The time is now-swim and swim fast:
It's poised to change the public network, and there's no way to escape its path. As Internet telephony comes of age, a number of quality, pricing and regulation issues are surfacing
Carriers are growing uneasy at the sight of a new obstacle looming over the public network and threatening to drown the traditional network structure. It's Internet telephony, and it has moved beyond the hobbyist phase.
Nimble niche players are carrying international voice and fax traffic for corporate America, and incumbent service providers-both local exchange carriers and interexchange carriers-are wondering what to do about this new threat. With 1996 revenues of only $19.8 million, Internet telephony is still small change, but Frost & Sullivan forecasts a growth rate of 149% a year, reaching $1.89 billion by 2001 (Figure 1).
Forrester Research reports that 42% of telecom managers expect to use the Internet for fax or voice by the end of the century.
Will Internet protocol-based networks soon carry all traffic in digitized form, supplanting the venerable circuit-switched network? It's not likely. But it's easy to imagine a significant percentage of voice traffic shifting to the Internet in the foreseeable future.
The simple, inescapable fact is that long-distance telephony is no longer wedded to the traditional wireline circuit-switched infrastructure. Now that Internet telephony has come of age, it is a good time to define the term, survey the key players in the marketplace and examine the issues shaping the future of this new phenomenon.
Internet telephony defined The Internet has grown from its humble Arpanet beginnings in 1969 to become an interconnected global network of data networks using IP.
As of mid-1997, the world had 23 million host computers-computers connected directly to the Internet vs. household PCs connected via an Internet service provider's host, according to MCI estimates.
The Internet is an unmanaged packet-switched network, and this characteristic defines its voice-carrying potential. Although increasingly tamed and commercialized, the Internet is still wild at heart. It is a best-effort delivery system, with no one entity able to guarantee service levels. Moreover, as a packet-switched network, it was designed to carry data rather than voice traffic.
Packet switching is the perfect vehicle for traditional Internet traffic, which includes e-mail, file transfer protocol downloading of data files from remote host computers, and logging onto proprietary networks to receive data and communication among news groups.
This traffic is routed per the TCP/IP protocols, where TCP and user-defined protocol control the routing and transmission of the packets, and IP defines the structure of the packets being sent. The flexibility of these protocols facilitates new services, resulting in the World Wide Web and now telephony.
Internet telephony means different things to different people. Most often, it calls to mind the image of voice traffic being routed over the Internet. However, this is only a portion of the all-embracing concept of voice-over-packet or IP-based telephony.
Voice-over-packet technology includes any set of enabling technologies and infrastructures that digitize voice signals and transmit them in packetized format. Voice can be compressed to between 2.4 and 8 kb/s, packetized and routed over any one of several underlying technologies such as frame relay, asynchronous transfer mode or leased-line networks.
The network carrying the packetized voice traffic can be private or public. Probably the largest potential voice-over-packet market in the near term is the private corporate intranet.
Intranet voice quality can approach toll quality because an intranet is a controlled network environment, and the savings can be substantial. With the help of a gateway, a voice/fax network can be overlaid on an existing IP-based corporate data network, so the voice and fax traffic ride for free.
A second network architecture is voice over extranets, or IP virtual private networks. Sometimes referred to as industrial-strength corporate Internets, these IP-based networks are managed by a service provider that makes capacity available to corporate users. The customers choose not to manage their own intranet, but they want security and quality that the public Internet cannot guarantee.
Finally, there is voice over the Internet.
How does it work? Internet telephony began with PC-originated calls. At first, such calls had to be originated and terminated by PCs equipped with similar telephony software. Early products included Israeli pioneer VocalTec Communications' Internet Phone, introduced in February 1995, which enabled real-time voice communication between PCs with VocalTec's software, a sound card, microphone and an Internet connection.
The voice signals are converted to data at the originating end of the call, split into packets and compressed to reduce the bandwidth requirement. Once packetized, the voice packets are indistinguishable from data packets and are routed as normal Internet traffic.
In other words, the originating ISP or on-line service provider receives the traffic via LEC or competitive LEC facilities and then routes it via higher capacity facilities (DS-1 or DS-3) to an Internet backbone provider.
The call is then routed through backbone facilities, with different service providers exchanging traffic according to peering arrangements or for a fee at network action points or metropolitan area Ethernets. When the packets reach the other end, the called party's ISP and LEC/CLEC deliver them reassembled as audio output.
This PC-to-PC communication has been institutionalized by including Internet telephony packages in the browser software of the likes of Netscape (Netscape Conference) and Microsoft Corp. (Microsoft NetMeeting). But the two recent advances that have revolutionized IP telephony are new software and hardware products that let the Internet piggyback on the ubiquity of the public network, and the arrival of start-up Internet telephony service providers to make it all more user-friendly.
New products such as the VocalTec Telephony Gateway Server and NetSpeak's WebPhoneGateway eXchange provide a bridge between the IP-based Internet and circuit-switched network, enabling any calling combination using the Internet as the transport medium, including PC to PC supporting real-time voice and video, PC to phone, phone to PC, and even phone to phone.
Everyone has a role The remarkable efficiency of packet switching and the negligible marginal cost of using the Internet as a transport spell opportunity for those willing to brave the waters of Internet telephony. The short-term opportunities focus on leveraging corporate data networks and international arbitrage, while Internet telephony zealots envision a longer-term play in various multimedia enhanced services.
The corporate IP network is expected to be the primary IP telephony application through 2001, according to Frost & Sullivan's 1997 Internet telephony report.
The concept is simple: If a company already has an IP-based data network, voice and fax can be added and can ride for free once the investment in the gateway is recouped.
The traffic is carried over an intranet or leased capacity on an extranet, so that quality of service is acceptable and voice quality-while not always toll quality-is good enough to justify the significant savings.
TexasBank uses IP telephony in a creative bank-by-phone application. When a customer calls a local number, the call enters an IP gateway provided by Micom Communications Corp., a Northern Telecom company.
The call is digitized, packetized and routed over the bank's own IP network to a second gateway at its headquarters. Finally, the call is routed into the interactive voice response unit where the transactions are processed. TexasBank had to invest in Micom gateways, but the savings vis-a-vis toll-free 800 service resulted in a rapid payback (Figure 2).The international telecommunications market is $60 billion to $70 billion. In spite of recent declines in accounting rates, the cost and price structure of the incumbent carriers is still heavily laden with subsidies, creating a window of opportunity for arbitrage.
The first vein to be mined was international faxing, which accounts for 30% to 50% of international traffic. A Pitney Bowes/Gallup survey shows that 37% to 40% of a Fortune 500 company's annual phone bill is for fax. IP-based faxing is a natural step because the delays and other degradations in quality that make voice calls problematic do not affect fax quality, especially if store-and-forward technology is used instead of real time.
Internet faxing is already well-established with pioneers such as ArbiNet and NetXchange Communications Inc., which are providing switching and software to ISPs, international callback companies and even incumbent players. Corporations shunt their fax traffic onto international backbones, facilitated by automatic dialers at the customer premises. IP fax has come of age with the market entry of UUNet, the biggest operator of local Internet access points in the world and now part of WorldCom.
Action plan for incumbents The role of Internet telephony in the business plans of start-ups like Delta Three is evident (see sidebar). Less clear is how it plays into the continual reinventing of the incumbent telco.
Only time will prove or disprove Probe Research's forecast that 34% of telephone calls will be carried on packet networks by 2005. What is true is that Internet telephony is a new force driving the convergence of data and voice networks, and incumbents cannot afford to dismiss this low-cost option as they weigh transport alternatives.
Internet telephony requires as little as 10% of the bandwidth of circuit switching with a concomitant reduction in infrastructure cost.
A natural point of entry for incumbent LECs into Internet telephony is through their own ISP subsidiaries. IP telephony product vendors confirm that they are talking with or have already sold gear to the market players. One international company that has revealed its plans is the Internet subsidiary of Kokusai Denshin Denwa, which will offer a service enabling Japanese customers to call the U.S. or U.K. via the Internet.
But the LECs also should be investigating its potential. For example, Internet telephony could be an efficient way to enter the international long-distance market for either voice or fax.
Once again, the first to weigh in are foreign telcos. Deutsche Telekom recently pledged to buy a 21.2% stake in VocalTec. The two already are offering a pilot program in which customers can originate calls over POTS or a mobile phone.
International calls may be priced at as little as one-fifth of the current rates. No incumbent wants to undercut its own price, but the time will come when half a loaf (or even one-fifth) is better than none.
One application tailor-made for an incumbent LEC is Telstra's Virtual Second Line. In the past, the Australian LEC would lose terminating access revenue on a long-distance call if the called party were using a single line for Internet access.
Now, using an SS7 IP gateway developed jointly by Telstra Research Laboratories and Boca Raton-based NetSpeak Corp., the incoming call would be routed to the ISP for delivery as voice over IP over the customer's single line. Integration of the LEC switch, IP routing and gateway functions creates a virtual second line that benefits the LEC, ISP, IXC and the customer.
The Internet also will play a fundamental role in the mix of IXCs' transport facilities, as evidenced by recent announcements by MCI and Qwest Communications International Inc.
MCI is in a class of its own because of its extensive Internet facilities. In December, the company upgraded its backbone to a whopping 1.2 Gb/s (dual OC-12). Pending Justice Department approval, this backbone soon will be merged with UUNet's considerable backbone capacity.
MCI intends to merge its telephone network and Internet backbone to better serve its customers. MCI's Vault technology will convert voice to IP packets and route them over its backbone, allowing customers to use a single line for simultaneous voice and Internet services. The company predicts that half of MCI network capacity will be dedicated to Internet traffic by 2001. Not to be outdone, rival AT&T will kick off a limited Internet telephony trial in the second quarter.
Denver-based Qwest will use IP packet switching to efficiently route voice over its new 16,000-mile fiber optic network, one of the most advanced in the world. The advertised price for the customer is 7.5 cents a minute for interLATA calls.
Lest we forget our coaxial incumbents, CableLabs is testing an IP telephony system for cable TV companies. If the current buzz over cable modem access to the Internet has staying power, a voice add-on will be something to watch.
Issues facing a nascent industry The big three issues facing Internet telephony are quality, pricing and regulation. They are interrelated in that quality determines what price the market will bear, and regulation affects the cost structure-and therefore the price-the carrier can bear.
The fact that Internet telephony is quality-challenged stems from both the nature of packet switching and the architecture of the Internet. Packet switching is arguably more efficient than circuit switching, but it is a best-effort delivery system.
Because dynamic routing is used, sufficient bandwidth between the two points cannot be guaranteed, posing problems for voice and video, which need a constant transmission rate for high-quality streaming delivery at the terminating end. This uncertainty is especially true for the Internet, where the network cloud may be better represented as a black hole.
The average throughput of the Internet is reputedly 40 kb/s, regardless of entry speed. Bandwidth is not guaranteed, and in some countries the ISP's connection to the backbone may be at only 64 kb/s. Insufficient bandwidth in both backbone and last-mile facilities significantly affects quality.
The helter-skelter routing of packets results in the loss or delay of packets. Round-trip delay can exceed one second overall and can be erratic during a single call. With multiple routers sending packets in different directions and traveling varying distances, some will be dropped, arriving too late to be included. The result is voice with the quality of a bad cellular call.
For certain data or fax services, the poor quality caused by the haphazard arrival of packets is far from fatal. But these weaknesses must be addressed before real-time voice over packet can take a quantum leap forward. In the near term, the best solution appears to be for carriers to make judicious use of a mix of facilities while the inexorable advance of technology continues to make the IP world a safer place for voice.
Quality will set an upper bound on price. Today's IP telephony providers cannot offer toll quality, but they can offer attractive discounts because of the cost structure of the Internet and the double savings of exemptions from interstate access charges and accounting rate-based settlements with international carriers.
Following the long-distance model, as quality improves, expect pricing to approach public network pricing. And as IP- and circuit-switched telephony become more similar and perhaps indistinguishable, special regulatory treatment will become more difficult to justify.
Pricing structure is another issue. One school of thought is that per-minute pricing makes no economic sense in a packet-switched world, although service providers are adhering to that convention. Tiered pricing by quality of service is likely because customers are given the choice between two sets of rates-a higher price for real-time delivery of voice and transactional data per a service level agreement, and a lower price for best effort delivery of other data traffic. Traffic would be prioritized on the backbone accordingly.
Darned if they do... Regulators around the world are scratching their collective heads over what to do about Internet telephony. Hungary and the Czech Republic require a license for providing IP telephony. So does the Nebraska public utilities commission. Japan has declared it will forbear from regulating voice over IP.
In the U.S., IP telephony providers enjoy the enhanced service provider exemption from access charges as well as Section 214 requirements and federal excise tax. And, like international simple resellers, they legally skirt international settlements based on the still-inflated accounting rates.
Although the FCC is loathe to take any action viewed as crippling a new service, the current regulatory framework harkens back to a time when voice over the Internet was science fiction. As Internet telephony becomes more of a substitute for the public network, a torrent of level playing field arguments will gush from the mouths of telecom attorneys.
The full panoply of Title II common carrier regulation would be a bitter pill to swallow, as it would include access charges, TDD relay centers, 911 call delivery and USF support. But these days, common carrier regulation is a moving target, and current rules likely won't apply to either Internet telephony providers or the incumbents a few years from now. Internet telephony will likely hasten the demise of international accounting rates and provide additional impetus for restructuring access charges.
Life was simpler when telecom services were linked to specific infrastructures, and forms of access and terminal devices were limited.
But this is an age of hyperconnectivity, where any number of terminal devices can use a variety of wireline or wireless access forms to carry their voice, data or multimedia traffic to any terminal device on the globe. The Internet is the newest option available for backbone transport, and anyone in the business of carrying messages for hire must figure out how this potentially powerful means of transport affects their business.
Back when Internet telephony was strictly PC-to-PC, it could be dismissed as a mere curiosity. But Internet telephony and the public network have become inextricably linked.
International voice traffic is following fax's lead. Like fax, it enjoys a double exemption-from interstate access charges and international settlements. Service providers such as Networks Telephony Corp. and Delta Three are using Internet telephony to drive down the average price of an international call, which is still a lofty 93 cent a minute. The trick is to know when and where to jump on and off the Internet and when to rely on private facilities and the public network.
Networks Telephony delivers traffic over the Infonet backbone, a private managed network that ensures a high-quality global service. Infonet combines the basic economics of lower-cost IP telephony and appeals to the business customer segment. Networks Telephony pays for the routers it installs. Upon obsolescence or changes in service levels, the company replaces them.
Interestingly, an ISP may become a distributor and earn a commission based on the traffic from its subscribers that use Networks Telephony's service. To earn an even higher commission, all distributors may choose to bill their customers directly. Networks provides complete billing records to the user through on-line and real-time billing statements.
Delta Three, a subsidiary of RSL Communications Ltd., conducted a demonstration call to Reed Hundt last March. It acts primarily as a carriers' carrier, providing the underlying Internet telephony service for other carriers, ISPs, resellers and end users. Service is paid up front or with prepaid calling cards (see figure).
The target market is Third World countries. The company satisfies this pent-up demand using a combination of Internet and private IP-based facilities. When using the Internet, the goal is to hop on backbone facilities as soon as possible and take advantage of some of the cleaner international routes. For certain countries, public network toll-quality service is sufficiently poor that the Internet telephony call may be comparable or even superior. Delta Three's rates are about 30 cents a minute anywhere the company services-a savings of 60% to 80% for the customer.
An interesting new entrant is AT&T/VocalTec-funded ITXC Corp., which styles itself as an interexchange carrier for Internet telephony service providers. In February, ITXC's WweXchange started picking up telephony traffic from the Internet and delivering it to an affiliated provider's gateway in the called party's city or as a default, terminating the call using resold IXC minutes. WweXchange lets service providers access each other's gateways regardless of vendor, thus greatly expanding the market.
International arbitrage is a short-term play. As shifts in price and cost slam shut this window of opportunity, the IP telephony faithful still see a rosy future based on IP's ability to deliver real-time voice, video, data and multimedia sharing applications, including sophisticated videoconferencing with enhanced functionality. Collaborative communication is the buzzword to bank on.
Microsoft is one of the companies pursuing this new market opportunity. Microsoft hopes to make Windows the premiere Internet telephony/conferencing platform and is positioning its NetMeeting product as the catalyst for real-time communication over the Internet. NetMeeting 2.0 has shipped. It supports IP telephony, data sharing and videoconferencing. VocalTec's Internet Phone product supports PC-to-phone calls through the VocalTec Telephony Gateway.
The deployment of IP conferencing will be advanced by the expected ratification of Version 2 of the H.323 standard. H.323 is ITU-T standard for low-bandwidth point-to-point and point-to-multipoint conferencing over IP networks. H.323 is actually a set of control standards defining call set-up, data transmission and more.
H.323 V.2 will allow different vendors' gateways to talk with each other. Those prone to hyperbole say it will have the effect of turning every PC on the planet into a phone. The Voice over Internet Protocol Forum, which includes heavy hitters Microsoft, Cisco, U.S. Robotics and VocalTec and is now part of the International Multimedia Teleconferencing Consortium, is promoting H.323. Microsoft's NetMeeting includes H.323 audio- and videoconferencing capabilities. Microsoft's inclusion of NetMeeting in Windows NT 5.0 and Windows 98 will enhance Window's telephony services.
And there's more to the enhanced functionality of IP voice than conferencing. One application that may finally breathe life into e-commerce is the Web-based call center. Imagine a customer browsing through the Web site of an upscale catalog company. The customer sees a desirable product and clicks the call-me button to establish a voice and video link with a customer service representative.
The CSR then can answer questions, scroll through the site with the customer, determine what page the customer is on and push additional information to the customer's PC. Most importantly, the CSR takes the apprehension out of e-commerce, closing the sale.
As a bonus, the catalog company gains valuable on-line data on prequalified customers. With companies such as Dell Computer Corp. selling $3 million worth of merchandise a day through its Web site, this scenario must be taken seriously.
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© 2014 Penton Media Inc.
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