IP's middle market

Convergence, one of the most ballyhooed buzzwords of the information age, is starting to take shape through Internet telephony.

The implications of Internet protocol telephony are significant. While the initial attraction of transmitting voice over an IP network lies in cost savings-particularly between international locations-the longer-term viability of IP telephony rests in the potential to combine voice, data and multimedia applications over a single IP packet-based network.

Businesses hope this convergence will lead to easier and more cost-effective network management and increasingly sophisticated applications that maximize productivity by combining voice and computing capabilities. This platform will lay the foundation for scalable communication services-and perhaps integrated messaging-over the Internet.

The real question now is not whether IP telephony will proliferate, but rather how it will develop and which combinations of applications will provide the greatest value. The answer is unique to each service provider as well as to each business looking to apply IP telephony.

Some service providers are initially focusing on a consumer-based model interconnecting POTS equipment using the Internet as a transport conduit. Others are implementing a business-based model interconnecting multiple corporate locations over an IP network, then integrating voice capabilities within that corporate intranet.

Although the first model may be most attractive to the large base of consumers looking for lower-cost voice calls to international markets, multiple issues around quality of service (QOS) and availability still need to be addressed.

The second model not only provides a higher-quality solution and lower-cost connectivity for commercial organizations, but also opens the door to combining applications such as voice, fax, e-mail and data.

Rapidly growing market In 1996, revenue for the total IP telephony market reached $19.8 million, according to Frost & Sullivan. Revenue is expected to grow at a compound rate of 149% by the end of 2001 (Figure 1). Furthermore, most indications suggest that this revolution toward IP telephony will be a global phenomenon.

This revenue growth can be attributed to factors such as toll bypass or toll reduction capabilities, rapid improvement in product quality, spreading interoperability, the growth of the Internet and intranets, the desire to conduct multimedia communications and the integration of voice and data networks into a seamless global communications infrastructure.

Furthermore, this growth seems destined to cut into the territory and market share of long-distance providers. In a report released by Forrester Research, analysts revealed that use of the Internet and corporate IP-based intranets for voice and fax is becoming a viable service that will siphon off 4% of U.S. telco revenues in 2004. For end users, that means the bottom line savings will be even greater-corporate customers are expected to save more than $1 billion annually with IP telephony once it is competitively provided.

Three types of traditional telephony traffic benefit most from the reduced costs of Internet transport: international voice calls, international fax transmissions and interoffice traffic among distant offices of the same business.

In essence, long-distance rate arbitrage is the lowest-hanging fruit for business decision-makers. Nevertheless, corporate users want to see proof of savings and quality before they make the leap. Nearly one-half of small and medium-sized companies that Forrester Research interviewed expect to experiment with Internet voice and fax by the end of 1999. The keys to acceptance are the continuing evolution of reliable and broadly adopted IP telephony technologies that are more tolerant of network delay, enable higher-quality voice transmission and continue to improve ease-of-use.

As the economics and technology of Internet telephony become more widely embraced, fully managed IP telephony services are expected to challenge incumbent carriers, technologies and pricing regimes throughout the industry. The Forrester study predicts that incumbent carriers may hold off on making IP telephony investments in the near term to avoid cannibalizing their own profits and to leverage investments in legacy networks. This shortsighted strategy by former dominant carriers is making room for new suppliers such as Internet service providers, competitive local exchange carriers and wireless operators to capture profits from the steady shift toward IP-based voice services (see sidebar on this page).

Despite the phenomenal opportunity for market growth, several challenges must still be overcome. One of the most significant inhibiting factors to the introduction of Internet telephony services has been the issue of voice quality. However, advances in technology and the use of managed private IP-based networks now enable providers to offer services with better voice quality.

The basic requirements There are four main requirements for widespread IP telephony adoption:

QOS and reliability. To support real-time services in an IP environment, standards such as multiprotocol label switching, H.323, resource reservation protocol, real-time transport protocol and real-time streaming protocol are being refined. Internet telephony requires QOS levels comparable with or greater than the high standard of reliability that is associated with traditional telephony. Until these and other standards are widely adopted and implemented, businesses can still examine certain criteria-namely, network latency and packet loss-to evaluate the quality of network service today (see sidebar on this page).

Service providers with switch-based networks capable of designating permanent virtual circuits can deliver services with lower latency and lower packet loss than carriers with router-based networks. Strategic distribution of network switches minimizes the number of hops between routers on core networks. Because packets experience fewer hops from end to end, there is less opportunity for packet loss and delays in transmission.

Ubiquitous deployment. In a consumer model, Internet telephony becomes most valuable when a large number of users are connected to the network. However, this widespread adoption could take a long time given the current rate of consumer adoption. Corporations, however, can derive value with each corporate location they put on the network. Eventually, corporations will be able to form virtual IP-based extranets for voice, data and multimedia using IP-based networks. A multinational corporation can choose a service provider that has network points of presence in many locations around the world and can offer greater reach as well as lower cost because of the availability of local access points for each location.

Flat-rate pricing. Currently, it is a challenge to measure accurately the number and length of voice calls traveling over an IP network. To simplify the budgeting and management of this new technology, a simple payment scheme is most attractive. A flat monthly charge for unlimited voice calls (within a specified number of voice channels) maximizes the value of the IP bandwidth and simplifies billing.

Dedicated connectivity. One reason that Internet telephony is more viable for the commercial market rather than the consumer market is that a dedicated connection to the Internet or IP network is required for unrestricted calling between locations. While many corporations have dedicated Internet connectivity, most consumers rely on low-speed dial-up Internet connectivity. As more companies acquire dedicated connections to the Internet, the application value of IP telephony increases accordingly.

Business implications No group of businesses stands to gain more from the incorporation of IP-based technology into the enterprise network than small and medium-sized businesses around the world (Figure 2). The Internet-and the spinoff applications of its underpinning technology at the intranet and extranet level-have done more to close the gap of operational capabilities between the Fortune 1000 and the middle market than any other development this century.

The IP-based data network has opened channels of communication with suppliers and customers and has allowed companies to offer value-added services that were once the exclusive domain of the highest tier companies. IP-based networking has also been instrumental in making the global economy a marketplace that all players can tap into. For the first time the middle market is challenging the traditional hegemony of large multinational corporations in the international trade arena.

As this reality manifests itself, no group of network providers has been more proactive in supporting the middle market than ISPs. Their IP-based network services have clearly embedded themselves into the data infrastructure of the global corporate market.

Like everyone else in the battle to become the single provider of communications services, wireless operators and Internet service providers are searching for cost-effective ways to differentiate themselves and grow their markets. Yet despite many unique advantages each offers the customer, both are limited in their ability to diversify their services and reach potential new customers.

For example, wireless operators have extensive expertise in voice services, the ability to bypass the high cost of the wired local loop and experience in customer care and billing for real-time services. However, they need content to provide the complete package of communications services that customers are demanding. And without it, they are left to compete on price alone to differentiate themselves.

On the other hand, ISPs offer Internet access, Web hosting and remote access services-the content customers want-but they don't have their own delivery infrastructure in place. Therefore, most of them must pay a local service provider-in many cases a competitor-to reach their customers. And while Internet protocol telephony technology now enables ISPs to complement their data offerings with reliable voice services, they don't have the expertise required to compete with existing voice providers.

An IP-enabled wireless network would allow ISPs and wireless providers to combine their expertise, bandwidth and content to provide consolidated communications services, including Web access, e-mail, fax, local voice and long-distance. With access to the wireless infrastructure, ISPs' markets will no longer be limited to those supported by the wired infrastructure. The wireless network will enable them not only to forgo the high cost of routing transmissions over the local loop, but also to quickly deploy voice and high-speed bandwidth services in new markets. These markets include remote places not currently served by a wired infrastructure and places where it is not economically feasible to build or extend a fixed-line network.

The delivery of IP telephony services over wireless networks is evolving in three phases. The first is long-distance service. In the second phase, carriers can offer virtual private networks that connect voice and data services for distinct offices within a city. Finally, ISPs and wireless operators will be able to provide IP Centrex services that will allow them to deliver IP telephony to the desktop.

The first and second phases are available today. Phase three is not far off. Looking further ahead, we will soon turn to ISPs and wireless operators for telecommuting solutions, multimedia collaboration and videoconferencing, once again changing the way we think about telecom services.

Customers are defining voice quality parameters in the telecom industry, and Internet service providers are often in a tailspin over how best to optimize IP telephony without scrimping on quality of service. ISPs need to factor performance into their overall equation. With performance comes management tools, and with management tools come clearly defined QOS and service level agreements.

IP reporting tools have emerged to provide ISPs with greater flexibility in meeting customer objectives, helping to ensure QOS and meet, if not exceed, SLAs. The bottom line is that IP reporting technology addresses the need for ISPs to take a proactive approach to installed systems by drawing on key performance data. The aim of this process is to facilitate proactive management for service providers by delivering both network performance and customer service based information-linking technical processes to the business.

The benefits are numerous. End-to-end QOS management becomes a reality. Network problems and shortfalls can be assessed and addressed before they affect customers. Network inefficiencies are detected immediately and solved to improve performance and minimize financial and competitive losses.

If we take a step back and look at what ISPs are trying to achieve in the voice arena, IP reporting tools address a basic rule of the competitive telecommunications environment: service providers need to keep a close check on QOS management. It is crucial to demonstrate that QOS to remain competitive as well as retain business.

The advantages of service management reporting are clear. Such automated systems enable service providers to offer detailed statistical management reports of their network, giving them a competitive edge (see figure). They also enhance and maintain the customer relationship. This applies to those providing networking services internally and those organizations that outsource.

For ISPs, service management techniques provide a growth path into the future. Customers of ISP voice services will benefit from these measures. Retaining existing and winning new business will become easier. In short, give the ISP real control over QOS and SLAs and you give the ISP the competitive advantage.

This proactive approach provides many benefits, including:

* The ability to deliver information to customers on SLA conformance.

* Provisioning information on how customers may need to tailor the service purchased to meet changing needs.

* Highlighting potential trouble spots on the network before they affect users.

* Providing "what if" analysis, allowing IT staff to assess the impact of any network component or resource planning on business efficiency and performance.

* Automating the network life cycle-not only analyzing and reporting on network QOS but also providing automated planning capabilities.

These factors will ultimately determine the success of ISP voice services.