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Voice over IP Equipment and

Service Markets
Elizabeth McPhillips
Internet Research Institute
HP Laboratories Bristol
HPL-IRI-1999-005
27th August, 1999*

VoIP, internet Internet telephony, Voice over IP, has attracted much attention
telephony, IP recently due to its potential to significantly reduce long-
telephony distance and international voice communications costs, and
because it presents entirely new and enhanced ways of
communicating. This report introduces the main topics
concerning the VoIP market - regulation, technologies, services
and players. The growth and segmentation of the market is also
discussed, and statistics regarding the future are given.

∗ Internal Accession Date Only


 Copyright Hewlett-Packard Company 1999
Voice over IP Equipment and Service Markets

Elizabeth McPhillips
elimcp@hplb.hpl.hp.com

July 1999

1. Introduction to VoIP Current applications for VoIP technology


Voice over Internet Protocol (VoIP) has are primarily focused around alternate
attracted much attention recently for a long-distance voice services. Incumbent
number of reasons, the most notable being service providers are recognising the VoIP
that it has the potential to significantly opportunity, as are non-traditional service
reduce the cost of long-distance and providers and next generation telcos.
international voice communications, and
that it introduces entirely new and Voice over packet had been researched
enhanced ways of communicating. during the 1970’s and 80’s, but real
developments in VoIP did not begin until
The fundamental applications of VoIP are 1995. Israeli firm VocalTec initiated the
voice, fax, data and multimedia. IP telephony market in 1995 with software
Traditionally ‘voice’ has suggested voice that allowed a voice connection between
telecommunications alone, however ‘Voice two PCs over an IP-based network.
over IP’ is a general term used for all areas Several other packages began to emerge,
of traditional telephony – and further and in 1997 Delta Three launched the first
applications – that are to be offered over phone-to-phone service for commercial use.
the public Internet and over private IP
networks. As a result, fax, multimedia, Although there are current market niches
and real-time data services can be and segments where VoIP prevails, it has
considered sub-segments of VoIP. major obstacles to overcome before it
becomes a mass-market success. These
VoIP had a difficult start, partly due to include regulation, quality of service,
technological limitations, and partly due to standardisation, infrastructure and network
the slow acceptance of new technologies management, and bandwidth.
characterised as being of poor quality and
reliability. Technological improvements Section 2 of this report discusses the
and strong public demand for lower phone regulatory environment and how this may
tariffs are resulting in the widespread affect the growth of VoIP. Section 3
market acceptance of VoIP. briefly introduces the methods by which
VoIP may be implemented. Section 4
VoIP services are fast becoming looks at the necessary equipment and its
practicable alternatives to traditional market. VoIP services, both network and
telephony services. Government regulated retail, including value-added services, are
PSTN (Public Switched Telephone outlined in Section 5. The advantages of
Network) services, with artificially high and challenges to VoIP are discussed in
prices, are left vulnerable as this new Section 6. Independent ITSPs and
technology steps in. Quality and other telephone companies, and their VoIP
challenges to VoIP are being addressed, strategies are examined in Sections 7 & 8.
and the worldwide boom in Internet usage Section 9 looks at the VoIP market
makes it a conceivable substitute, possibly segmentation and uptake, and Section 10
resulting in the long-predicted integration gives statistical forecasts for the future of
of voice and data networks. the market. Section 11 wraps up
significant market observations. A brief

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glossary is also provided, with entries With the introduction of high-speed local
marked [glos]. loop [glos] technologies, the ability to
access the local loop will become necessary
in order to provide a competitive service.
2. Regulation of VoIP Regulation has resulted in the unbundling
of the local loop in the US, Hong Kong and
Regulation of VoIP is largely questionable. some European countries. Recently (July
Telephony services have traditionally been 1999) BT was ordered to open up their
heavily regulated. Most governments local loop. This will give the opportunity
operate telecommunications monopolies, of high-speed access provision to small
and deregulation has come recently in providers.
others (1996 in the US, 1998 in most of the
EU). Although there is enormous growth
potential in the short term, with increased
Most governments’ policy (both in choice and competition, the uncertainty
developed and developing countries) over the future of the regulatory structure
towards the Internet has been to encourage is still impeding investment and
growth and competition by adopting a development. Telcos, not wishing to
laissez-faire attitude. The rapid obliterate existing profitable business, may
development of the Internet has, in large, be banking on regulation, assuming the
been due to this lack of regulatory threat of VoIP will peter out as ITSPs
intervention. The introduction of most (Internet Telephony Service Providers)
forms of regulation would almost certainly become classified as voice telephony
retard innovation in the Internet, and would providers. Many others will not want to
create a barrier to entry for start-up invest in VoIP solutions until its technical
companies. Those that would stand to gain problems are overcome.
from this would be, in general, operators
that have enjoyed a monopoly position for Enhanced data services are those that can
many years. Both the FCC (Federal be provided economically by independent
Communications Commission) and the service providers (non facilities-based
European Commission welcome this aid to service providers, [glos]) in competition
forcing down international phone tariffs. with network providers, as long as they can
Regulatory constraints that are specifically gain access to the networks. Examples of
related to the Internet may put new entrants enhanced services are the provision of
at a severe disadvantage, and would assist content for premium rate services and the
the continued over-pricing of long-distance provision of retail Internet services. ITSPs,
and international telephony. However, and ISPs (Internet Service Providers) in
general telecoms regulation may have general, as ESPs (Enhanced Service
advantages for the small VoIP provider. Providers), are not subject to long-distance
access charges. Telcos are urging this
The main barrier to changing telephone regulatory position to change. As ITSPs
companies, for a consumer, is having to become increasingly competitive with
change phone numbers, and the associated telcos, it is argued that they should be
inconvenience. Number portability allows classed identically. At the same time, it is
customers to keep their number when very difficult to distinguish between
changing companies. When phone-to- different types of Internet traffic, and hence
phone VoIP becomes convenient and a method of levying access charges on
commonplace, the ability to offer a total ITSPs seems almost impossible.
VoIP service without having to change
phone numbers will work to the advantage The European Commission has defined
of smaller providers. voice telephony as ‘the commercial
provision for the public of the direct

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transport and switching of speech in real If ITSPs are classified as carriers of basic
time between public switched network voice services, they may be required to
termination points, enabling any user to use comply with routing restrictions and rules.
equipment connected to such a network These may restrict services that bypass
termination point in order to communicate accounting systems. However, given the
with another termination point’[1]. complex topology of the Internet, it would
Thus the following conditions must be met: be virtually impossible to monitor
• the service offered must be part of a individual packets and impose routing rules
commercial offer on them.
• the service is provided to each member
of the public
• the service involves direct transport and 3. Methods of VoIP
speech in real time
• the service is provided between public Initially VoIP was easily dismissed. Client
switched network termination points in software gave poor quality, similar to CB
the fixed telephony network radio, and allowed only one party to speak
at a time. Both communicating parties had
VoIP clearly lacks some of these criteria, to be online together and had to have
most notably real-time transmission. It compatible software running on their PCs.
also falls short of traditional telephony in However, potential for the service was seen
that it is not fully reliable, ubiquitous, nor by vendors such as Netscape, Intel and
transparent. Microsoft, all launching VoIP products in
1996. By this stage, both computing
VoIP is not a generally available voice power and Internet backbone capacity had
transmission service, but an application improved such that much better voice
available to those who have already quality was available with VoIP. At the
subscribed to a basic Internet package. same time, VoIP communications received
Because of this ‘closed-user group’ ITU (International Telecommunications
offering, the European Commission may Union) standardisation and by 1997
not force ITSPs to pay access charges. standards-based products became
Also, due to the telephony restrictions in available.
Europe, VoIP is seen as an effective way of
introducing competition. The basic necessity of all early VoIP
products was that the users at each end had
It has been suggested [2] that additional an Internet connection. The development
regulatory movements may affect the VoIP of the VoIP gateway has changed this such
industry. These include market entry that PC-to-phone, and even phone-to-phone
requirements and entry rules: calls can be made. This has removed one
of the most important barriers to broad
Because most Internet services have been market acceptance. With gateways
classified as non-basic or non-voice installed, users need not have PCs, special
services, providers have not been subject to software or even an Internet connection to
restrictive licensing and market entry place calls that are routed mainly over the
requirements applicable to other public Internet. Gateways allow users to
telecommunications providers. As VoIP circumvent the PSTN and its tariffs, using
becomes a serious competitor to traditional the Internet for voice communications of
telephony, regulators may start to impose variable quality, and for significantly
registration, licensing, or other reduced prices.
requirements on ITSPs. These processes
can be time-consuming, increasing the
time-to-market of new entrants.

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Many new operators* and equipment carry the voice between two gateways.
manufacturers/vendors have emerged since Phone-to-phone VoIP calls can now offer
the release of the Internet Phone product, greater quality than PC-to-PC or PC-to-
the first robust and scalable VoIP product phone VoIP calls, as the former may be
and the initial VoIP service offered by offered over a dedicated IP network. There
Delta Three in late 1995. Client software is breakout to the PSTN at both ends, but
is now supported by most operating because the originator cannot know the
systems (Windows, Unix, Mac). termination of the call, and vice versa,
problems regarding regulation and access
PC-to-PC telephony is the original form of fees will exist.
VoIP. Both users are required to be online
before any connection is set up, and must Fax over IP (FoIP) is arguably superior to
use compatible software and multimedia traditional fax because it does not require
computers. It is not practical to separately real-time transmission. Transmitting a fax,
tariff or regulate this form of VoIP, as it is which has traditionally been associated
difficult, and probably counter-productive, with the PSTN, is no different from
to try to distinguish audio bits from other sending any other file. Fax messages are
bits. It is also difficult to distinguish able to absorb delay and retransmitted
between real-time, full-duplex packets without any negative impact on the
communication and time-insensitive store- final received message.
and-forward information. Unless the
Internet is regulated as a whole, it is not Multimedia conferencing will involve the
feasible to regulate this form of VoIP. combination of real-time voice, video and
data transmission over the Internet.
PC-to-phone telephony arose as IP-to- Although standards are emerging, it will
PSTN (and PSTN-to-IP) gateways became lag behind other VoIP applications
available. A gateway packetises and somewhat due to the substantially greater
compresses voice traffic from the PSTN bandwidth required for multimedia
and places it on an IP network, and applications.
assembles and decompresses traffic in the
other direction.
Regulating PC-to-phone VoIP is a 4. VoIP Equipment
difficulty. The originator of the call pays
no access charge, as to the service provider In order to provide VoIP solutions, the
this looks the same as a PC-to-PC call. Internet and other IP networks must
This greatly reduces access charges as the interface seamlessly with the PSTN
originator usually pays about two-thirds of through gateways. These gateways will be
the overall access charge. At the one of the key areas of revenue for VoIP
terminating end, the service provider may equipment vendors. IP networks will also
provide termination services to both local have to acknowledge the resource
and long-distance callers, but cannot know reservation and prioritisation schemes
where any particular VoIP call originated, needed to guarantee quality of service for
spurring problems with regulation and delay-dependent data.
tariffing. Similarly, with phone-to-PC
VoIP, there is no access charge at the The hardware required to provide VoIP
termination point, as the originator cannot services ranges from standard networking
know where the call will be terminated. equipment such as routers and switches, to
gateways, to IP phones.
Phone-to-phone VoIP eliminates the need
for a PC altogether, using the Internet to 4.1.1 IP Phones
IP phones function as regular phones do,
* see http://www.iptelephony.org/frame/providers.html but instead of connecting to the PSTN,

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they connect to an IP data network and offered by cable companies and telephone
transmit voice messages through IP companies [3].
packets.
Siemens has also released (April 1999) an
Presently, IP phones are very expensive, IP telephone with enhanced capabilities [4]
and using VoIP can be cumbersome and - a new interface, ability to retrieve the
inconvenient. Traditional telephones are names and addresses of IP callers, and
cheap to buy and simple to use, and information regarding unanswered calls.
marginal costs are close to zero, allowing Their HiNet LP 5100 IP telephone is to
prices to be reduced hugely. Hence IP cost $425, but this price will fall rapidly.
phones (and VoIP in general) have to
develop further in the way of ease of use, Ericsson has released the telephone
and decrease in price, before they can Doubler, which allows use of a virtual
invade traditional telephony space. telephone line, enabling the user to receive
phone calls (over IP) without having to log
Until now, IP telephony has been difficult off the Internet. The voice traffic is carried
for the average user to adapt to because the over IP between the user’s PC and the
interfaces were inconvenient. By bringing gateway, with the rest of the call carried on
many of the familiar and necessary features the PSTN, thus Quality of Service (QoS,
of traditional telephony to the IP [glos]) is directly dependent on the user’s
environment, the move towards seamless connection speed and on the traffic they
integration of the PSTN and IP networks generate.
has begun.
4.1.2 VoIP Gateways
Selsius, purchased by Cisco in late 1998, Gateways act as interfaces between the
has introduced a phone that provides all of PSTN and IP networks. When making a
the functionality found in a traditional VoIP call, there is usually breakout to the
phone, and connects directly to an IP PSTN at each end, for the first and last
network. This signals an important shift in legs of the link, with the Internet or another
the telephone equipment industry, possibly IP network used for the trunk connection.
suggesting a new opportunity for PBX
(Private Branch eXchange, [glos]) and The gateway accepts connections from a
telecoms service vendors. In theory, IP traditional phone or fax machine,
telephones are as functional as traditional determines the termination point of the call,
phones, whilst being able to add new and decides what is the best and cheapest
capabilities. way to route the call (i.e. how much of the
link will be over the PSTN).
Nokia’s IPCourier Ethernet Phone provides
PBX functionality (such as multiple line Although gateways were originally aimed
appearances and call control features) at business customers, they are
without a PBX. It is an Ethernet telephone increasingly being aimed at ISPs and
with a familiar interface that links directly carriers wanting to offer VoIP services as a
to an IP network. It also supports competitive advantage. As scalability
telephony features such as call waiting, increases, the opportunity is there to supply
caller ID, call forwarding, and call products to service providers rather than
transfer. smaller enterprises.
Nokia’s IPShuttle product is a customer
premises device that allows standard Gateways tend not to interoperate well,
telephones to be plugged into an IP leaving users confined to the network of
network. It is aimed at residential their provider, or one formed through
environments and is designed specifically partnerships. H.323 [glos] is likely to
to serve new voice and data services being become the standard interoperability

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protocol, and this standardisation will Suppliers to the VoIP market must bridge
happen soon (by the end of next year, 2000 the dynamic world of the Internet and the
[5]) due to pressure from service providers. rather more static world of traditional
telecommunications.
Motorola has teamed with Vsys (June
1999) to develop a VoIP gateway based on The VoIP equipment industry grew from
its Vswitch VoIP solution for intelligent small players such as VocalTec. As the
network applications [6]. Vswitch is a industry has grown, much acquisition has
UNIX-based software product that occurred. Nortel acquired Micom, the
provides interfaces for both H.323 and SS7 gateway vendor, and Bay Networks, Cisco
(Signalling System no. 7, [glos]) standards acquired Selsius and has incorporated
to support voice, data and fax. Its voice modules into its routers, and Nokia
capabilities include billing and has acquired Ipsilon, an IP switching firm.
provisioning, and advanced intelligent Smaller vendors are teaming with larger
network services such as freephone players*, such as software provider eFusion
numbers and single-stage dialling. The announcing deals with Ascend (who have
product is to be commercially available merged with Lucent) and 3Com, providing
later this year. IP gateway functionality through DSPs
(Digital Signal Processors, [glos]) in the
Gateways can be implemented through the formers’ equipment. These partnerships
following methods: intend to build upon the experiences of
• router-based voice modules each member. This will lead to new
• concentrator-based voice modules products as well as the adaptation of
• PC-based servers existing technology.

PC-based gateways move data through an Although the market is growing, Internet
interface, across the LAN and to the router. equipment is not recognised as being as
These standalone devices cannot move reliable as PSTN equipment. However, as
delay-dependent traffic to the front of the the world of telecommunications moves
router queue, however they have several towards IP, new equipment will be in the
advantages: form of data equipment. Hence data
• they are independent of the router and equipment will be updated to handle voice
can be installed in mixed equipment rather than vice-versa. This will give an
networks advantage to data networking equipment
• they are easily scalable vendors, as this is where they have
• they do not require router upgrade experience.
• their market is more competitive than
other gateway markets, resulting in Telecoms operators with their own access
lower prices networks have been the main customer of
traditional suppliers such as Nortel, Alcatel
• they were specifically designed for this
and Siemens. There is often a supplier
purpose
relationship that has been built up over
years with the main provider in their
Router- and concentrator-based gateways
country.
[glos] can reduce delay time as they can
Data networking suppliers understand IP
eliminate the extra hop PC-based gateways
networking better than traditional
require. This can improve the quality of
suppliers, but may not satisfy the quality
the system. The traffic is moved directly
and management requirements of a
into the router queue and to the WAN
company as strong as a telco. These
interface. Simple forms of prioritisation
companies have experienced huge growth
may also be employed.

4.2 Equipment Market *


see http://www.iptelephony.org/GIP/partners/

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in recent times, and need new applications split approximately equally between the
to continue this growth. VoIP is a great two geographic areas. Because telephony
market opportunity for them. As well as prices in the US are much lower than in
with the tremendous number of new Europe, the opportunities for new entrants
entrants, these suppliers are developing are lower in the US, and hence the
relationships with traditional telco enthusiasm is generally reduced. However,
equipment suppliers, and either by due to new IP networks being built by
acquisition, alliance or marketing are ITSPs, and the fact that the US is a more
making relationships with the telcos IP-developed region, there is still expected
themselves. to be a high uptake of VoIP.

Large data and VoIP vendors have great The worldwide market for VoIP gateways
experience with packet switching and have will reach $1 billion by the end of next
relationships with ISPs and ITSPs. They year, growing by 75% the following year,
need to build on their expertise in real-time and a further 40% in 2002 [5]. The
communications. The key challenge for suggested decline in rate of increase could
them (and for other businesses operating in be due to the falling prices for such
this area) will be to understand the equipment. The number of ports shipped
integration of voice and data, and to be will also increase greatly over the next
able to realise this integration both couple of years, to over 8 million by 2002,
technologically and economically. but rate of increase will decrease
significantly after 2000.
Most data networking vendors have added
VoIP capabilities to their equipment, such The uptake of VoIP may also affect the
as routers and remote access equipment. WAN switch carrier market, with switches
They are also extending their networks to purchased specifically for VoIP purposes
enable more sophisticated functions. This to increase from less than 1% now to
is the strategy for the integration of voice around 6% by 2002, producing revenue of
and data networking in order to create a nearly $.25 billion [5].
multi-service network.

From a provider perspective, deploying 5. VoIP Services


VoIP gateways is much more expensive
than deploying PSTN switching equipment The VoIP industry is changing from one
on a per-port basis. VoIP gateways cost essentially catering for hobbyists into one
an average of over $1,800 per port in 1997 in which services are offered to the general
and now (1999) have fallen as low as $600 public. These services are low in quality
per port. The same capacity (i.e. per line) but tariffs are substantially lower than for
for traditional telephony costs about $100- PSTN telephony. The next phase of this
$200. Carriers are placing enormous transition will be to a market where quality
pressure on vendors to lower costs to the is comparable to the PSTN and
$100-per-port range within the next year. functionality is significantly more
Increasing scale (more ports per product) advanced.
and economies of scale will lower prices.
Standardisation will add to economies of Service providers offering reduced price
scale, and in all high-tech industries VoIP services can do so due to the
engineering tends to improve, thus lowering efficiency of packet switching over circuit
prices. switching, and due to the lack of
regulation, and hence access charges.
Although the Internet enjoys significantly Traditional telcos will reduce their PSTN
more users in the US than in Europe, the prices, develop their own VoIP strategy, or
market for VoIP equipment is likely to be face the loss of substantial market share.

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Although many facilities-based operators Backbone network providers supply
[glos] have their primary focus on the wholesale bandwidth to service providers
wholesale capacity market, almost all of closer to the end user. They may own the
them are offering end-user consumer network or lease it from other backbone
services. In addition to this, there are providers. Backbone providers tend to be
numerous ISPs and ITSPs offering VoIP incumbent telcos or large traditional
services, with many new entrants making operators, but a new generation has begun
their presence known in the market. to emerge, including companies such as
Level 3 and Qwest, building brand new IP-
The key focuses of retail VoIP providers based networks. Large ISPs and cable
are the long-distance and international operators are also involved in offering
markets. Due to the avoidance of access backbone capacity.
charges (long-distance and international),
tariffs can be significantly cheaper for Technologies such as ATM (Asynchronous
these markets. International markets have Transfer Mode, [glos]) and frame relay
generally been difficult to enter, but will allow the backbone networks to carry
smaller providers can now use the Internet different types of traffic, and to offer
to offer international services. Aside from quality of service guarantees for real-time
difficulties obtaining access to local services. In situations where quality and
networks, it is also the case that in the local latency are the issues, it is likely that IP
loop, the trunk link length is reduced over ATM will be the dominant
significantly (and sometimes even technology, however where efficiency is
eliminated completely), and because VoIP important, IP may be run directly over
tends to use the PSTN for first and last leg SONET (Synchronous Optical Network)
connections, using the Internet for the short (or SDH, Synchronous Digital Hierarchy)
trunk length would reduce the cost benefits. [glos, and see Appendix 1]. Whatever the
In the longer term, local access will become physical/link layer technology, the future
more important as last mile technologies backbone appears to be IP - it is a
become increasingly sophisticated. universally accepted network protocol and
is independent of lower layer technologies.
Fax will also be of importance, and will
move to IP before voice telephony due to QoS issues are the responsibility of the
its latency tolerance. Sending a fax over backbone operators, as are Virtual Private
an IP network is no different from sending Network (VPN, see Section 5.3)
any other file, so much fax traffic will use obligations offered as value-added services.
the Internet as its trunk connection. An
estimated 30-40% of long-distance and Access networks essentially belong to
international traffic is fax [estimate based incumbent telcos and, to some degree,
on numerous sources], and this can be very cable operators. It can be difficult to get
easily switched onto the Internet. Fax over access to the local loop, and the
IP is discussed below (Section 5.4). construction of entirely new access
networks is economically impractical.
As an increasing number of providers are Although regulation in some countries is
interested in providing long-distance pushing for an unbundled local loop, its
services, those that own the networks are in owners still have enormous market
a prime position to take advantage of this. strength.

5.1 Network Services The local loop speed will increase greatly
The communications network can be with the mass deployment of high-speed
broken down into two sections - the technologies such as xDSL (Digital
backbone network and the access network. Subscriber Line), cable, satellite and radio.

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The improvement of VoIP quality PSTN, or by receiving it by VoIP over the
compared to that of the PSTN may have an Internet connection). The call can be
impact on the local loop and its owners. forwarded to another number, such as a
This will be discussed in Section 8, mobile. The call can be forwarded directly
Telephone Companies and VoIP. to voice mail or a busy tone can be
provided to the caller (these apply if the
Unlike telcos, most small providers have user does not wish to be disturbed). A
not evolved sophisticated billing systems, message can also be played for the caller to
and it can be difficult for them to develop hear, instructing him what to do next.
these systems over short periods of time.
This has pushed the idea of pre-paid calling Click to talk - an individual can initiate or
cards by small providers. This offers many establish a voice connection by clicking on
advantages to providers and customers. a web page. This service has applications
Customer identification and authentication for catalogues and call centres, amongst
is simple – the customer dials in his others, enabling a customer to speak to a
account number and his information is representative while looking at a
captured. If the calling cards are pre-paid, company’s web site. The customer can
no bad debts can accumulate. Essentially click on an item to initiate a call to the
no billing is involved. The cards can be catalogue and speak to the sales
obtained and recharged directly through the representative through their PC without
company’s web-site with automatic billing having to take down the Internet
by credit card. A manager having connection. This is discussed further in
employees with frequent changes to their Section 9.1.1, Business Usage.
calling requirements can do this. Although
this method gives a good short-term way of The integration of services such as voice
promoting the service, in the longer term, mail, fax, email and other information will
users will require more convenience. become important as customers become
more mobile. A number of mobile
5.2 Retail Services telecommunications companies have
The enhancements to traditional telephony already begun to offer some sort of
services will be the main market attraction integrated service, allowing customers to
once the tariff arbitrage has dissolved check their email over their mobile phones.
somewhat, as it appears it will. These services may also allow the sending
of messages from the Internet directly to a
Current PSTN caller ID allows the mobile phone. Deutsche Telekom offers an
receiving party to see the number of the extension to this, by way of their NOVICE
calling party and nothing more. An IP system, using voice-synthesis software to
environment can support more information convert email messages into speech, and
– who the caller is, where he is, the request customers can have their messages read
for a multimedia connection, or any other over the phone to them. Other companies
information he wishes to send. provide services whereby information such
as football results or stock market quotes
The call waiting function available with can be obtained on mobile terminals via
VoIP is greatly enhanced compared to the SMS (Short Message Service, [glos]) [7].
PSTN version. When a call arrives, a new
window can be displayed on the user’s Real-time administration (billing and
screen showing the caller’s name and provisioning) is becoming a service in
number (and any other information he has itself. The unification of bills for all
sent). Then the user can choose how to services, and the ability to view bills online
handle the call. The call can be answered (real-time, up-to-date) will be seen as a
on the phone (either by disconnecting the huge convenience. Provisioning of services
Internet connection and taking it on the may also be available ‘on the fly’ over the

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Internet, e.g. do I want call waiting services brokers, and high-tech manufacturing firms
for this session? Yes, click, and they are [5]. Targeted companies will also be
available. determined by size band, large companies
being a prime target for long-term
As Internet penetration grows, the technical contracts, and medium-sized firms showing
literacy of the average user will decrease. short-term potential.
Thus, a more robust and comprehensive
customer service will be necessary to serve 5.4 Fax Over IP
less savvy users. In spite of predictions made in the face of
email, the fax market is growing, not
5.3 Virtual Private Networks waning. Despite the popularity of email
VPNs are private data networks that make for general communications and file
use of the Internet, maintaining privacy transfer, some functions, such as sending a
through the use of a tunnelling protocol and hand-written, signed document cannot be
security procedures. They can be accomplished effortlessly. Speed and
contrasted with a system of lines leased reliability of email can also be
from a telco that can only be used by one unsatisfactory.
company and which can be incredibly
expensive. A VPN gives a company the Traditional fax machines are connected
same capabilities at a much lower cost by directly to the telephone network, just as a
using the public infrastructure rather than a traditional telephone is. Phone numbers let
private one. various local and long distance carriers
initiate connections and deliver faxes.
Because market demand has not yet been Internet fax servers collect traffic from
high, Internet VPN services have not been standalone fax machines and route it to the
pushed as a key element of most providers’ Internet for delivery. The user dials the
offerings. It is supposed that the market destination phone number, but it is the
will be demand-lead, and so although many Internet fax server that interprets the
providers have the technical ability to offer dialled digits, not the PSTN, and the fax is
these services, they have not seen the transmitted via the Internet to the remote
necessity to promote it. However, they do fax server.
feel that VPNs will change the service
provision market dramatically and offer The global fax market has been able to
great opportunities to providers. flourish due to the adoption of fairly
consistent standards that are used
Consumer and small business VPN VoIP worldwide. One of the problems of using
services over the Internet are likely to be fax over the Internet has been the lack of
offered by non-facilities based carriers, standardisation. It seems likely that the
whereas facilities-based carriers are first standards-based FoIP will be a mail-
targeting large business customers. type standard to transport fax image files,
but session-based and real-time fax should
Because of the individuality of each follow closely as more immediate
network, services will be priced according document delivery and confirmation of
to the specific requirements of the delivery become necessary.
customer. No particular markets have
been targeted yet, with providers offering Already an extensive number of fax
services to individual organisations. services are available over the Internet,
However, certain market segments present mainly by large backbone operators
great opportunities for early adoption, (AT&T, MCI, Sprint) or companies
including the IT sector, firms with a large focused on providing FoIP (FaxSav,
number of small sites such as travel FAXiNET).
agencies, estate agents and insurance

10
Mailbox services are provided, comprising charges (based on Fortune 500 fax usage)
a fax or unified messaging mailbox that [8]. Revenues lost by PSTN operators
can store and forward a user’s faxes, can may be in the region of $1bn by 2002, and
be configured to automatically forward may reach $2bn by 2006 [9].
messages to another location, and can often
allow users to check voice, fax and email
simultaneously. 6. Advantages of and Challenges to
VoIP
Fax multicasting can be provided, allowing
the sending of a single fax to multiple 6.1 Advantages of VoIP
destinations, be they fax machines or PCs. The ISP market today is driven largely by
a tariff arbitrage. Although QoS is
Overflow services take into account that unsatisfactory compared with traditional
the receiver’s fax may be busy or not telephony, people wishing to make long-
answering. The fax is stored by the service distance or international calls over the
provider and then automatically forwarded Internet may do so cheaply, saving 20-
to the destination machine at a later time. 100% on a call by bypassing the PSTN
[9].
Interactive fax/fax-on-demand services
allow a customer to store documents on the There are three main reasons for the price
service provider’s server, such that clients advantage [10]:
without Internet access may retrieve these 1. Regulators have ruled that VoIP
documents by calling into an interactive providers are not subject to the long-
voice response system and requesting them. distance access charges levied on
traditional providers
Message translation can convert fax 2. VoIP providers avoid the payment of
messages to email, email to voice, or other settlement charges to foreign operators
transformations for the delivery of terminating their calls (of which US
messages. This is becoming a significant operators pay approximately $5bn per
feature of the unified mailbox. year) [11]
3. The networks used are more efficient
The primary target markets for FoIP (and due to compression and packet switching.
unified messaging) will be the SOHO
market and mobile professionals. The The technical and economic advantages of
former will have increased functionality, packet switching are numerous. It appears
whilst saving money, and the latter can that VoIP has a long-term cost advantage
receive all messages – voice mail, email over traditional telephony based on
and fax – at once. efficiency and lower equipment costs.

The FoIP market will initially be mainly an Packet-switched technology uses the
international one, due to the price infrastructure with more efficiency than the
differentials between using the Internet and circuit-switched technology used in
the PSTN. Until 1997, virtually all of the traditional telephony. Although the cost of
global international fax market was PSTN- telephony switching equipment has fallen
based. According to Probe Research, by sharply in price, so has the cost of
2001, FoIP will account for 10% of computer equipment. Port prices for VoIP
originating international fax, and by 2006, are relatively high but are falling rapidly
almost 30%. and will soon undercut prices per line for
traditional telephony. Low cost routers are
Multinational companies may be able to beginning to replace switches.
save a substantial part of their average of
$15m a year on fax-related transmission

11
The unit economics, although debatable, providers to integrate the PSTN and IP
seem to favour packet switching, with networks in this way [14]. This is an
estimates suggesting that packet switching important development to ensure the
is almost four times as cheap as circuit speedy evolution of VoIP. Lucent
switching at the per byte level [12]. Technologies [15] and Nortel Networks
[16] have developed packages that will
The data overhead associated with packet support the delivery of enhanced VoIP
switching is far less significant than the services, including the above, single-stage
capacity wasted in circuit switching when dialling.
no information is being conveyed.
Once feature parity exists, future uptake of
Much swifter compression update can be VoIP will depend largely on the
made on the Internet than on the hardware introduction of enhanced applications. It is
of the PSTN. On a circuit-switched assumed that by this stage the price
network, all hardware in the network must differential will be much less significant,
be updated in order to progress with due to lowering PSTN prices and/or
advances in compression, whereas an regulation.
Internet client on a standard PC can
implement the latest technologies without Applications already available include call
concern for the rest of the network. waiting, caller ID, multicast, and
multimedia conferencing. Simple
Multimedia services on IP networks will traditional features can be much richer over
allow one network to be used for telephony a packet-switched network. The benefits of
and data, as well as more sophisticated such enhancements are obvious. The need
multimedia services. Although there is not for separate lines for voice and data
yet any practical evidence to support the disappears, and flexibility and functionality
argument that managing one network is are increased.
more economical than managing two, the
argument is straightforward. The possibilities for such applications on
IP networks certainly extend beyond that
Even in an unencrypted form, speech available on the PSTN, and to applications
carried over the Internet is considerably not yet envisaged.
harder to wiretap than analogue speech
carried over a copper wire pair. Where VoIP is driving the public network towards
encryption is used, decryption by an an open, client-server topology.
unauthorised party would be immensely Proprietary switching systems and legacy
time consuming, taking many weeks or networks have retarded integration of voice
months for a supercomputer to decrypt a and data for many years, but competition
two-minute phone conversation [12]. in the area of telephony has initiated the
move towards an open network. This
VoIP has not, until now, been a convenient could be the trigger that brings about true
telephony mechanism, being cumbersome convergence of voice and data networks,
and requiring awkward dialling, whereby but this cannot happen until cost parity
the user is required to first dial an access exists between packet-switched voice and
number, wait until this call is routed to the circuit-switched voice technologies [17].
access IP telephony switch, and only then VoIP equipment, although falling rapidly in
can the destination number be dialled. price, is still considerably more expensive
Providers have begun (early 1999) to than traditional equipment. This will
introduce VoIP services that will no longer change, but will take a number of years to
require the user to dial any differently than do so [18].
he would when making a regular call [13].
Korea Telecom has been one of the first

12
The ubiquity of IP networks in enterprises
is ensuring a large addressable market for Propagation delay is that which is caused
VoIP equipment as well as facilitating the by the signal having to travel a distance,
integration of VoIP equipment into existing and is therefore a function of distance. It is
networks. Enterprises are beginning to put governed by the laws of physics and cannot
VoIP on their WANs and LANs, cutting be overcome.
costs as the voice is treated as data. On Network delay is a function of the capacity
such private networks, control of data is of the pipes in the network and the
much easier than on the public Internet, processing of the packets as they transit the
with QoS exceeding that of VoIP on the network. The delay associated with jitter
Internet. buffers (see below) is considered part of
the network delay.
The value of any telecommunications Accumulation delay depends on the type of
network increases exponentially according voice coder used. It is caused because a
to the number of users/computers attached finite amount of time (varying from a
to it (Metcalfe’s law). As more and more single sample time to several msecs) is
IP equipment is attached to the Internet, the needed to collect a frame before the
benefits derived from being part of a VoIP processing begins.
network will increase, fostering further Processing delay is caused by the actual
demand. encoding and collection of encoded samples
into a packet for transmission. This also
To sum up, there is huge opportunity in the applies to decoding at the receiving end. It
provision of VoIP. Presently, the main is a function of the coding algorithm used
attraction is the low tariffing that can be and the processing time.
offered by bypassing various access
charges traditional providers must pay. Jitter is the variable inter-packet timing
VoIP is no longer a technology employed caused by the network a packet traverses.
merely by hobbyists. A new generation of It can be considered the standard deviation
users has emerged, and as convenience of in delay. Not only is it impossible to
use and richness of applications become predict or control how many hops a packet
satisfactory and attractive, VoIP will from a VoIP call will traverse, packets
become increasingly popular among from the same call are often assigned
general telephony users. different routes, with varying numbers of
hops and different traffic volumes along the
6.2 Challenges to VoIP way. Because of this, packets from the
The low quality of service and unreliability same source can experience different
of the Internet are the main market delays on the way to their destination.
restraints for VoIP. There are many QoS
issues experienced by packet-switched Jitter is removed by buffering fast packets
networks that do not affect circuit-switched in order that the slowest packets arrive in
networks. time to be sequenced correctly. This
The Internet is a best-effort network, where causes additional delay, as the buffer must
variable latencies and dropped packets account for all packets, thus delaying them
occur. Because voice services require real- all by up to the delay of the slowest. The
time transmission, VoIP often results in a conflict of minimising delay and removing
heavily degraded QoS. jitter has resulted in various methods of
dynamically adapting the buffer size to
There are four types of delay in IP match the time variations. This minimises
networks: propagation delay, network the delay associated with jitter while
delay, accumulation delay and processing preventing buffer underflow [19].
delay. The overall delay is the aggregate of
these components:

13
If the one-way delay exceeds about Fortunately, uncompressed voice
200msecs, the two speakers will adopt a communications tend to be highly tolerant
mode whereby one speaks, the other listens of dropped packets. The human ear cannot
and pauses to make sure the speaker is detect the loss of a packet in an audio
finished, then speaks. Usually these pauses sequence if an adjacent packet is played in
are ill-timed; thus speakers will end up its place. It is only when several packets in
stepping on each other's speech. a row are dropped that a noticeable
degradation of quality occurs. However,
Present IP networks are best-effort many voice compression mechanisms result
networks and do not guarantee service. in the transmission of the changes (actual
When a router becomes overloaded, it may or predicted) between adjacent signals,
intentionally drop packets to relieve the rather than the whole signals themselves.
congestion. With traditional data traffic, Hence the loss or corruption of a packet
there are error-checking methods built into can result in propagated errors, hugely
the protocol (Transport Control Protocol, degrading the quality of voice or video,
TCP) to address these situations and often beyond recognition.
maintain data integrity. This protocol
requires some overhead not conducive to The use of UDP has a further challenge in
real-time traffic, and has not been that many networks protected by firewalls
implemented for voice transport. Instead, do not permit UDP traffic. For data to
UDP (User Datagram Protocol) is used as pass through many firewalls, some sort of
the transport level protocol. It requires less registration must occur between sender and
capacity, but does not guarantee delivery of receiver. UDP, having no error correction
the data to the destination, nor delivery of or retransmission associated with it, need
packets in the right order, nor does it avoid not set up any such registration between
duplication of packets. It does, however, sender and receiver. This gives the need
guarantee data integrity. for an open port on the client, which results
in its blocking by the firewall.

When a two-wire telephone cable connects


to a four-wire exchange interface, a circuit
called a hybrid is used to convert between
the two wires and four wires. Echo is
caused by signal reflections in a hybrid
circuit. Although the circuits are very
efficient in their conversion ability, a small
percentage of the energy is not converted,
and is reflected back to the caller. This is
known as echo. If the speaker is close to
the PBX or the telephone switch, the echo
is sent back so quickly that it is hardly
noticeable. As echo reflection time
increases, the echo needs to be cancelled
out. DSPs listen for the echoed signals and
subtract a prediction of them from the
speaker’s audio signal. This is particularly
important with VoIP, since echoed signals
tend to have delays long enough to be
noticeable, even annoying to the speaker.
Although echo-cancellation is used, it is
often insufficient as only a prediction of the
actual echo is removed.

14
increase in demand has rendered this
Quality problems are the most important insufficient. The latter of the two
barrier to the development of VoIP. Until backbone bottlenecks is the routers that
a QoS management mechanism is receive and forward the data packets. The
available, this will remain a major speed of routers has grown since the
restraint. Unreliability will also be cause beginning of the Internet explosion, but this
for concerns in areas such as public safety. growth has not been able to keep up with
PSTNs are usually well engineered and the growth in Internet traffic, and thus
very reliable. General services are rarely delays result.
unavailable, and emergency services are
extremely reliable. The Internet can be Finally, the original Internet backbone
slow or unavailable for a number of interconnection points are becoming
reasons, and data can get lost or corrupted, severely overloaded. Over the last few
making it extremely unsuitable as a years, the main exchange points of the
dependable network. Internet backbone, the Network Access
Points (NAPs), have become congested and
Inability to connect, and slow traffic many providers have chosen not to use
transfer are a result of network bottlenecks. them anymore. It is also the case that they
There is no single bottleneck on the have not received funding from the
Internet; rather, each junction on the National Science Foundation since 1998,
Internet can create a performance and there has been a move to privately
bottleneck. operated exchange points. This has meant
that, as many providers enter private
The first bottleneck (for dial-up interconnection agreements, much traffic
subscribers) is the connection to the data is no longer available. The operators
telephone switch. The average phone call and providers involved have no obligation
lasts about 3 minutes, while the average to disclose this information.
Internet user is online for 20 minutes [20].
The PSTN was not designed for calls of All of the above contribute to the
this length, and the abnormally long unreliability and delay of the Internet.
holding time is resulting in the absorption
of much capacity of the switch, causing The existence of legacy networks is a
many call attempts to fail. The phone line restraint on the growth of IP networks,
also has significantly inferior capacity to particularly within enterprises. Compelling
the rest of the Internet. Because the overall business cases are needed to replace voice
connection is only as fast as its slowest networks that work perfectly and offer
pipe, the last mile (from the telephone better quality than IP networks.
switch or service provider to the premises)
usually slows down traffic transfer A variety of interoperability problems are
dramatically. presented to VoIP vendors, and the market
will push hard until these are resolved.
The second bottleneck is the connection Current interoperability exists only at the
between the service provider and the client software level. This enables H.323
Internet backbone. As these connections clients to communicate with other
approach overload, some users may be telephones through a H.323 gateway.
denied access, while others will experience However, no standard yet exists that allows
response time problems. gateways from different vendors to
interoperate. This is slowing the adoption
The third and fourth bottlenecks are in the of IP by telcos [21].
backbone itself. The former is the
backbone bandwidth. Although it has Network vendors must supply gateways
extremely high capacity, the dramatic and gatekeepers (the software that provides

15
call control and address translation) that Scalability is also a problem here because
are interoperable. Service providers will there are many needs in this area. The port
not, in the long run, deploy large-scale density of each gateway can be easily
proprietary solutions. Gateway increased, as can the overall number of
interoperability is not fully addressed by users due to the distributed nature of the
the H.323 protocol, but is expected to be Internet, however sufficient business,
accomplished by protocol extensions such service, network and element management
as MGCP (Multimedia Gateway Control tools and processes are not available,
Protocol). MGCP is used for controlling making scalability of general operations
VoIP gateways from external call control difficult [21].
elements called call agents or media
gateway controllers. The call control When technical problems are overcome, an
intelligence is outside the VoIP gateways acceptable voice quality will be available,
and handled by the call agents. In the probably exceeding that of the PSTN.
MGCP model, the gateway focuses on the There will be widespread availability of
audio signal translation function, while the VoIP without having to subscribe to a
call agent handles the signalling and call basic Internet package, and truly scaleable,
processing functions. Consequently, the interconnected services will become
call agent implements the signalling layers available [23]. Much development and
of the H.323 standard, and presents itself maturing will need to occur before this
as a H.323 gatekeeper. Several ventures becomes reality.
are addressing interoperability at this level,
with a Lucent alliance developing a
gatekeeper that enables interoperability 7. Independent Providers in the
between gateways of different vendors VoIP Market
[22].
Due to the entry of the telcos, and the
The problem of integrating VoIP gateways number of new entrants to the VoIP
with existing PBXs, switches and routers industry, it is expected that there will be a
often results in a complex configuration. certain amount of market squeeze as the
This is due to a lack of experienced industry matures. The ability to survive in
technicians and the closed architectures of this market will be, in large part,
most PSTN network elements. determined by the competitive strategy of a
provider, and its ability to change rapidly
The VoIP community has not yet agreed in the dynamic marketplace.
upon a common Call Detail Record (CDR).
This would make it possible for one As in any market, those who grow large
network provider to access and settle with enough to generate economies of scale are
another network provider or owner. in a position to survive, as are those finding
Without a common CDR, the areas in a niche market to serve.
which ITSPs operate will be limited to
regions where they have their own IP To the advantage of independent providers,
gateway. time to market has been very short for
Internet products and services. Innovation
Standard applications for billing and in traditional telephony has never been a
OAM&P (Operations, Administration, priority, as most providers were protected
Maintenance and Provisioning) are not monopolies, so new services have generally
available, forcing users to rely on one not been promptly deployed. Data service
vendor for a complete solution. This is a providers realise how important it is to
great restraint, especially if proprietary bring services to market quickly, as a
applications cannot be integrated with competitive advantage. Their ability to do
existing operations support systems. this will be seen as a great strength over

16
telcos in this market. Their dynamism in time, and billing systems and sustainable
terms of technological upgrade and business models need to be developed.
business processes will similarly be Most independent ITSPs will have much
advantageous. data experience, but little or no voice
experience. Although some packet
These companies, although they may be switching knowledge will transfer from
young, have been in the business of packet data to voice, it cannot be assumed that
networking and have accumulated this knowledge will be sufficient when
experience in this area. Telcos may find it dealing with a whole array of new services.
difficult to transfer their knowledge to
packet switching. Dominant carriers tend to already have
relationships with established companies,
Independent ITSPs are willing to take risks and prefer to do business with them.
because they have little to lose. Facilities- Companies like to do business with other
based providers, such as telcos and next companies of the same size, and this will
generation telcos, have invested enormous disadvantage independent providers in the
sunk costs in their infrastructure, and will areas of interconnection and bundling of
therefore be more conservative in their value-added services. Smaller providers
choice of activities. Those that have simply cannot operate without the co-
invested little more than some venture operation of large carriers, and to a certain
capital can take greater risks, and often degree will have to accept the market rather
these will pay off. than shape it.

As there will be a huge number of new Regulation can be considered both a threat
entrants in this market, there will be great and an aid to any Internet service
potential for joint ventures among these providers. Lack thereof has allowed the
companies, to increase geographic scope, Internet to flourish, suggesting that any
customer base, business knowledge and sort of regulatory intervention would stifle
technical know-how. There will also be the growth somewhat, putting smaller
opportunity to partner with suppliers, providers at a disadvantage. However, as
bringing billing experience and high discussed above in Section 2, general
reliability. Traditional suppliers already telecoms regulation has provided benefits
have relationships with telcos, but data for small providers as well as threats.
vendors incorporating voice capability into
their products will want to partner with Incumbent providers also pose a threat to
companies focused on providing VoIP independent ITSPs. Most have realised the
services. potential of IP and have acted accordingly.
They are investing in VoIP equipment, and
There is also the opportunity to cause some have already begun to offer VoIP
disruption to the traditional telephony services.
industry and negatively affect incumbent
telcos. Those telcos who have not reacted To sum up, VoIP is growing rapidly, and
yet to VoIP may be leaving themselves will be huge. There are many possibilities
vulnerable in the long term. for established companies and for start-
ups. However, all such markets offer
In spite of the above, there are many short-term potential and long-term market
disadvantages to being a small, squeeze, sympathising only with those who
independent provider. Although youth has have succeeded in their strategic
led to strengths such as dynamism and positioning and relations, both customer
willingness to take risks, it also results in and business.
an overall lack of experience. Business
experience needs to be accumulated over

17
8. Telephone Companies and VoIP services. Several have already begun
experimenting with VoIP, tackling the
Telcos are starting to take the challenge of problem of undercutting their own prices
IP telephony seriously. Although it can be before other ITSPs do. Future-thinking
seen as a threat, it is also a huge incumbents have been quick to respond to
opportunity. Incumbents have a natural this challenge. Deutsche Telekom,
tendency to work on improving existing Germany’s incumbent telco, has become
technology and operations within existing Europe’s largest ISP, and due to the high
business models, rather than embracing number of new entrants planning to use
new technologies and industrial change, not VoIP, has purchased a stake in VocalTec,
wishing to cannibalise their lucrative and has begun offering a VoIP service
business. called T-NetCall. The company has
expanded its service outside of Germany,
Telcos own the local loop infrastructure, installing gateways in Japan, the UK and
and tend to own backbone networks; thus the US, and is taking advantage of full
there are opportunities for them to leverage liberalisation in the European market.
revenues from each part of the network,
either as capacity providers or as retail In the US, MCI is the most notable of the
service providers. traditional operators who have entered the
VoIP race, having already launched a
Within telecommunications, IP gave new technology enabling integrated voice and
companies a chance to enter the market by data transmissions for call centres. More
offering services that posed no major threat services are being planned for the future as
to existing traditional operators. However, MCI continues to expand on its telephony
as technologies have matured and revenues.
progressed, a new range of applications
becoming available are rapidly threatening Other large operators in the US have
traditional operators’ core business, the seemed excited about the possibilities of
most notable, of course, being VoIP. IP, yet have been reluctant to offer these
services in their own domain. AT&T
VoIP, originally considered too unreliable offered commercial phone-to-phone
for mass-market development, gives new services in Asia-Pacific (particularly in
entrants an easy and cost-efficient way to Japan) for nearly a year before commercial
compete with incumbent operators through trials began in the US. AT&T’s Japanese
the current price arbitrage associated with venture includes 27 Japanese companies,
Internet communications. Along with this and offers business and residential VoIP
price advantage, VoIP offers a platform for service throughout the country, with calls
the integration of voice and data, richer offered at up to 80% cheaper than standard
applications and increased functionality. services.
The opportunities presented by the Internet
have resulted in many new entrants – Because long-distance and international
without traditional business investments to tariffs in the Asia-Pacific region are
protect – wishing to exploit the commercial generally high, and call volumes are
possibilities of VoIP. The short-term rapidly expanding, many new entrants are
economic advantages available will allow trialling VoIP there. This has resulted in a
new entrants to build up their customer response by the home incumbents offering
base and know-how (both technical and such services. Japanese companies have
business), leaving them to gain potential begun to offer prepaid IP phone-to-phone
for the longer term. calling card and FoIP services, while
Telstra in Australia has been under
Incumbent telephone operators need to pressure to offer VoIP services between
think very seriously about IP and its related Sydney and London.

18
lead to the use of business and other
8.1 Telcos in the VoIP Market processes that are unsuitable or outdated.
It is evident that the incumbent telcos are
moving into the VoIP market, and have The business model associated with telcos
significant advantages and disadvantages in is not based on marginal costs, as will be
entering a market neighbouring their own. for VoIP provision. Traditional telephony
Their strengths, weaknesses, opportunities has also relied on cross-subsidisation and
and threats are identified: access charges so that universal service
may be provided. The VoIP model will be
Strengths: telcos own the local loop, and based on marginal costs, which are
often own large parts of the Internet minimal compared to fixed costs. The
backbone. This is a huge advantage ability of large incumbent companies to
because a high percentage of costs can be adapt to this new scheme is arguable, as
eliminated. Telecommunications, in they have always had difficulty with rapid
general, are becoming very customer- change. However, if telcos do manage to
centric, meaning that the most important move away from their traditional cost
part of the value chain is that nearest to the model and lower prices towards marginal
customer. In owning the local loop, telcos costs, the attraction based on price
manage to be near the customer, whether arbitrage will be minimised.
they are providing services or leasing their
infrastructure to others. The idea that they are cannibalising
existing business may retard some large
Incumbent telcos have been providers of operators. Those that have enjoyed
telecommunications services for many monopoly status in the past are already
decades, and as a result have accumulated suffering at the hands of new entrants, and
knowledge of network management, may be averse to further reducing short-
dealing with large customer bases, and the term margins, even if this may result in a
outlook of a multinational company. long-term downfall.
General business practice is not abundant
in start-up companies, many of whom have Because the regulation (or lack thereof) of
little more than some technical knowledge VoIP is questionable (see Section 2,
and venture capital. Regulation of VoIP) many telcos have
taken the attitude that the regulators will
Telcos already have a large customer base, deal with their threat of ITSPs. This may
and due to loyalty and convenience, many result in telcos being unprepared for the
customers will be happy to accept VoIP coming market, and being left to play
services from this company rather than catch-up when they realise the extent of
look further afield. They also have names VoIP uptake.
that are known. They have huge capital
resources, both existing and potential, and Opportunities: telcos entering the VoIP
are big enough to undercut many other market will experience many of the
companies on price. opportunities of ISPs and vendors, such as
mergers and acquisitions of small and
Weaknesses: the weaknesses telcos medium-sized companies. Deals and
experiencing on entry into the VoIP market alliances may be formed to generate
may be due to expectations that economies of both scale and scope. Many
communications provision is the same of these joint ventures and take-overs have
across the board. They may fail to been evident already, as telcos see this as
understand that the new networks and an easy way of entering the VoIP market,
technologies with which they are dealing and at the same time can acquire customer
are not wholly analogous with those they bases and technical expertise.
have become familiar with. This could

19
Large telcos owning much of their network Regulation in this area is highly debatable
will have the opportunity to leverage and thus must be considered a threat.
revenues at all points of the network: local
loop, leased lines, backbone, as well as
Strengths Weaknesses
avoiding having to pay others to carry their Own infrastructure (backbone and local loop) New networks not wholly analogous
traffic. It appears that this will be the Global presence and/or outlook
Huge capital resources, both existing and potential
Aversion to cannibalising existing lucrative
business
greatest advantage of the telcos in this Large existing customer base
Name recognition
Business processes outdated
Inability to adapt to volatile market conditions
market. As the NAPs break down, Understanding of scaled network management
Ability to bundle different services (1-stop
Lack of corporate understanding for the new
competitive environment
shopping)
interconnection agreements are becoming Big enough to undercut on price
commonplace, and those that stand to gain
Opportunities Threats
the most from these are the owners and Leveraging revenues at all points of the network Effective marketing and customer service by
operators of the networks. Unified service and billing proposition for
customer
competition
Consolidation amongst competition
Squeeze competitors on price and service offerings Consumer choice
Sign deals and alliances to generate economies of Emergence of ITSPs
Because they have much experience in the both scale and scope
Relationships with large ISPs
Regulation

telecommunications industry, and because Acquire small/medium companies

they can offer bundled services (one-stop


shopping – phone, Internet access, online
Fig 1 Telco SWOT Analysis [source 25]
banking etc.), they may be able to squeeze
much of their competition on price and
service offerings. Smaller providers, There are three basic strategies that telcos
although in a prime position to service can adopt in the face of VoIP.
niche markets and to change rapidly, are
simply not in a position to be able to offer The first involves staying still and hoping
bundled services without the co-operation the VoIP phenomenon will never take off.
of large operators. This was the general strategy among telcos
until recently, expecting that voice quality
Threats: because telcos will enter the VoIP would never be sufficient on such a
market at a high level, there will be not geographically distributed packet-switched
only competition amongst themselves, but network as the Internet. There was also an
competition from the established players. expectation that price differentials would
These players know the market and know eventually dissolve. Although this may
the customers, unlike telcos who may make prove true, the price arbitrage currently
the mistake of thinking that their fuels VoIP adoption, but it is the
knowledge will transfer to this market. availability of enhanced functionality that
The accumulated knowledge of large ISPs will take over as PSTN prices fall.
and ITSPs will need to be learned by
telcos. The quality of voice on the Internet will
eventually exceed that of the PSTN, and
Whilst the opportunity for telcos to other current PSTN advantages, such as
expand, both in terms of size and expertise, the integration of intelligence into the
exists in the form of acquisition and network, are already entering the Internet.
mergers, similar activity is occurring Nortel Networks has announced a next
amongst other ITSPs, making the surviving generation SS7/IP signalling gateway
companies more dangerous. application, which is to deliver large scale,
carrier-class PSTN/IP integration [24].
The emergence of next generation telcos
has shown the necessity for such a strategic The above approach would maximise
focus. Telcos providing bundled services revenues in the short term, however as
may lack such a dedicated focus, and as a prices are forced down by competition
result may not be able to service their from new entrants and VoIP providers,
customers adequately. revenues would slip similarly. At the same
time, innovative providers will gather a
customer base and establish credibility.

20
Operators wanting, at a later stage, to enter communications, and will soon be able to
the IP arena, will find themselves in a race offer mass-market and ubiquitous services
to catch up, and with a tarnished brand to each member of the public.
image.
The emphasis so far has been in two main
Operators seeking to become early movers areas – business use and long-
have to make the difficult decision to offer distance/international use. Current VoIP
low priced services in direct competition markets are heavily biased towards
with their existing business. This strategy business usage, but consumer markets are
could take advantage of their known names developing quickly as a result of next
and available capital to obscure generation carriers.
competition. Telcos would be in a position
to offer differentiated services over the 9.1.1 Business Usage
Internet (or other IP networks) or the Quality problems such as latency can be
PSTN, depending on the requirements and minimised over a local network such as a
sensitivities of the customer. They could corporate LAN. For this reason, many
also move into new markets as new businesses running IP LANs have taken
entrants, as AT&T have done successfully advantage of the efficiency of packet
in Japan, whilst learning about these new switching. Technical problems are less
markets and services. daunting due to the closed nature of the
network, which results in greater reliability
This approach seeks to maximise revenues than on the Internet. This means that delay
in the long term by compromising some in processing and reception can be
short-term margins. However, minimised, and calls are closer to PSTN
segmentation of the market and the offering quality. VoIP may also be adopted for
of differentiated services does not inter-office communications (on a WAN or
necessarily mean revenues will drop LAN-to-LAN over the Internet), where
significantly in the short term. quality is less of an issue than when
dealing with customers or partners.
The final strategy involves operators
looking to climb the value chain by Businesses can also set up web-enabled
exploring value-added VoIP services and call centres, so that customers wishing to
offering them to their corporate customers. contact them by phone can initiate a call
This could involve movement into any of without having a second line or
the primary areas of value-added services disconnecting their Internet session. They
generally associated with ISPs - content, can ‘click to talk’. If the customer too has
systems integration, web hosting. Because VoIP capability the call can be made over
these services are very far from the the Internet without the customer having to
companies’ traditional strategic focus and disconnect his connection. Otherwise, the
core competencies, many have failed to be customer can enter his information, send it
successful in this area. over the Internet, disconnect and wait for a
9. VoIP Market Segmentation call centre agent to call him back.

The VoIP market, in its immature stage, is Shared applications are also possible
highly segmented, with particular across an Internet connection, allowing
functionalities and enhanced services both the caller and the agent to share
especially suited to certain customer information and to interact. This could
segments. An industry that began by signal a radical change in the way
offering simple low-quality services to customers interact with a company, going
Internet-savvy hobbyists is now building from a purely auditory experience to one
customer bases in various areas of that can involve speech, information
traditional telecommunications and data sharing through web interaction,

21
whiteboarding [glos] and file exchange. has become phone-to-phone long-distance
Push technology can be used to guide a and international calling.
customer to other pages on the Internet.
Instead of the customer requesting these International and long-distance residential
pages using HTTP, the agent can ‘push’ callers are willing to accept lower-quality
the information onto the customer’s international calls at a lower price. These
computer. users are less sensitive to quality, and do
not necessarily require enhanced services.
There are also advantages to VoIP call It is the price arbitrage alone that has
centres in terms of time. Forms can be attracted them to VoIP. Consumers
filled in directly by the customer, and when generally tend to be cost-conscious and
he connects to the call centre the more flexible than business customers
information is sent directly. Also, cookies regarding quality and convenience.
[glos] can be left on the customer’s PC that
will identify them to the call centre the next Next generation telcos are moving towards
time they call, saving both the caller and catering for large cities having high
the agent time. densities of people with strong foreign
links. Offering VoIP between, say, San
Businesses with high incoming toll-free call Francisco and China, would allow service
volumes can eliminate their toll-free providers to build up large amounts of
number access charges by letting traffic between these locations. This
customers call a local number, from which backbone cost reduction seems to be one of
they are transported to an internal, the main objectives of the next generation
centralised network. This appears to be a telcos. Gateways can be appropriately
local call to the customer, unaware that his positioned, and a dedicated line can be set
call has been transported over a packet- up between these destinations. This may
switched network, and costs that for the allow for VoIP without any use of the
business [26]. Businesses that have high Internet, and hence overcome significant
telephony usage, such as travel agents and QoS problems, as capacity can be easily
financial services, will be the target of managed and long distances can be
many new entrant VoIP providers. traversed in just one hop.

SOHO (Small Office/Home Office) 9.2 VoIP Uptake


premises tend to have higher penetration From country to country, the development
rates than consumers for multiple telephone of VoIP will depend on a number of
lines, PCs, and online services. Their high complex and dynamic issues. Certain
connectivity and multiple needs are an environments are more inclined towards the
opportunity for VoIP service providers. take-up of VoIP for many reasons. For
Being already connected to the Internet, a instance, in the US, tariffs are lower than
virtual second line can be provided by elsewhere, and quality tends to be higher.
reception of VoIP and through the PC. Therefore, most customers will be reluctant
Significantly enhanced services, which may to move to lower quality services when the
be of great use to small businesses, can be price arbitrage is not so evident. On the
offered. Small businesses are likely to be other hand, in countries with poorly
less concerned about the lack of QoS on developed infrastructures the cost/quality
the Internet, and will be willing to trade off trade-off of VoIP will be considerably
convenience and quality for lower prices. more attractive. The regulatory
environment may also have an effect here,
9.1.2 Residential Usage as a competitive telecoms environment
Internet hobbyists, the original users of generally results in lower tariffs. However,
VoIP still use PC-to-PC calling. However, such an environment can foster innovation,
the primary focus in the residential market

22
3500
3000
2500
leading to a quicker uptake of new

US$m
2000 US
services. 1500 Europe

1000
The Internet infrastructure and penetration 500
of Internet usage will affect adoption. 0
1997 1998 1999 2000 2001 2002
Customers already online will be more
willing to try out VoIP, and a well- growth of 149% for the next few years,
developed infrastructure will be able to while minutes of use will increase by
give a higher quality of service. The approximately 220% annually.
penetration of high-speed local loop IDC (International Data Corp.) has
technologies will also facilitate VoIP. The suggested the market may be worth as
last mile is usually the slowest part of an much as $24.4bn by 2002, with
Internet connection, and with the international calling generating more than
introduction of xDSL and other high-speed 83% of this revenue, whereas Killen &
technologies, enhanced VoIP service Associates estimate revenues will reach
quality could increase dramatically. $63 billion by 2002.

The maturity and sophistication of the ISP Consultancy Phillips Tarifica estimates
market in a particular country will be an that AT&T will lose $620m to $950m in
indicator of the time-to-market for new international calls by the end of 2001 due
services. to VoIP. Digital estimates that VoIP could
cost traditional phone companies $8 billion
Specific routes (e.g. east-coast USA to in lost revenues over the next four years
Ireland, UK to south Asia) with high and may be able to eliminate the profits of
volumes of consumer traffic will take U.S. long-distance carriers by stealing just
advantage of the low costs of international 6 percent of U.S. telephone traffic [27].
calling. According to Forrester Research, by 2004,
ITSPs will offset the incumbent carrier
revenues by $3 billion in domestic long
10. Market Forecasts distance, $2 billion in spending and $1
billion in savings by end users. Forrester
VoIP revenues are currently higher in the Research also predicts that prepaid calling
US than in Europe, but this is set to change card traffic will drive 50% of VoIP end
due to both the current high tariffs in user spending by 2002, reaching $1.4
Europe, and the recently liberalised billion by 2004 [28].
markets bringing competition. Usage will
be greater in the US, primarily due to the Probe Research predicts that IP networks
superior Internet infrastructure, but will carry 7% to 11% of the world's
margins will be higher in Europe, allowing international voice traffic by 2002, 34% of
providers to reap greater revenues. the U.S. domestic long distance traffic, and
10% of the world's fax communication.
Within Europe, the VoIP market is They also suggest that as much as 50% of
expected to develop fastest within mature VoIP minutes will be additive, i.e. minutes
communications markets such as the UK the PSTN is not losing [29].
and Scandinavia, and in countries with
high PSTN tariffs, such as Italy and Spain. VoIP Minutes of Use

16
14
Fig. 2 VoIP Service Markets 1997-2002, source [5]
Billions of Minutes

12
US Long-Distance
10
Europe Long-Distance
According to Frost & Sullivan, the total 8
Us International
6
VoIP market will experience compound 4
Europe International

2
0
1997 1998 1999 2000 2001 2002

23
in a prime position to grab a share of the
Fig. 3 VoIP Minutes of Use 1997-2002, source [5] business market, as they can offer QoS
guarantees over their managed private
network.
11. Conclusion
In Internet industries, the early mover
Although competition and demand will usually wins vital market space. Netscape,
determine the market, a number of factors for instance, a start-up in 1994, almost
are clear in order that VoIP gain immediately became the largest provider of
widespread acceptance. web browsing software, and did so because
it saw the opportunity before Microsoft
QoS will be a pre-requisite for mass- and other software houses. Equipment
market VoIP services, particularly business vendors need to enable service providers to
services. It is critical that networks have offer business telephony features that
the ability to prioritise traffic to minimise transfer the features of the PSTN to the IP
network delay, and different service levels world, benefiting both themselves and the
must be available for different classes of latter.
use.
The long-term view (5-10 years into the
The market is used to the PSTN, and is future) sees quality issues as a thing of the
reasonably satisfied with it. Users require past. By that time there will be no need to
seamless integration of the PSTN and IP make the economic case for VoIP, as
networks. They require services that are PSTN tariffs will have dropped in response
always available and reliable, with the high to competition. Users will opt for VoIP
quality and enhanced calling features they because it is more efficient, has improved
have come to expect. The average user functionality, and is an altogether better
does not care about the network solution to serve a technology-savvy
technologies involved as long as his market’s needs.
expectations are met and modifications to
his behaviour need not be dramatic.
End user equipment needs to become more
user-friendly; reliability must approach
that of the PSTN; interoperability amongst
vendors needs to be accomplished through
an open architecture and industry
standards; and accessibility needs to be
extended beyond the telephone to the fax
machine, PC, and other compatible
devices.

Once the price advantage dissolves, the


market will be service-driven with
enterprises pushing these services. Tariffs
are lower than those for the PSTN due to a
toll bypass, but it can be argued that the
costs required to build an IP network with
the reliability and features of the PSTN
may yield only marginal cost benefits
relative to the PSTN. Service providers,
through business-oriented services and
applications, can achieve higher margins.
Those building dedicated IP networks are

24
Glossary
Router-Based Gateway – a node that
ATM – Asynchronous Transfer Mode, a translates between IP and PSTN information,
multiplexing and switching technology used to and which resides at a router.
transport small fixed-length packets, called
cells, over a high-speed network. SDH – Synchronous Digital Hierarchy, the
international equivalent of SONET.
Concentrator-Based Gateway – a
concentrator (or aggregator) is a device that SMS – Short Message Service, a service for
acts as an efficient forwarder of data sending messages of up to 160 characters to
transmission signals. A concentrator-based mobile phones that use Global System for
gateway is one that resides at such an Mobile (GSM) communication.
aggregation point.
SONET – Synchronous Optical NETwork, the
Cookies – special text files that a Web site US standard for synchronous data
puts on a PC so that it can remember transmission over optical media.
something about the user at a later time.
SS7 – Signalling System No. 7, the global
DSP – Digital Signal Processor, a circuit used standard for PSTN telecommunications.
to improve the accuracy and reliability of
digital communications. A DSP circuit is able Whiteboarding - the sharing of a document
to differentiate between human-made signals, or image between by two or more users,
which are orderly, and noise, which is allowing them to make notes or changes using
inherently chaotic. the drawing capabilities of the particular
program they are using.
Facilities-Based Providers – those that build
and operate their own networks.

H.323 – the standard for the transmission of


real-time audio, video and data
communications over packet-based networks.

Independent/Non Facilities-Based Providers


– those that do not build their own
telecommunications network infrastructure,
leasing capacity from others, or paying per
use.

Local Loop – the wired connection from a


telephone company's central office to its
customers' telephones at homes and
businesses.

PBX – Private Branch eXchange, a telephone


system within an enterprise that switches calls
between enterprise users on local lines while
allowing all users to share a certain number of
external phone lines.

QoS – Quality of Service, the idea that


transmission rates, error rates, and other
characteristics can be measured, improved,
and, to some extent, guaranteed in advance.

RBOC – Regional Bell Operating Company,


one of the US regional incumbent telephone
companies.

25
Appendix 1: Comparison of Capacities of IP over ATM and IP over SONET

Based on a 155.520 Mbps capacity link running IP packets of size 576 bytes.

Protocol Layer Available Bandwidth % of Line Capacity % Overhead Added


(Mbps) by Each Layer
SONET 155.520 100 3.7
ATM 149.460 96.6 9.43
AAL 135.362 87.5 6.41
LLC/SNAP 126.937 80.7 1.37
IP 125.918 79.6 0

Protocol Layer Available Bandwidth % of Line Capacity % Overhead Added


(Mbps) by Each Layer
SONET 155.520 100 3.7
PPP 149.460 96.6 1.54
IP 146.15 95.4 0

source [30]

Based on the above figures, IP over ATM gives 79.6% of line capacity, compared to 95.4% for
IP directly over SONET/SDH. The reason for this significant differentiation is that ATM and
its related layers provide QoS guarantees.

26
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28