RECLASSIFYING SOFTSWITCHES

The softswitch market is officially in shake-out mode. Softswitch solutions originally intended for Class 5 replacement or Internet offload have not given a crowded vendor community enough sustenance. In particular, the ongoing drought of capital spending still affecting the RBOCs and other large telcos is taking a toll on a market that has been holding its collective breath while waiting for signs of mass softswitch deployment.

Recent industry news bears this out. In a move that will have significant repercussions on future softswitch deployment and vendor competition, Lucent Technologies announced last month that its efforts to consolidate product lines will result in its pullout from the softswitch market (Telephony, Oct. 28. p. 10).

“That could be a big guy out of my hair,” said John St. Amand, founder and CEO of Telica, which has had some success implementing its packet switches at Bell companies. As one of the few vendors that still focus on the RBOCs as its primary sales target, Telica may have the most to gain from Lucent's withdrawal. Though Lucent's move has more to do with the company's poor financial health than anything, it also points to the fact that many existing Lucent circuit-switch customers were not aggressively migrating to packet switching or softswitch applications.

Another recent piece of news that could signal change in the softswitch market is the merger of softswitch vendor NexVerse with ECI Telecom's ECI-NGTS, an international media gateway provider. The merger, which will close in the coming weeks, ostensibly gives NexVerse a strong partner with which to pursue international carrier contracts, said Amit Chawla, CEO of NexVerse and vice president of marketing.

The deal also indicates that softswitch vendors must chase new market opportunities — new customer targets, geographic regions and applications — to survive. And along with the economic realities of the current market, new market needs could drive major consolidation among softswitch vendors.

“There will be fewer suppliers,” St. Amand said. “This economic downturn will have a cleansing effect. Carriers and their projects have been consolidated, and vendors will, too.”

The financial straits at many telcos are the root cause of changes to the softswitch market. Some vendors that originally developed softswitches to pursue circuit-to-packet migration projects and replacement opportunities at large domestic telcos have scurried to other market segments as those telcos downsized such costly projects or put them off entirely.

“Tandem replacement was a popular application for a while, but the demand really hasn't been there yet to replace older switches,” St. Amand said.

Mike Borsetti, executive director of the International Softswitch Consortium, said that although much current adoption looks like replacement work, in reality “the softswitches are displacing lines, not the circuit switches themselves.”

Consequently, vendors are looking elsewhere for business, and rural carriers and independent operating companies are becoming increasingly popular targets. Many softswitch contracts announced within the last few months have been awarded by rural carriers and other independents.

The top reason these smaller firms have become a hot target is obvious: They have money to spend. “In the U.S., the market of interest is small carriers; that's where we're seeing RFPs and RFIs,” said Dkarma Kuthanur, director of product marketing at NexVerse.

Unlike larger telcos, some of the rural carriers are moving cautiously ahead with packet migrations. Utah-based Beehive Telephone recently announced the deployment of nine packet softswitches from Taqua to replace three larger Class 5 Harris switches. Jody Bennett, vice president of marketing at Taqua, said many rural companies doing Class 5 replacement not only want to support their traditional telephony services more efficiently, but also want to be ready for an eventual move to IP.

Many rural firms have the luxury of buying now for what they may need to support later, while most big telcos are using the majority of their capex budgets just to maintain existing facilities.

Though independents have been victims of depressing economic conditions just like everyone else, their usually modest spending habits have allowed them to continue investing, and Wall Street has not punished them as harshly as it has the Bell companies for poor financial performances.

According to market reports, there are about 45 million rural lines in the U.S. — about 15 million of which belong to independent telcos. The customer base is less than 10,000 lines, and the average switch is 17 years old, giving hope to the replacement market.

“The replacement market is worth about $8 billion,” Taqua's Bennett said.

Despite the smaller contracts, vendors such as Taqua and Nortel Networks are committed to the rural market. “For us, getting revenue from a lot of smaller players is like the difference between hitting home runs and stringing together a lot of base hits,” said Ron Kunkel, rural markets manager for gateway and independent carrier marketing for Nortel.

“We are a 2500-line switch built for this market,” Taqua's Bennett said. “Others' switches are too big. There is too much costly unused capacity. They can't make money in this business.”

While the rural carrier base is providing some hope for softswitch vendors, there are a few other enticing market segments that seem ready to pursue applications beyond TDM replacement. International potential drove the NexVerse/ECI-NGTS merger, and it has stirred vendors such as Telica into thinking about international partnerships. Many international carriers, such as Equant, have been more progressive in offering IP voice services than U.S. carriers.

Also, NexVerse's Kuthanur said his company has seen limited wireless network opportunities. “It hasn't matured. There are a lot of capital problems in wireless, as in wireline,” he said.

However, according to one vendor, you may just have to know where in wireless to look. Winphoria, which markets a softswitch-based MSC architecture and is the only vendor focusing on softswitch opportunities in wireless, has had early success running push-to-talk applications off its product — and other vendors' softswitches — for wireless carriers.

“Many switch vendors are beginning to look at the wireless space, and it's totally foreign ground to some of them,” said Mike Champa, CEO of Winphoria. “In most cases, we cooperate with the pure softswitch vendors because we can run on them as an application.”

Rural, international and wireless opportunities may be giving softswitch vendors some validation, but Telica's St. Amand said it's foolish for vendors to turn away from the RBOC market to focus on rural carriers. “I think that is a tragic mistake,” he said. “The RBOCs still control 80% of the access lines. They are crucial customers.”

While large telco circuit-to-packet migration has slowed, several new enterprise applications — most notably PBX management, IP Centrex and voice over IP for the enterprise — are kicking in. New deployment models and applications can give the hungry vendors new selling points as they hunt for elusive contracts.

“We are beginning to see enterprise applications,” NexVerse's Kuthanur said. “You could use a softswitch to collect multiple locations of IP PBXs within a large enterprise. If the office locations are far-flung, it would be better to hire a carrier to manage them via a softswitch, which would also provide more enhanced services for the enterprise.”

Such an application could be a boon for carriers looking to crack the enterprise business for a new revenue channel, as well as move out of their home territories incrementally. “Carriers are trying to get more revenue by increasing the size of their pie by getting into new territories,” said Mark Jackson, manager of product marketing at Nortel. “They are trying to first pick up any out-of-region branch offices of their in-region customers.”

While that model is more applicable to large, distributed enterprises, softswitches can also help carriers breach smaller enterprise opportunities.

Tony Surak, executive vice president of marketing and sales at TalkingNets, said the carrier uses softswitches from Sonus and TTI with Broadsoft feature servers to provide IP Centrex and other applications. The architecture keeps the company's market entry costs low, Surak said.

Wireless LANs present another potentially hot enterprise application in which softswitches can play a role. Nortel's Jackson said whether a LAN is wired or wireless shouldn't make much difference to a softswitch. “Wireless LANs are just another access technology,” he said. “The softswitch is really agnostic in what it supports at other layers.”

These new applications expose carriers, vendors and users to an exciting new world. But they won't create huge windfalls for the market, and their migration to mainstream use could be as slow and cautious as anything else. That's why softswitch vendors have to apply the same logic they use in retaining support for TDM to the enterprise applications environment. While enterprises may have great interest in IP voice or IP Centrex, they probably won't leap in to enterprise-wide deployments.

“You want to be able to get multimedia services in the enterprise but have the flexibility to do that in conjunction with a packet phone, soft client or an old, black phone,” Nortel's Jackson said.

As telecom capex has tightened and softswitch deployment has arrived more slowly than previously thought, vendors have pressed for any piece of reliable market knowledge they can get their hands on.

One lively forum for information exchange has been the softswitch consortium meetings run by Borsetti. He said ISC meetings have evolved away from issues like technology interoperability and toward market discussions.

“Carrier members can talk about their goals and problems. It's individuals trading information about what's hot, what's not, and it's not a bunch of canned presentations,” he said.

The ISC also has initiated several rounds of market research with The Yankee Group to give its members more market guidance. The research consists of interviews with 80 to 100 wireline and wireless service providers worldwide about their deployment plans, technology perceptions and how long they'll continue purchasing TDM equipment, Borsetti said.

Various market segments and new application trends are giving throngs of softswitch vendors some much-needed business and hope for the future. Yet like every vendor looking to attain profitability and grant its investors the returns they were hoping for at the dawn of the softswitch era, they need an industry turnaround. And though there are some firms that focus strictly on rural carriers or international markets, the key to this turnaround will be the return to healthy infrastructure spending by the RBOCs.

As Telica's St. Amand pointed out, the RBOCs still represent the king's ransom of network spending. There have been signs that they will begin to moderately increase capital spending, such as Verizon Communications' recent pledge to invest in enterprise networks. But it looks like vendors will have to keep testing their patience. Even if network investment resumes, they will still have to deal with languid RBOC purchasing practices.

“RBOCs always test for 18 to 24 months, and integration takes a while,” Santera's Martin said. “For people to get to the next generation, it's not so much an infrastructure issue as a legacy integration issue.”

“New network investment will be all about organic growth. $9 billion in revenue has disappeared from the telecom industry,” St. Amand said. “These companies have to spend their money more wisely than ever.”

RURAL MARKETS: NEW SOFTSWITCH HAVEN

Just because many of their old switches work fine doesn't mean rural firms aren't ready to move into the future. “The pride of the rural carrier is equal to or greater than that of the RBOCs, and they want to provide their customers the best possible services,” said Ron Kunkel, rural markets manager for gateway and independent carrier marketing for Nortel Networks.

In addition, rural telcos — a segment that numbers some 1200 companies across the nation — receive financial assistance from the federal government, which encourages them to continue spending in network infrastructure improvements.

The Rural Utility Services initiative is a program that sets aside federal money for rural companies in telecom and a variety of other industries. Rural telcos get the RUS funding to spend specifically on network projects intended to give rural users the same degree of modern service and quality their more urbane counterparts enjoy.

“If they don't invest, they don't get funding through the RUS,” Kunkel said.

Vendors have to get all products deployed by RUS-funded carriers certified by the program. The testing process lasts a minimum of six months and could take up to a year or more, but the certification process can begin after deployment.

“The program runs you through a specific set of test cases to ensure the product is reliable to deploy for rural requirements,” said Tricia Nelson, director of product marketing at Santera, which recently began RUS certification. “These rural companies don't have labs in-house, so they can't do their own lab testing like Bell companies can.”

Though the RUS money provides a boon for both carriers and vendors, there are also some technical realities that make rural deployment less complex than RBOC deployments. “The small and medium [independent carriers] don't have a lot of the legacy problems. But because they outsource billing to systems integrators, a success factor for use is how well we integrate with those integrators,” said Claire Lewis-Martin, vice president of marketing at Santera.

Nortel has an installed base of 2500 DMS-10 switches in the rural market and plans to retain them. “We are continuing to evolve it as a TDM switch,” said Kunkel, adding that a new software release is in the works.