A new brew for revenue

Service providers can capitalize on the move to packet by exploring packetized voice business services

Keep the money flowing. That's what service providers want to do. But faced with sharply increasing network costs and, in many instances, declining revenues, service providers must find new ways to sustain economic growth. Tapping into the estimated $6.6 billion market for business-class voice over packet (DSL and IP) by 2004 would be one viable way for telecommunications firms to expand their revenue bases.

For competitive local exchange carriers and ISPs offering data services, this provides an opportunity to expand a revenue base through the addition of voice services by using relatively affordable voice-data routing hardware. For other service providers, it could mean the opportunity to combine voice and data traffic onto a single network, capping equipment costs and maximizing existing bandwidth.

Although the local loop infrastructure has trailed behind the core network in its ability to offer speed and capacity, the growth of DSL and fiber services means that more customer premises have enough inexpensive bandwidth to converge voice and data onto a single network.

Today's challenges To succeed in today's aggressive telecom industry, choosing the right business model is just as important as selecting the right technologies. In fact, the two decisions go hand-in-hand. The industry's long-standing business model and technological infrastructure are being tested - as prices drop while new investments still are required to offer new services.

Specifically, service providers face flattening usage margins for data services, and voice service revenues have declined from 28› per minute to 5› per minute. As a result, both data and telecom service providers must make crucial choices about how to obtain new income. At the same time, they need to devise a strategy for migrating to a converged voice-data network since market forces make that step a clear necessity.

Confronted with these challenges, most service providers recognize the need to adopt next generation, value-added products to augment their existing service offer. Many also acknowledge the importance of moving quickly, before agile competitors take away their revenue opportunities and existing customers.

But few service providers are taking full advantage of the current opportunity to transform their existing business model - and open the door to breakthrough revenue opportunities.

The service in service provider To take this next step, service providers need to look beyond the obvious economies offered by a converged network. Of course, any opportunity to cut capital and management expenses is important in a world of shrinking margins. But packet technology offers other advantages that may be even more valuable. With packet-based capabilities, service providers gain direct control over development and deployment of competitive, revenue-generating services. Not only can they create completely new services designed for a broadband converged environment, they also can develop advanced versions of traditional services.

For example, new services can include integrated messaging, Web-based business processing, office/home collaborations, ubiquitous video and services on demand. In addition, a nearly endless array of traditional services can be re-implemented for broadband packet networks, including local loop replacement over packet networks, long-distance, IP Centrex, IP voice mail, Internet access with quality of service (QOS), Web hosting and other business applications hosted by the service provider.

Stated another way, the bottom line of any business model can only be lowered so far, but the "top line" has unlimited room for growth. Because packetized voice services offer powerful service creation capabilities, its business case can be revenue-driven, not cost-driven. The most successful voice-data convergence strategy can exploit this enhanced ability to deliver unique services.

What does this new approach really offer service providers? It presents an opportunity to think more strategically. Service providers may ask, "What are today's `killer applications' for the small, medium-sized and large enterprise? And how can we meet customer demands for communication-driven business process improvement?"

Once they know the answers to these questions, service providers can choose which revenue they intend to pursue and develop differentiated services for these markets.

Opportunity knocks... Industry analysts believe that the market for packet services holds great promise in the years ahead. Dataquest forecasts that packetized voice revenues will exceed $88 billion by 2004. More specifically, business revenues are expected to comprise a large portion of these earnings. In the voice-over-DSL market, business revenues are expected to reach $6.6 billion in 2004, representing 83% of all voice-over-DSL income.

In the voice-over-IP market, IDC predicts that business revenue will expand by 518% in 2001.

One source of this expansion lies in the ability of packetized voice to open up new markets such as the small and medium-sized enterprise market and the multi-tenant (MTU) market.

In the past, traditional circuit-switched providers were handcuffed by high costs, which forced them to justify their voice services by targeting only large enterprises. But with next generation packet technology, voice-over-DSL and voice-over-IP providers can provision a broader range of customers, delivering competitive, high-quality services at a superior value.

According to Dun and Bradstreet, the small and medium-sized enterprise market includes approximately 1.3 million small and medium-sized U.S. businesses, which spent more than $47 billion for voice services in 1998, more than $14 billion for data and Internet services. Industry sources predict these numbers will reach $53 billion and $40 billion, respectively, by 2002.

The evolutionary role of bandwidth The growth in network capacity has played an important role in the development of sophisticated service capabilities. Today, widespread use of 2.5 Gb/s, 10 Gb/s fiber and fiber optic lines makes enormous quantities of bandwidth available within the core network. This increased capacity supports large-scale transport of data - such as today's vast Internet traffic - while still providing enough bandwidth to carry voice calls on the same lines.

These new developments benefit core network service providers by enabling an expansion of their business models. With bandwidth to spare, they can offer voice and data services, including innovative, next generation capabilities; or they can bring in new revenues by wholesaling excess network capacity.

The local loop, however, trails behind the core network in its ability to offer speed and capacity. Because of its traditional copper infrastructure, bandwidth is less abundant and more costly, while provisioning and services are currently limited by users' continued reliance on narrowband technology.

The growth of DSL services is helping alleviate this situation by providing up to 2.3 Mb/s of symmetric bandwidth to the customer premises. DSL also can handle converged voice and data, using a GR-303 gateway to send voice traffic to the public network while switching data traffic directly to routers.

Cause and effect Which network technologies are taking advantage of today's dramatic increases in bandwidth and driving development and demand for packetized voice services? Currently, IP dominates the application space and with plenty of experienced developers available to easily create new applications, this technology has the momentum to continue its leadership. IP is a peer-to-peer technology, which makes it ideal for distributed applications. Currently, voice over IP is viable at the network core, where extensive bandwidth solves QOS issues. In the future, IP also will provide the foundation for a wide range of converged voice-data services, including chat, auctions, collaborations, music downloading and digital video.

The goal of the service provider, however, should be to build a business model based on a core technology foundation. For example, IP was developed for Ethernet, so the two technologies have evolved hand-in-hand, along with the distributed computing model. Ethernet, therefore, can be regarded as the foundation for a business model and as a transport technology.

Offering connectionless packets, global addressing and simple protocols, Ethernet has become ubiquitous as the backbone of corporate networking - where it serves a dual role in offices worldwide. That is, Ethernet not only provides network transport across the office LAN with seamless metropolitan area network (MAN) connections, it also serves as a platform for distributed applications and services, enabling high-bandwidth applications in a unified LAN/MAN.

It all computes As telecom networks have added the bandwidth necessary to carry vast quantities of data, computer technology has kept pace by delivering the power required to handle these new data levels at tremendous speed. Soon, digital signal processors will offer hundreds of channels per chip. Network processors function at gigabit rates, and switch fabrics and network interface chips grow more powerful every day. Moreover, the cost of computing technology has gone down, as power has increased.

As a result, computer hardware now is cost-effective, but the software that provides "intelligence" can be expensive and therefore must be used efficiently. Today's networking capabilities offer a cost-effective approach to leveraging software functionality by supporting distributed systems. In other words, software now can be located wherever it offers the greatest efficiency, based on the business needs of the user, with data transported to and from applications at high speeds. The Internet provides a powerful example of a distributed system that serves vast numbers of users with diverse needs. But service providers also have an opportunity to develop new services targeted to specific users.

For example, an intelligent integrated access device or voice-data router can be located on the customer premises, with features specially designed to interface with voice and data mediation platforms such as softswitches, voice gateways and converged central office (CO) switches. The intelligence of these devices will enable services on demand, beginning with a robust class of service and bandwidth management services that include management of individual flows in the network. With this level of control, the character and QOS can be fine-tuned to meet the unique needs and preferences of single users and classes of users.

Illustrating the value IP Centrex offers a good example of the revenue opportunities available when traditional services are re-implemented for broadband packet networks.

At the most basic level, IP Centrex delivers standard calling services such as caller ID, three-way calling and voice mail over the data network. This enables voice-over-IP providers to compete with today's voice providers by offering a bundle of value-added services. More important, a next generation service provider can use IP Centrex capabilities as a valuable platform for building new, advanced killer applications aimed to drive demand.

While traditional Centrex services are generated by a Class 5 switch in the CO, IP Centrex systems are software running on more economical servers or softswitches. With its reduced costs, IP Centrex allows any service provider to offer cost-effective Centrex services to any business, regardless of size. This approach also offers the opportunity to develop an unlimited array of services targeted to the chosen markets.

For large enterprises, IP Centrex can offer some advantages over traditional Centrex and PBXs. These services can deliver superior bandwidth management, provide an integrated applications environment and support "virtual offices" for off-site workers worldwide. For small and medium-sized businesses, IP Centrex can deliver advanced communication capabilities without the capital investment required for PBX systems. In the MTU market, IP Centrex offers property owners the chance to gain a complete package of communications services from a single vendor - while bringing in new revenues from services that are carefully targeted to building tenants.

IP Centrex also can offer other advantages to business customers. It helps reduce operating costs and limit staffing requirements, while offering the convenience of a single billing statement and integrated support for voice and data. But the biggest advance over traditional Centrex may lie in the ability of IP Centrex to deliver its features outside the corporate office facilities. Based on a converged network, IP Centrex features are equally accessible from home, a cell phone or remote dial-in location - meaning telecommuters and "road warriors" can take full advantage of these features from any location.

The next generation features of IP Centrex offer even greater opportunities for differentiation. Going beyond today's familiar telephony capabilities, IP Centrex offers single-number access; unified messaging; "smart" call handing that routes calls using data from Web-based applications; automated conference calling that checks in with conference attendees at the designated time; and features that support user customization. Future developments will continue to integrate the capabilities of multiple communication devices and business productivity software.

The cash potential IP Centrex over a true end-to-end packet network can increase profitability by transforming a packet-based voice transport service into an access service provider's business model to deliver outsourced call management services.

Potential revenues for today's IP Centrex services have been estimated at $70 to $100 per seat. But the revenue opportunities are actually much greater because the open, converged packet network enables continuous development of new services and business models. It also supports deployment of new, customized features and services, allowing an IP Centrex service provider to act as a strategic partner that can respond to the strategic needs of its enterprise customers. These customizable, value-added services, with their integration into corporate collaboration and personal productivity applications, can offer higher profit margins for service providers while potentially increasing customer satisfaction and retention.

Table 1 presents five possible scenarios for deployment of basic and value-added IP Centrex services for 2400 customers. Basic IP Centrex services are just like traditional Centrex or PBX features and are priced accordingly. Adding advanced, next generation IP Centrex to the service offer, along with voice and data access services, generates higher subscription revenues. Based on a conservative $70 per user monthly subscription rate for advanced services, profitability is illustrated for adoption rates of 25%, 50%, 75% and 100%. Potential monthly revenues are estimated net of operating costs, calculated as one engineer per Class 5 alternative switch.

While service providers worldwide are experiencing the challenges and growing pains of rapid industry change, the shift to a revenue-based business model holds promise for packet-based services. Market forecasts for these services are favorable and point out the potential for packetized voice to open untapped markets such as the extensive, but up to now expensive to serve, small and medium-sized enterprise market.

Simultaneously, packetized voice gives service providers enhanced control over service creation so they can meet specific requirements of whichever markets they choose to serve. As a result, service providers can operate far more strategically, developing the killer apps that will drive demand and increase profitability. Using this new approach, even familiar services such as traditional Centrex can be re-implemented for broadband packet networks. Transformed into next generation offerings, these services can incorporate the latest business applications, increase office productivity, provide a high degree of customization and generate the levels of income service providers need for success in today's competitive environment.