----- Forwarded by Catherine Bachelier/NMS Communications on 19/08/2002 10:04 ----- I have copied below coverage in this month's issue of Communications International, quoting Brough in the section entitled 'Incumbent Legacy'. This follows his interview last month with the publication. Best regards Henny ---------------------------------------------------- Henrietta Valder Account Manager Brodeur Worldwide Tel: + 44 (0) 1753 448839 Mobile: + 44 (0) 7940 521 529 Email: hvalder@uk.brodeur.com --------------------------------------------------- Strategy: Voice over ip: Getting vocal 01 August 2002 The quality of voice over ip is improving fast and, on managed networks, is starting to provide similar voice quality. And some key business contracts show that users are beginning to trust the technology. How will incumbents cope with this further erosion of their voice revenues? Nathalie Raffray looks at the most likely scenarios for the future. In many countries competition is continuing to reduce prices for voice calls, leading to the rather simplistic argument that there will soon be barely any profit left in providing voice services. But it is a view partly backed up by at least one report, which recommends cable operators should abandon any idea of triple play offerings in favour of double play - by omitting voice services. "European cable operators should halt the rollout of telephony services in order to concentrate on what they do best - television distribution and broadband internet access," says Martin Duckworth, director of Coleago Consulting. "Telephony has high fixed costs, resulting in substantial investments and operating losses in the early years of operation. Hence the number of subscribers is low." No doubt true for now, but any predictions for the profitability of future voice services must include examining the impact, and potential profitability, of voice over ip. And there are plenty of people who think the death of profit from traditional voice services is already being over-exaggerated. "Voice lost a little excitement, as everyone wanted to talk ip, data and broadband," says Frank de Bloois, vice president of international carrier management for Global Crossing. "The market didn't think voice was interesting. Other things were more important, but the overall voice market and voice traffic is still addressable." And the profitability varies enormously between different countries. "There is a ton of money in traditional voice still," says Tim Parsonson, director of Storm, a South African alternative operator. "The profit and revenues will change as voice over ip comes in, which will substantially reduce previously exorbitant fees." Voice over ip is currently illegal in South Africa. While voice over ip is being seen as the way forward for some struggling alternative operators perhaps it may not become that ubiquitous. "Just as the pc was wrongly destined to signal the death of the pencil, so voice over ip will not signal the death of traditional voice services," insists Brian Mackow-Maguire, business lines product manager for NTL Business. "As services evolve there will be applications and markets for each to serve." INCUMBENT LEGACY Clearly incumbents currently have little incentive to heavily promote voice over ip. "There's a reluctance to spend money on new equipment and most are looking at their legacy networks," says John Greenwood, managing director of telecom services company Greenwood. "They aren't making big cash but the network's there and they are making money on it." Even though profit margins will remain low, he adds that they "would rather keep ticking over. People are keeping their heads down. (But) as people start offering new technologies, all of a sudden they will be hungry to add to theirs." Whilst most existing operators are dabbling with voice over ip, their general view is wary. "We can't see compelling advantages or assurances it can handle a large number of voice calls," insists Peter Morely, head of voice services at BT Ignite. "Voice over ip is very advantageous for data but voice should be treated in distinctive ways. You can't have delays in voice. We get a better cost base and overall profit (by continuing to use our switched network). We can and are continuing to make margins. We wouldn't be doing it if we weren't." Greenwood insists that the future of voice services is voice over ip. "Long term, voice over ip will be the major packet people want," he argues. But Brough Turner, chief technology officer of NMS Communications, a US telecom equipment manufacturer, doesn't believe it's that straightforward. He argues that any profit in voice will only go to the incumbents until there is decent competition. "It has to do with politics, not technology. Voice over ip or voice over tin cans, the technology for communications has been advancing for decades," he says. "In most countries there is only one carrier, sometimes two, but the original monopolist controls the subscribers. Logically voice should be dirt cheap. The wires are fully depreciated. The only reason people charge for it is because of the monopoly. It depends how long that lasts - probably forever, since competition hasn't been particularly successful." "Alternative carriers have been an effective threat in places that haven't involved the local loop," he adds. "There's a ton of money to be made providing voice over ip to Asia. A lot of traffic in Eastern Europe is voice over ip and a lot of developing countries are coming in to it. Voip has popped up wherever it's been able to work around regulation." The fact that some calls are part ip and part switched introduces another intriguing factor when trying to estimate the future likely profits of voice. "There is no such thing as an international phone call that doesn't touch ip somewhere," says Denis Murphy, vice president for Emea at Clarent. "Operators are slowly integrating and developing ip, but it's not as slow as it looks." Yet the fact remains that, when it comes residential users in particular, few companies are offering voice over ip. Sonera is one of the first operators to offer an ip residential service as an add on to broadband access. Since July, for $6 a month, subscribers can add voice to their internet service, after which they pay for the minutes, just like any normal switched call - and, rather surprisingly, at slightly higher prices than traditional calls. Rental lines on a switched network are generally around $10 a month and Sonera is hoping that the cheaper monthly fee will more than compensate for higher call prices. "The monthly fee is so much lower people will want to try," claims Jari Hakalin, director of broadband and internet services at Sonera. "We want to see the market reactions. There's more money in the residential market but it seems most companies don't realise that. There is a lot more expenditure (needed) with the corporates, for instance on marketing, so it isn't that fast (to market)." Voice over ip has already exceeded Sonera's expectations, says Hakalin. "We realise that there is better quality with this than with pstn. If there are any limitations it comes from the interconnect on the pstn side." He also believes that if other operators don't capitalise on the merits and growth of ip technology, it will be their loss. "It's something they have to take care of. If they don't do it, there'll be trouble, definitely." Out on the public internet, there are plenty of companies, such as dialpad.com, net2phone.com and phonefree.com offering voice over ip technology for customers willing to risk poorer quality for far cheaper call prices. Dialpad.com for example claims to have 14 million users. But the most obvious looking path to voice profitability is the corporate sector. Researcher group Analysys argues that voice over ip will cannibalise existing corporate voice revenues for operators, taking away up to $1.1 billion in revenues by 2007. It says that the return on investment as well as the cost savings offered by voice over ip will be an attractive offering for enterprises wanting to cut costs. "Voice over ip will change the way business users work," agrees NTL Business's Mackow-Maguire, "particularly for those spread across disparate sites on a national or even international scale." DEMANDING BUSINESS But BT Ignite's Morely insists there is no compelling advantage to voice over ip for the enterprise. "Maybe corporate networks can reach a configuration that allows voip to be carried alongside other voice traffic. They might be able to do this for smaller amounts of traffic. But I'm not convinced there's sufficient confidence in large scale billions of minutes. I'm not convinced the technology is solid enough." Corporates, however, may have other ideas. "The return on investment, as well as the direct cost savings offered by voice over ip, are seen as a significant factor in the increased takeup of the technology by the enterprise," says Jason Moody, chief operating officer at Convergent. "Corporations will now drive the telcos hard for voice over ip provision as they see the cost and functionality benefits. But we shouldn't ignore the fact that voice over ip directly attacks a big part of telco revenue streams. They are going to have to look at the business model carefully, never mind the technical integration and deployment challenges that will arise." UK based Purple Voice, a provider of next generation communication services for the financial trading community, is one of a growing number of companies ready to take advantage of this. It recently secured a contract to supply voice over ip to Bear Stearns & Co, covering several hundred desktops in New York. "Voice over ip will unquestionably bite into carrier revenues," says Neil Gray, chief executive of Purple Voice. "With software, anyone can log on when and where they like instead of having to dial up. It isn't bandwidth for nothing. You're using the efficiency and the costs are dropping." Stearns says that it can now supply employees with a greater choice of channels without the need for costly private wires, cabling infrastructure and the clutter of extra hardware. "The ip routes the packet to wherever you send it. It's resilient and flexible," adds Gray. "The drivers are so strong that churn will be for different reasons. The price breakpoint isn't the biggest issue. No-one's going to throw out switches, where the functionality is similar. But with voice over ip, the costs will drop and the functionality will increase." Purple Voice charges customers around $100 per month perdesktop for its software application, which exists on clients' existing infrastructure. Gray insists the software application works out less than a private wire, which requires a pstn connection and, he argues, typically costs about $800 to $1,000 a month. A private wire, working like a copper wire with a to b connections, is not equipped to take bandwidth from everyone, there's always the assumption that a number of people will be online at any given time. The inefficient use of the network results in the high charges. As voice over ip keeps growing in popularity and keeps improving in quality, incumbents may indeed find themselves in a catch-22 position. They can either do nothing and watch at least some of their profits being taken by smaller niche operators or eat into their own profits in order to try and stay ahead of the game. As Alan Taylor, technical director at Juniper, comments, running a telephone network is a high fixed cost where revenues are declining. "Incumbents are starting to look at how to move across to packet. Those that do nothing will hit a wall," he says. "Basically they are cannibalising their own revenues. But the way offices are connected is by the same provider so there's potentially a higher revenue. Incumbents like Belgacom and Telia are responding with plans for voice over ip services. "Right now, traditional voice is sustainable," says Steve Jackson, head of UK sales at Telia International Carrier. "It works, customers understand it, the cost base is well under control and our margins have flattened out. But we're not pushing against a move to ip at all. It will happen but who knows when. People don't trust it yet." On a wholesale level, Telia carried 1.6 billion minutes of international voice over ip traffic during the last six months. At some point later this year, Telia says it will launch voice prioritisation on ip vpns, but it does not have an exact date or price yet. So will voice over ip be able to be nestled in amongst other services with its low costs? It might depend on whether there are reasonable profits still to be made, even as the rates for voice minutes continue to decline. "In its early stages, you won't know it's happening. If you're calling overseas, you can be sure a part of it is packetised. That has the initial effect of reducing the network's costs and preparing that network for broadband," says Juniper's Taylor. "But voice is a necessary part (of any package). Without it you won't sell the service. The value of the sum is greater than the individual components".