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February 22, 2006 9:52 am

Can there be any future for traditional telephony?

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A seismic shift is underway in the telecommunications world where Voice over Internet Protocol has begun to make its inevitable move from the consumer realm into the mainstream as an enterprise service, and is beginning to consign traditional telephony to the dustbin of history.

For many years VoIP, or internet telephony, was considered too unreliable for general use by all but a few early adopters but now it is difficult to find large domestic or multinational companies that are not either in the process of adopting VoIP, or at least planning to layer voice services on top of their data networks.

The technology and financial services sectors that led the move towards converged networks and IP-based telephony have been joined by companies in almost every sector. Some companies, such as Boeing, the US aerospace company, have launched huge IP telephony projects.

Boeing announced plans two years ago to scrap 125 older phone switches and replace them with internet-based systems from Cisco, one of the leading IP telephony equipment vendors.

“As competition becomes fiercer across all industries, enterprises are pressured to control – if not decrease – costs,” said Taher Bouzayen, telecommunication strategies analyst for the Yankee Group IT consultancy, in a report published last month.

Mr Bouzayen argues that VoIP has already “shifted from an emerging technology to a critical business solution”, and forecasts that as a result, business VoIP services are poised to grow rapidly.

“The IT division, under which resides the management of communications, is an area that continuously seeks to cut costs by improving processes and consolidating networks. It also provides measurable cost savings [by drastically reducing long-distance toll charges, centralising the management of different sites’ communications platforms] and improves the manageability of communications.”

Nevertheless, many enterprises still view IP-based telephony cautiously, and limit usage to internal calls between branches or divisions. As a result many industry analysts predict that the migration to IP telephony will not be a wholesale swap of current PBX (private branch exchange) installations.

Rather, they suggest, VoIP's appearance in enterprises will be a gradual transition. Introduction of VoIP in enterprises typically happens in stages, according to ABI Research.

Often companies begin by putting in one IP PBX, and then if the system works out, extend IP telephony throughout the whole organisation. This approach also enables them to protect their often substantial investment in legacy systems.

An IP PBX switches calls between a VoIP and a landline user or between two traditional telephone users just like a conventional PBX but works with a single converged network instead of requiring separate voice and data networks.

Recognising this, leading IP telephony systems vendors such as Avaya have developed products that allow companies to migrate to VoIP gradually and integrate older style circuit switched systems with IP-based voice traffic.

Nevertheless, there are clear indications that the enterprise VoIP market is gathering momentum. For example, last year the IP PBX market again out distanced the conventional PBX market, which continued to trend steadily downward.

Infonetics, the market researcher, predicts IP PBX revenues will grow 24 per cent in the current quarter against the same period the year before, and that pure IP PBX revenue now accounts for more than 15 per cent of global PBX revenue.

Similarly, the Dell’Oro Group forecasts IP PBX shipments will reach 28m lines this year, surpassing TDM (Time Division Multiplexing) units for the first time.

The move to converged IP networks has been driven in part by cost considerations, but it has also been facilitated by improvements in quality of service and by the broader shift from circuit-switched to IP-based systems in the telecommunications industry.

For enterprises the benefits of operating converged networks and treating voice calls as simply another application running over an IP network lie not so much in reduced telecommunications costs now that the price of traditional circuit-switched calls have declined so much.

Rather, say experts such as Jon Arnold, an independent consultant and VoIP blogger, more important advantages are the significant cost savings from reduced network maintenance, greater flexibility and advanced features that IP-based telephony supports.

As a result he expects converged networks to continue to proliferate. “IP looks ready to deliver on a lot of its promise in 2006,” he says.

Mr Arnold also sees significant potential in the small and medium-sized business market and views the growing interest in IP-based telephony in this market segment as another indication that VoIP technology is maturing.

Often their interest in VoIP is triggered by particular business developments. For example, the need to deploy a VPN (virtual private network) for remote or home workers, or the opening of a branch office. “The idea of convergence is very attractive to them [SME’s],” says Barry O’Sullivan, general manger of Cisco’s IPC business unit.

This trend is fuelling the growth of a group of independent communications service providers and systems integrators capable of designing, building and managing IP-based systems for their clients.

In the UK, AT Communications Group attributes much of its growth to the demand from customers for converged IP services.

“We can provide our customers with a fully managed VoIP service,” says Alex Tupman, founder and chief executive. He says this is particularly attractive to small and medium-sized companies that lack the in-house expertise to run their own converged networks. Last year Mr Tupman says 93 per cent of ATC’s sales were based on IP technology. Significantly, managed or hosted VoIP services are among the fastest growing communications services on both sides of the Atlantic. As the Yankee Group’s Mr Bouzayen points out: “Through managed services, enterprises save on capital expenditure on equipment and infrastructure upgrades, as well as on management contracts.”

In the US, all the big carriers including AT&T (the former SBC Communications), Verizon Communications, Global Crossing and XO Communications, as well as systems integrators such as IBM, EDS and CSC as well as equipment vendors such as Cisco and Avaya now offer different varieties of business VoIP services.

Indeed, SBC’s recent acquisition of AT&T and Verizon’s purchase of MCI were driven in large part by their need to deliver an expanded range of IP based services to business customers.

“Not only are these players entering this market to respond to an enterprise need, but they also are following a revenue growth opportunity,” says Mr Bouzayen. Indeed, Yankee Group estimates the total US retail business VoIP market will grow more than 31 per cent between 2005 and 2010.

Put in perspective, the market research company estimates the business VoIP market would reach $840m by the end of 2005 and almost $3.3bn by 2010.

“The most anticipated growth will occur in the hosted IP space, where Yankee Group projects it to grow to more than $1.2bn in 2010 from $233m in 2005.” This is a CAGR of almost 40 per cent.

Dave Tansley, technology and telecommunications partner at Deloitte & Touche, provides a similar upbeat assessment, particularly of hosted services. “2006 will see two types of voice VoIP take shape, each following a markedly different path,” he says.

“Managed VoIP services, offered both by specialist VoIP service providers and mainstream telecommunications companies, should rapidly gain market share. These will largely look and feel like traditional PSTN telephony and may be positioned as affordable voice services, rather than internet or IP-based telecommunications, whose precise meaning few consumers understand.

“Using wholly-owned and professionally managed infrastructure, managed VoIP services should be increasingly capable of offering service quality on a par with existing PSTN operations. Tariffs should be highly competitive, but should still allow operators to generate positive cashflow and even profits.

“Managed VoIP is expected to increasingly become the technology of choice for internal office and campus networks, and in the medium-term is likely to earn a solid place in the corporate telecommunications repertoire. This should be good news for VoIP equipment vendors.

“It may also be beneficial to telcos who have traditionally occupied the corporate voice market – many of which have now folded VoIP into their service portfolios and are happy to see unprofitable intra-office legacy networks converted into marginally profitable VoIP networks. But in contrast to many others, he warns that carriers’ consumer-orientated VoIP services still face challenges. “Ad-hoc VoIP, which uses the open internet as the service platform, may struggle to gain a mass market, revenue-generating following,” he says.

“Though subscriber numbers should rise rapidly, usage and revenues may well remain low, largely due to extremely low tariffs and marginal service quality [and the type of customers attracted to such a low-end offering]. “More than ever before, the threat posed by VoIP may be over-estimated by many traditional telecommunications firms. Many may assume that VoIP will aggressively eat into their share of global voice minutes – and cause their margins to erode rapidly.”

Thus, despite the excitement caused by eBay’s purchase of Skype last year, and the announcement this month that Vonage, the pioneering US-based consumer VoIP service provider, is seeking an initial public offering, Mr Tansley predicts: “In all probability VoIP should do neither during 2006 – as it is likely to constitute less than 1 per cent of total voice volumes and revenues.” Indeed, as he notes, several market research firms are already scaling back their forecasts for the impact of consumer VoIP on traditional carriers.

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