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Turning voice into data will remain a common ambition for the largest enterprises in 2005. According to Deloitte’s research*, two thirds of Fortune 2000 companies will have deployed voice over Internet Protocol (VoIP) either partially or throughout their company by the end of 2005.

Accordingly, there will be an overall growth in both the volume and value of business calls carried over VoIP. Much of this growth in usage will come from companies placing VoIP right at the heart of their business, rather than just technology-led trials.

Against the background of a rising rate of adoption, there is a good chance that VoIP will fail to live up to expectations in two respects: quality of service and return on investment.

In many ways the fledgling VoIP industry is in denial. Enterprises try to convince themselves that the cost reduction opportunities are significant, that the perceived quality issues don’t matter to end-users, and that their businesses are crying out for ubiquitous, integrated and unified voice communications and messaging. Similarly operators try to persuade themselves that they can immediately deliver VoIP at greater margin, and can offset any revenue reductions by “upselling” more sophisticated applications.

By the end of 2005, despite the increase in adoption, VoIP will remain, relatively speaking, a niche technology. Only a minority of businesses will migrate totally to VoIP. Quality problems will lessen but persist, with the key issue being the delivery of consistent levels of performance.

Problems will be exacerbated by a continuing disconnect between users’ expectations and suppliers’ promises. Business will remain confused as to the real value of moving towards VoIP. Is the primary driver cost reduction or accessing new functionality? Is early adoption a route towards competitive advantage, or a recipe for performance problems and user frustration?

The potential to deliver increased functionality with VoIP may offset performance quality issues, but few businesses will invest sufficiently in the business process and people dimension to be able fully to exploit potential benefits.

Few, if any, VoIP pure-plays will make money in 2005 as the business models remain immature and the macro-economics are at best challenging. Traditional providers will see lower margins than for switched voice services as they grapple with the largely unfamiliar technology with its service management implications, and little sign of the promised up-sell revenue coming from other converged applications until 2006.

Given the occasionally negative press that VoIP will receive in 2005, some enterprises will be put off taking the plunge, or from expanding their base of VoIP users. In the absence of a compelling event to drive an early migration, many enterprises will decide to forego the risks involved with VoIP-driven cost reduction, and opt to renegotiate their existing voice service contracts or to enforce tighter control on usage.

Many more will opt for a hybrid approach, using VoIP for internal desk-to-desk communications and a combination of Public Switched Telephone Network (PSTN) and mobile for external traffic. The truly conservative may also choose to wait and see what fixed-to-mobile convergence brings before committing to a strategy.

VoIP will be largely profit-free in 2005, and its prospects for future profitability will be muted by PSTN tariff reductions, particularly for the currently most expensive routes. This will be the case both for incumbent operators offering VoIP (where operators will compete with themselves) and for VoIP pure-plays.

VoIP faces three main challenges in 2005.

• Quality of service: While the last three years have witnessed a marked improvement in VoIP quality, for both consumer and enterprise services, there is still a noticeable difference between VoIP and PSTN quality. The VoIP industry needs to bridge this gap in order to stimulate more widespread adoption.

• Value for money. Operators offering VoIP need to provide more evidence that VoIP is better value for money than the PSTN. VoIP cannot become mainstream unless it can deliver better value than the PSTN for a wide range of consumers, including those that make frequent calls to mobile phones. At present VoIP works best for the minority of callers that make frequent long distance calls to PSTN. For enterprises, VoIP’s further take-off is contingent upon proven, rather than hypothetical, return on investment.

• Profitability. Selling at a loss is one way of gaining market share, but is unsustainable. Both VoIP pure-plays and part-plays need to show an improvement in profitability to ensure continued funding. One additional, though initially minor barrier to the take-up of VoIP in 2005, will be a growth in VoIP spam, facilitated by low-cost and free VoIP-based calls. The press will have a field day – but it will be little different from telemarketing.

* “Getting off the Ground: Why the move to VoIP is a decision for all CXOs”, available from www.deloitte.com/research/tmt

Dave Tansley is a partner (pictured left) and Paul Lee (pictured right) a research director at Deloitte.

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