IP PBX, increasing mindshare of IT and telecom departments, and more activities in hosted services. Every market has a tipping point where you say ‘OK this market is real.’”

Further supporting that statement, TELUS, the largest telecommunications company in Western Canada and the second largest in the country, recently revealed that its hosted and managed IP telephony service in Canada called IP-One is now handling more than 1 million calls.

And a study by Frost & Sullivan notes that “recent announcements by Sprint about finally deploying Nortel’s packet technologies for Class 5, as well as BellSouth’s decision to move ahead with VoP (voice over packet) for Class 4, provide good evidence that major carriers are ready now for next-gen.”

Of course, the VoIP action isn’t limited to North America. For example, Taiwan’s Chunghwa Telecom recently announced it is using Nortel Networks’ equipment to help transform its network to a packet-based infrastructure, and to position itself to drive new revenue opportunities.

The jury is still out on how aggressively the cable companies, which with all their CableLabs VoIP planning were expected to be early comers to this arena, will be with VoIP in the year ahead.

Jon Arnold, VoP program leader for Frost & Sullivan, thinks the MSOs will be “the prime movers of competition in their markets with VoIP services,” noting that cablecos including Comcast, Cox and Time Warner Cable have already been doing trials of the technology.

Valovic disagrees. “I just don’t think cablecos will do much with VoIP in 2004,” he says. “Comcast was making a lot of strong statements about moving into VoIP and cable telephony, but has since moved back somewhat. Cox is really the one to watch currently.” Valovic adds that some equipment vendors have had difficulties in the cable VoIP market, “and often that is a good bellwether for what is happening. Sonus Networks Inc. is backing out of cable VoIP.”

Sonus Vice President of Marketing Michael O’Hara tells xchange that his company is not backing out of cable, but rather that it is focused today more on access development in Asia and in voice over broadband applications like Vonage is doing. Those are two areas where Sonus sees activity today. Meanwhile, Sonus believes the cableco market for VoIP won’t develop before late 2004 or early 2005.

In any case, IDC forecasts that the total market for VoIP equipment will reach $15.1 billion by 2007, with a compound annual growth rate of 44 percent. For service providers, the VoIP services market is expected to reach $11.3 billion by 2007, with a compound annual growth rate of 27.2 percent, according to Gartner Dataquest.

“VoIP is gaining tremendous traction in the enterprise space, and we expect that will grow throughout the coming year into the service provider space,” says Bob Warstler, president of global sales at Lucent Technologies Inc. “Any kind of equipment surrounding and supporting this technology from phones to networking equipment will experience growth.”

Despite “a lot of false starts,” the VoIP industry is turning around now because the technology has evolved to become “carrier grade, or is close enough,” says Arnold, and consolidation — or at least partnerships — among the IP voice vendors is creating more complete solutions. For example, he says, signaling company Tekelec has acquired next-gen switch vendor Santera; access vendor UTStarcom bought CommWorks; ECI Telecom and NexVerse Networks combined to form Veraz Networks; and there have been a host of interoperability deals forged among different equipment companies in this industry sector.

Of course, the regulatory environment for VoIP remains a question mark, but the FCC so far has taken a hands-off approach, apparently to give the technology a chance to take hold in the marketplace. “The clear message thus far, particularly with the Federal Court’s stance towards Vonage in Minnesota — is that VoIP is not subject to regulation,” says Tom Kershaw, CTO of vendor SS8 Networks. “Until 2003, this had been implied but not explicitly stated. Now that it seems to be close to an official policy, this could spur more investment in that area. The key reason for this is taxes — since as much as 20 percent of your phone bill is tax, VoIP providers have an undeniable cost advantage over landline carriers.”

But in November, FCC Chairman Michael Powell announced plans to look at how to regulate Internet-based phone companies this year. Meanwhile, more state regulatory commissions are starting to consider whether and how to regulate VoIP.

“The VoIP debate promises to be every bit as significant as the Triennial Review for the longterm future of telecommunications,” opines Warstler. “Whether the debate will be completed during 2004 remains to be seen.”

Clearly, video is the other technology that has gained renewed vigor in recent months as the RBOCs have moved forward with DBS resale deals and early PON network plans, in an effort to support video among other services. Meanwhile, some independent telcos have moved into video services and more are looking to join those ranks. All eyes will be on the RBOCs this year as they decide how and when to deploy PON-based FTTP networks.

“We believe 2004 will be an investing year for the industry, in the area of FTTP, as operators try to get their basic FTTP infrastructure deployed,” says Corey Geiger, vice president of marketing for Advanced Fibre Communications Inc., the vendor that won the active-component PON business from Verizon, the first RBOC to announce its PON equipment providers. “We probably will not see broad momentum through initial deployments in this area during 2004, but groundwork will be laid for FTTP-based services.”

On the marketing side, Geiger says there still is room for more aggressive pricing and packaging by telcos that are offering services in competition with cablecos, particularly as DSL coverage rates increase, and as FTTP is used as a marketing tool against the cable companies. “Will it put pressure on margins?” asks Geiger. “Yes, that’s probably inevitable but, in 2004, it won’t be broad, but rather very targeted regions where DSL coverage is being improved or where FTTP-based access is deployed. Also, the RBOCs view FTTP as a technological edge, as an infrastructure for delivering bundled services over a wireline network, compared to what the cable companies currently offer. That’s really significant because this will up everybody’s game; it will be interesting to see how the cable companies react to FTTP.”

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