Disruptive technology vs. disruptive applications

May 30, 2002 12:00 PM, Tom Barsi

Clayton Christensen coined the phrase "disruptive technology" in his 1997 book, "The Innovator's Dilemma," and this soon became the standard way to describe many of the networking advances that appeared during the Internet bubble years that followed. The concept seemed perfect for that start-up happy world: disruptive networking technology (often based on IP convergence) would allow new, risk-tolerant telecom carriers to make rapid market share gains against the more conservative, risk-averse RBOCs and ILECs. At the height of the bubble, a lot of people were placing large bets on disruptive technology under the assumption that "disruptive" meant "better."

What a difference a year or two makes. These days, many of those disruptive technologies go begging, and many of the start-up telecom equipment vendors and carriers that tried to implement them have gone broke. For carriers selling last-mile access, "disruptive technologies" proved to be disruptive in the wrong way.

Disruptive technology - Promise and reality

Integrated voice/data access for small or medium-sized businesses (SMBs) is one example of the difference between a disruptive technology and a disruptive application. IP is a fundamentally disruptive technology that has created huge changes for everyone in the IP networking value chain. Carriers have rolled out xDSL services in many markets, bringing broadband to homes and businesses, and the next logical step is to packetize voice traffic to bring the same networking efficiencies and operational simplicity to the entire telecom infrastructure. After all, VoIP has been deployed as a trunking application in core telecom networks to reduce costs and congestion in core networks, so it makes sense to apply the same logic for integrating voice and data services in the SMB market.

On paper, packetizing voice for the SMB market seems exactly the sort of disruptive technology that promises higher revenues with simpler operations and lower operating costs. When the idea first arose, competitive carriers could obtain unbundled DSL circuits for as little as $15 per month, and they could use them to deliver voice along with data speeds similar to T-1 circuits, which then cost about $300 to $500 per month.

Operationally, packetized voice also makes sense by offering more efficient use of bandwidth. VoIP allows carriers to concentrate their traffic 10 times more efficiently than with TDM by using bandwidth as needed, while TDM allocates bandwidth to time slots and assigns it to a service, regardless of whether information is available to fill the slot.

But despite these advantages, the proof is in the profits, and carriers have found few of them so far in packetized voice for the SMB market. Despite its theoretical appeal, packetizing voice in the access network presents several real-world obstacles:

• Reaching the market: Integrated voice/data services for SMBs are useless if carriers can't bring the service to every customer that wants them. Only 55% of SMB customers can be served because of the reach limitations of DSL, according to a recent Yankee Group report, while T-1 circuits are widely available to virtually every business in the United States.

• Configuration and management costs: The cost of acquiring an access line is one thing, but configuration and management are another part of the deployment equation that carriers must consider. Carriers typically assume that configuration and management represent 50% of the cost to deploy a service line, and packetized voice promised to achieve or beat this ratio. But in the real world, configuration and management costs for voice-over-DSL (VoDSL) technologies are running 80% or more of their deployment costs.

• Service reliability: DSL has a long way to go before it reaches the reliability of TDM, and the service response times show it. If a T-1 line goes down, carriers offer a 24-hour repair service to fix it quickly. Not so for DSL. Service downtime erodes customer loyalty, interrupts carrier revenues and raises VoDSL configuration and management costs to the point where the business case looks weak at best.

In addition to these factors, a dramatic decline in wholesale T-1 prices has considerably leveled the playing field between the two technologies when it comes to line costs. Prices for local T-1 circuits have dropped to $75 to $150 per month at the wholesale level and they continue to fall, while DSL access prices have held steady.

Disruptive applications - New revenue without risks

Even in a perfect market, the multiple operational challenges of VoIP and VoDSL would pose daunting obstacles to their widespread commercial acceptance. Today, though, the telecommunications sector's financial problems have magnified packet switching's flaws.

Since the industry downturn began in the fourth quarter of 2000, carriers have found themselves under increasing pressure from Wall Street to show a profit, prove the soundness of their business models and conserve their cash.

Last-mile access carriers are looking harder than ever for ways to improve profitability, but rather than going out on a limb to deploy packet-based versions of services they currently offer, they are adopting "disruptive applications." Disruptive applications are new services that create significant changes in a business model, but do so via existing, proven technology. It turns out that finding offering integrated voice/data access via TDM is just such a disruptive application. It allows carriers to get to market faster, penetrate more markets, and accelerate their return on investment (ROI).

TDM-based integrated access has been enabled by two solutions: lower-cost integrated access devices (IADs) and new integrated multiservice access platforms (IMAPs) that move voice and data aggregation and concentration to the network edge. Used together, these products allow carriers to increase revenues by delivering higher-value integrated services to any of their SMB customers with rapid payback, and to optimize their voice and data networks to extend the life of their huge investments in Class 5 switches and core routers.

The combination of increasingly economical T-1 connections and lower cost IADs has turned the traditional business case for breaking the bandwidth bottleneck on its head. Years ago, when a T-1 link leased monthly for $300 to $500, the value proposition for bringing a broadband pipeline to the last mile favored packet-switched technologies. Although T-1 suffered from none of the operational handicaps of packet-based protocols, its wholesale rate per line dwarfed theirs by at least a factor of 20. 

Comparing Business Cases

The accompanying chart shows how integrated access via T-1 stacks up against DSL when it comes to costs and return on investment. Assuming management and provisioning costs are charged at the beginning of deployment, a carrier loses more than $3,300 during the first month and grosses $461 for every succeeding month when it uses DSL to provides integrated voice/data services to a customer with eight voice lines. At that level of return per site, the provider must wait eight months to begin reporting a cumulative gross profit.  With T-1 based IADs, the same company loses $684 in the first month of deployment but reaches positive margin in the third month with an ongoing margin of more than $410. 

 

These numeric advantages are possible because T-1 based integrated access is a disruptive application rather than a disruptive technology. It leverages existing infrastructure, operational practices, and back-office systems to provide a far smoother transition to higher profits.

By using IMAPs in their serving offices, these carriers can gain further cost reductions.  IMAPs move aggregation and concentration capabilities to the access edge, allowing carriers to significantly reduce backhaul costs by eliminating the stranded bandwidth and underused circuits that have typically plagued TDM networks.

Today's carriers face the triple challenge of boosting profits, lowering costs, and squeezing maximum leverage out of their existing infrastructures. Disruptive applications, not disruptive technologies, are the right prescription for these issues.

Tom Barsi is founder and VP of Business Development for VINA Technologies.

Visit VINA Technologies online.