Overview

John Lennon once said, "Life is what happens to you when you are making plans to do something else," and as an aphorism, it captures the essence of what IP telephony is doing to the traditional telecommunications industry. In the early 1990s, the federal government gradually loosened its controls over the Internet, with consequences unimagined by telephone companies—or society as a whole. Today, the few remaining Baby Bells find their stock price languishing, and a giant like AT&T is brought to its knees because the business models that have worked for seventy years no longer fly.

There are many ways to measure communications volumes, such as connections, lines, bits, and dollars. All of the measures are subject to interpretation and dispute, but there is no question that data communications is growing much more rapidly than voice. Voice traffic grows at roughly the rate of the gross domestic product (GDP), which in good years means a ten to twelve percent growth rate. Data, on the other hand, has been growing at an annual percentage rate in the triple digits since the early 1990s. At the same time, the cost of transporting a megabyte has declined.

If the cost of transporting data declines as volumes increase, why continue to consider voice as a separate form of media requiring its own network, rather than treat it as just another form of data? The answer is a surprise to no one—phone companies have a sunk investment in the circuit-switched infrastructure and a revenue model based upon selling voice service.

If the world’s networks were created anew today, the costs of providing a telecom service would be dramatically different. There would be:

• No investment in obsolete technologies,
  
• No need to maintain compatibility with older equipment, and
  
• No pre-conceived expectations on service quality.

Fiber would reach into every home and business and the backbone network would be far simpler (with only enough multiple paths to assure against failures.) Voice, along with all the other media, would be transported in packets throughout one converged network.

Fortunately or unfortunately, this "greenfield" scenario doesn’t exist. We have hundreds of large telecom corporations employing millions of people with a market capitalization that exceeds a trillion dollars, all relying on the status quo, and we have lethargy on the part of the average consumer. In fact, some consumers will be very reluctant to accept a packetized voice service. One of the key assumptions in the greenfield scenario is that users would have no pre-conceived expectations regarding the quality of their voice service. In reality, users have many expectations in terms of sound quality, reliability, and availability. The success of many of the largest carriers is keyed to meeting these expectations. Hence, substituting high quality circuit-switched voice with a lower-cost packet-switched solution that is even marginally inferior is not easily done.

The first implementations of voice over packet (VoP) in major enterprises already reflect these realities. Companies provision their own services through private branch exchanges (PBXes) by installing gateway devices that use the existing telephone equipment to provide basic VoP services and use the data network for transport. These implementations tend to be either voice over Internet protocol (IP) or voice over frame relay. The implementations avoid Internet reliability and performance issues because they use bandwidth purchased from service providers with minimum performance requirements specified in service level agreements (SLAs). Voice over IP (VoIP) services offered to consumers are more basic, and are often provisioned through prepaid accounts or prepaid calling cards. Lower quality of service, resulting from the use of the "uncontrolled" Internet, is accepted in order to get better pricing.

The Technology

If the new decade is witness to the end of separate voice and data networks, so too will it see the end to pronounced differences in the rate new network technology adoption. Traditional telecom equipment vendors are developing data networking equipment in-house and acquiring more technology through acquisitions. The formerly telephony-oriented equipment vendors such as Lucent and Nortel are now offering their own integrated voice/data products, such as Internet-enabled call centers, which allow users to contact a business’ call center by clicking on an icon on a Web page. Telecom equipment vendors are actually accelerating the rate of technological change—especially in VoP—as they introduce architectures that allow enterprises and service providers to retrofit old equipment and provide gateways between data and voice equipment.

The data networking and personal computer (PC) industries have also been instrumental in driving the convergence of networks. For example, as the dominant player in software and operating systems for PCs, Microsoft bundles many new multimedia capabilities with each new release of Windows. Windows 98 includes NetMeeting, a voice and data conferencing product, and NetShow, a video streaming product. Windows 2000 has a telephony application programming interface (TAPI) 3.0, that has built-in H.323 and IP multicast support, allowing the computer to work with a variety of telephone systems. Since Microsoft products are shipped with virtually every computer sold, voice over IP capability will be on the desktops of tens of millions of users over the next few years.

The rate of change will also be affected by the fact that the best minds in the data and voice equipment industries are now focusing on improving the performance of converged networks.

The Market

In this study, Insight looks at the impact that VoP is having on traditional circuit-switched voice communications. Our definition of VoP includes all packetized voice including voice over IP, voice over frame relay, and voice over asynchronous transfer mode (ATM), plus combinations (e.g., IP over ATM transport.) The protocol used may be based on any of the standards such as H.323, session initiation protocol (SIP) or media gateway control protocol (MGCP), or a proprietary protocol. As long as some portion of the call is packetized—either its origination, transport or termination—it is considered a VoP call.

Continued deregulation and opening of markets worldwide will stimulate the spread of VoP. Over the next five years, these VoP technologies will take an increasing share of the world’s telecommunications service revenues. From a mere $870 million in 1999, VoP-based services will grow to just over $98.7 billion by 2004. While $98.7 billion seems like a huge number, it only represents a small portion of the voice revenues received by service providers. Should the major interexchange carriers (IXCs) move more quickly to migrating their core infrastructures to ATM or IP, VoP service revenues will grow more rapidly than forecast. The upside potential for VoP is enormous, especially as data traffic now exceeds voice traffic volumes.

Back to Top