by Robert Clark
Is this the year of voice over IP, or the year of hype over voice over IP? A slew of major carriers has entered the consumer retail VoIP arena, while challengers like Skype and Vonage continue to rack up impressive numbers. VoIP is taking serious headlines and mindshare. And it's clearly a direct threat to incumbent carriers around the world.
"Almost every service provider I am speaking to is thinking about some sort of transformation," says David Caspari, vice-president of Cisco's Asia-Pacific service provider operations.
"If the incumbents don't develop a product--in this case, VoIP--to cannibalize their own base, then their rivals will come in and attack their base," adds Darren Day, Asia-Pacific director of marketing for MCI.
"There's no doubt in the consumer market it's one of the most talked-about subjects," says senior Ovum analyst Mark Main. He estimates the number of worldwide consumer VoIP users represents a "very small penetration" of the total voice market, about 1% to 2%.
But development of consumer VoIP has been very market-specific, Main notes. VoIP has become a major service in Japan, which leads the world with more than 9 million customers, because of the high-cost of IDD calls. Both Yahoo! BB and NTT Communications now each have more than 4 million VoIP customers, offering calls around the world for just a few cents a minute.
Free Telecom in France is bundling VoIP with multi-channel TV, a response to the poor level of choice in the TV market, says Main. By contrast, the UK has low IDD prices, a wide choice of TV channels and only 10,000 or so VoIP customers.
In the United States, several major cable companies such as Time Warner, Comcast and Cablevision are marketing VoIP as part of a discounted voice, data and video service bundle.
"There's not a lot of money to be made from any kind of telephone service these days," Main says. "It's not a huge money-spinner."
So we are still fairly early in the technology adoption cycle of VoIP, despite the great leap of the past 12 months. But every carrier has marked the VoIP and NGN transformation onto its roadmap, says Caspari.
"When you look at the business case, purely on cost regime, and reducing opex, operators struggle to justify the very significant investment they have to make to transform the network from circuit to packet-based. Their focus is also on how to address incremental revenue and services."
Asian markets certainly run the gamut of responses to VoIP. At the opposite end to Japan, Thai authorities responded by arresting 30 people in early October for offering VoIP as an unauthorized service.
No consumer VoIP service is available in Singapore. SingTel's initial foray, via a partnership with U.S.-based SIPphone, has moved slowly. SIPphone CEO Michael Robertson, who founded dot-com company MP3.com, said at the April launch that the service would have a similar impact on the voice market as his previous venture had on the music market.
However, although initially targeted at Asian service providers, its end-users today are all in North America. Richard Tan, vice president of SingTel's international carrier services, sees limited prospects for consumer VoIP in Singapore.
What's brought VoIP to center stage right now? Hardcore hobbyists were making Internet voice calls a decade ago. Internet or packet-based voice has been running in trunk backbones for four or five years now. IP wholesaler iBasis estimates that a third of all international voice minutes are now carried by IP. Likewise IP voice over corporate VPNs or PBXs is not new either.
VoIP for the mass market, or consumer VoIP, or broadband telephony, is the first big broadband application after pure high-speed access; ironic perhaps, that the telcos' much sought after killer app for broadband is one that cannibalizes their core revenues.
The availability of broadband has given the impetus for viral PC-based applications such as Amsterdam-based Skype and Voglo from the U.S. Skype CEO Niklas Zennstrom was also the co-creator of the Kazaa file sharing software, which is the all-time most popular Internet download.
UK research firm Analysys calls Skype and Voglo "PVAs"--private VoIP applications--and estimates they could take as much as 13% of the residential wireline voice market in Europe by 2007. By that time, in the worst-case scenario, incumbents could lose as much as 3.3 billion euros in subscription revenues a year, Analysys suggests.
From one perspective, services like Skype, Voglo and Vonage make for tough competitors. Says Main: "The beauty of their approach is there is no risk for the user. But it's not clear yet how much impact it has had, and how much revenue it is going to gain."
Skype's strategy in Asia is more akin to a portal play than that of a telecom service provider, leveraging its strength as a PC-based application, capable of offering instant messaging and file-sharing.
The downside is that a PC-based, proprietary system hardly matches the traditional phone for simplicity and convenience.
Other experts point to the huge branding power and marketing reach of incumbent telcos.
Yankee Group senior analyst Kate Griffin says the first-to-market advantage of "Vonage-like providers" will be "short-lived." Their market share is declining under pressure from VoIP offerings from trunk carriers like AT&T, cable firms like Time Warner and ILECs such as Verizon.
The major carriers' resources "dwarf even the largest of the alternative VoIP providers," says Griffin. "The local VoIP market is already crowded with more than a dozen players vying for local consumers."
JupiterResearch senior analyst Joe Laszlo believes new VoIP players would be important in jump-starting the market, but it was "unlikely that start-up VoIP providers will become a significant threat to the incumbent phone companies."
But if there's one market that is going to test just how much value VoIP can bring to consumers, it has to be Hong Kong. Five main fixed-line service providers (four of which have built out extensive access networks) have brought VoIP offerings to the market.
"Hong Kong is going to lead the region if not the world in how this plays out," says Caspari of Cisco. "Plenty of other markets in the world are offering these services, but no one is offering all these at the moment."
The punch line for VoIP players could be that their real rival is not each other, or even the incumbent, but the fastest-growing part of the voice business: cellular.
"For attracting young adults, VoIP's biggest competitor may prove to be mobile operators, not the Bell companies," warns JupiterResearch's Laszlo. He recommends that VoIP providers offer plans for consumers seeking only a low-use back-up to their mobile.
The huge bundles of cheap minutes offered already by 3G operators point to the fierce contest ahead for the voice dollar, Ovum's Main points out. The future voice market will be a battle between hungry 3G players, aggressive VoIP startups and incumbents stoutly defending their patch.
It's something of a land grab right now," says Main. In a few years will be the inevitable shakeout. Incumbents are accustomed to challenges to their market. With mobiles on one side and VoIP operators on the other side, the battle for voice could be the biggest battle of all.
Defining the rules for VoIP
For a service that is not even classified as belonging to the telecom sector, VoIP is causing plenty of headaches for industry regulators. In fact, it is the very nature of VoIP that is the heart of the problem; it supports voice, but in no other way resembles a telecoms service.
VoIP thus presents a paradigm-busting dilemma for progressive regulators. They don't want to stand in the way of fresh technology but know they will be first to blame for any kind of service disruption.
So, regulators from Singapore to Europe have embarked on industry consultations on VoIP, dealing with the same slate of issues.
It's pretty unusual to see everyone working on the same issue at the same time," observes Paul White, executive manager of standards and compliance with the Australian Communications Authority (ACA). The ACA lists 21 questions in a consultation paper issued in October.
On one side are technical questions. Internet voice calling doesn't have its own power supply, meaning no service in a power cut. Emergency and security services are worried that it doesn't provide location information. There is no VoIP numbering plan, nor is it configured for number portability. Quality is uncertain.
Then there are the financial issues. In particular, incumbent carriers are quarrelling about the impact on the financing of universal service obligations (USOs) and on local access or interconnection fees.
That's become a thorny topic in the U.S., where $6.2 billion each year is paid out for various USO programs. One FCC commissioner, Kathleen Abernathy, has proposed a flat tax on every physical network connection, or every phone number.
These issues will take some working out, but it's worth noting that most regulators have gone out of their way to facilitate the development of VoIP. Most look likely to follow in the spirit of the FCC, which has declared VoIP to be an information and not a telecommunications service, and hence not subject to telecom regulations--at least not yet.
But Hong Kong incumbent PCCW has objected to the green-lighting of VoIP ahead of industry consultation. It's taken regulator OFTA to court, claiming that rival CTI has exceeded the scope of its local license with its VoIP offering.
"This is a very Hong Kong-specific, narrow legal issue," says Stuart Chiron, PCCW's director of regulatory affairs. "It's not an attack on VoIP generally, it's not an attack on technology.
"There's a proper way to get (VoIP) off and running here and that is through public consultation," Chiron says. "All the issue are laid out... and the government takes a decision. The way not to do it is to do it outside the scope of its license."
OFTA simply disagrees. "There is nothing we can do to pull back a service that is within the license conditions," says OFTA chief M.H. Au.
PCCW also has issues with the financing of the universal service charge, which comes out of international minutes. "Some of the revenue will go missing," says Chiron.
Despite those differences, Chiron says PCCW saw the same issues with VoIP as those laid down in OFTA's paper. Au said the key issues for OFTA were whether the existing license conditions were too stringent, whether or not non-network based operators should be allowed to enter the market, and the impact on the existing interconnection regime.
Reaching for the Skype
You've not tried Skype? OK, you're in the majority, but some 5% of all Internet users, or 32 million people, have downloaded the free Skype application.
That makes it the one of the most popular-ever Internet downloads, and doubtless the world's most viral telecom service. Marcomms managers, pay attention: Skype hasn't spent a penny on promoting the product, but has had up to a million people online at the same time.
Your humble correspondent joined the Skype-ists recently, when a dodgy local line put my fixed-line out of service. The first thing you quickly discover is that a lot of your friends, and lots of their friends, are also in the Skype club.
It's a rapidly-growing universe, but that still leaves you without access to the universe of 3 billion mobile and fixed phone numbers. Prompted by a sudden spike in my phone bill, I took the plunge with a subscription to SkypeOut, which interconnects with the PSTN. After one week of using the service daily, I've spent a grand total of 1.65 euros. Is that affordable or what?
It's not totally reliable. Probably one call in five doesn't get through the first time. On two occasions I've had to give up and call later, and I find myself starting too many calls with, "Can you hear me?"
Perhaps it's the secondary things that make it attractive. Like any prepaid service, I'm paying only for usage and I know exactly how much I've spent. Using a quality headset is more efficient than a phone; no need to hunch the shoulder while trying to get an extra hand free.
Would I junk my regular phone service for Skype? Not yet. I can't walk around the house talking on Skype and the quality isn't quite there, while local calls are cheap enough and vastly more convenient.
But Skype has signed up 290,000 users to its SkypeOut commercial service, which is at least 3 million euros in revenue straight off. It's here for awhile. So is this user.--Robert Clark
"Almost every service provider I am speaking to is thinking about some sort of transformation," says David Caspari, vice-president of Cisco's Asia-Pacific service provider operations.
"If the incumbents don't develop a product--in this case, VoIP--to cannibalize their own base, then their rivals will come in and attack their base," adds Darren Day, Asia-Pacific director of marketing for MCI.
"There's no doubt in the consumer market it's one of the most talked-about subjects," says senior Ovum analyst Mark Main. He estimates the number of worldwide consumer VoIP users represents a "very small penetration" of the total voice market, about 1% to 2%.
But development of consumer VoIP has been very market-specific, Main notes. VoIP has become a major service in Japan, which leads the world with more than 9 million customers, because of the high-cost of IDD calls. Both Yahoo! BB and NTT Communications now each have more than 4 million VoIP customers, offering calls around the world for just a few cents a minute.
Free Telecom in France is bundling VoIP with multi-channel TV, a response to the poor level of choice in the TV market, says Main. By contrast, the UK has low IDD prices, a wide choice of TV channels and only 10,000 or so VoIP customers.
In the United States, several major cable companies such as Time Warner, Comcast and Cablevision are marketing VoIP as part of a discounted voice, data and video service bundle.
"There's not a lot of money to be made from any kind of telephone service these days," Main says. "It's not a huge money-spinner."
So we are still fairly early in the technology adoption cycle of VoIP, despite the great leap of the past 12 months. But every carrier has marked the VoIP and NGN transformation onto its roadmap, says Caspari.
"When you look at the business case, purely on cost regime, and reducing opex, operators struggle to justify the very significant investment they have to make to transform the network from circuit to packet-based. Their focus is also on how to address incremental revenue and services."
Asian markets certainly run the gamut of responses to VoIP. At the opposite end to Japan, Thai authorities responded by arresting 30 people in early October for offering VoIP as an unauthorized service.
No consumer VoIP service is available in Singapore. SingTel's initial foray, via a partnership with U.S.-based SIPphone, has moved slowly. SIPphone CEO Michael Robertson, who founded dot-com company MP3.com, said at the April launch that the service would have a similar impact on the voice market as his previous venture had on the music market.
However, although initially targeted at Asian service providers, its end-users today are all in North America. Richard Tan, vice president of SingTel's international carrier services, sees limited prospects for consumer VoIP in Singapore.
What's brought VoIP to center stage right now? Hardcore hobbyists were making Internet voice calls a decade ago. Internet or packet-based voice has been running in trunk backbones for four or five years now. IP wholesaler iBasis estimates that a third of all international voice minutes are now carried by IP. Likewise IP voice over corporate VPNs or PBXs is not new either.
VoIP for the mass market, or consumer VoIP, or broadband telephony, is the first big broadband application after pure high-speed access; ironic perhaps, that the telcos' much sought after killer app for broadband is one that cannibalizes their core revenues.
The availability of broadband has given the impetus for viral PC-based applications such as Amsterdam-based Skype and Voglo from the U.S. Skype CEO Niklas Zennstrom was also the co-creator of the Kazaa file sharing software, which is the all-time most popular Internet download.
UK research firm Analysys calls Skype and Voglo "PVAs"--private VoIP applications--and estimates they could take as much as 13% of the residential wireline voice market in Europe by 2007. By that time, in the worst-case scenario, incumbents could lose as much as 3.3 billion euros in subscription revenues a year, Analysys suggests.
From one perspective, services like Skype, Voglo and Vonage make for tough competitors. Says Main: "The beauty of their approach is there is no risk for the user. But it's not clear yet how much impact it has had, and how much revenue it is going to gain."
Skype's strategy in Asia is more akin to a portal play than that of a telecom service provider, leveraging its strength as a PC-based application, capable of offering instant messaging and file-sharing.
The downside is that a PC-based, proprietary system hardly matches the traditional phone for simplicity and convenience.
Other experts point to the huge branding power and marketing reach of incumbent telcos.
Yankee Group senior analyst Kate Griffin says the first-to-market advantage of "Vonage-like providers" will be "short-lived." Their market share is declining under pressure from VoIP offerings from trunk carriers like AT&T, cable firms like Time Warner and ILECs such as Verizon.
The major carriers' resources "dwarf even the largest of the alternative VoIP providers," says Griffin. "The local VoIP market is already crowded with more than a dozen players vying for local consumers."
JupiterResearch senior analyst Joe Laszlo believes new VoIP players would be important in jump-starting the market, but it was "unlikely that start-up VoIP providers will become a significant threat to the incumbent phone companies."
But if there's one market that is going to test just how much value VoIP can bring to consumers, it has to be Hong Kong. Five main fixed-line service providers (four of which have built out extensive access networks) have brought VoIP offerings to the market.
"Hong Kong is going to lead the region if not the world in how this plays out," says Caspari of Cisco. "Plenty of other markets in the world are offering these services, but no one is offering all these at the moment."
The punch line for VoIP players could be that their real rival is not each other, or even the incumbent, but the fastest-growing part of the voice business: cellular.
"For attracting young adults, VoIP's biggest competitor may prove to be mobile operators, not the Bell companies," warns JupiterResearch's Laszlo. He recommends that VoIP providers offer plans for consumers seeking only a low-use back-up to their mobile.
The huge bundles of cheap minutes offered already by 3G operators point to the fierce contest ahead for the voice dollar, Ovum's Main points out. The future voice market will be a battle between hungry 3G players, aggressive VoIP startups and incumbents stoutly defending their patch.
It's something of a land grab right now," says Main. In a few years will be the inevitable shakeout. Incumbents are accustomed to challenges to their market. With mobiles on one side and VoIP operators on the other side, the battle for voice could be the biggest battle of all.
Defining the rules for VoIP
For a service that is not even classified as belonging to the telecom sector, VoIP is causing plenty of headaches for industry regulators. In fact, it is the very nature of VoIP that is the heart of the problem; it supports voice, but in no other way resembles a telecoms service.
VoIP thus presents a paradigm-busting dilemma for progressive regulators. They don't want to stand in the way of fresh technology but know they will be first to blame for any kind of service disruption.
So, regulators from Singapore to Europe have embarked on industry consultations on VoIP, dealing with the same slate of issues.
It's pretty unusual to see everyone working on the same issue at the same time," observes Paul White, executive manager of standards and compliance with the Australian Communications Authority (ACA). The ACA lists 21 questions in a consultation paper issued in October.
On one side are technical questions. Internet voice calling doesn't have its own power supply, meaning no service in a power cut. Emergency and security services are worried that it doesn't provide location information. There is no VoIP numbering plan, nor is it configured for number portability. Quality is uncertain.
Then there are the financial issues. In particular, incumbent carriers are quarrelling about the impact on the financing of universal service obligations (USOs) and on local access or interconnection fees.
That's become a thorny topic in the U.S., where $6.2 billion each year is paid out for various USO programs. One FCC commissioner, Kathleen Abernathy, has proposed a flat tax on every physical network connection, or every phone number.
These issues will take some working out, but it's worth noting that most regulators have gone out of their way to facilitate the development of VoIP. Most look likely to follow in the spirit of the FCC, which has declared VoIP to be an information and not a telecommunications service, and hence not subject to telecom regulations--at least not yet.
But Hong Kong incumbent PCCW has objected to the green-lighting of VoIP ahead of industry consultation. It's taken regulator OFTA to court, claiming that rival CTI has exceeded the scope of its local license with its VoIP offering.
"This is a very Hong Kong-specific, narrow legal issue," says Stuart Chiron, PCCW's director of regulatory affairs. "It's not an attack on VoIP generally, it's not an attack on technology.
"There's a proper way to get (VoIP) off and running here and that is through public consultation," Chiron says. "All the issue are laid out... and the government takes a decision. The way not to do it is to do it outside the scope of its license."
OFTA simply disagrees. "There is nothing we can do to pull back a service that is within the license conditions," says OFTA chief M.H. Au.
PCCW also has issues with the financing of the universal service charge, which comes out of international minutes. "Some of the revenue will go missing," says Chiron.
Despite those differences, Chiron says PCCW saw the same issues with VoIP as those laid down in OFTA's paper. Au said the key issues for OFTA were whether the existing license conditions were too stringent, whether or not non-network based operators should be allowed to enter the market, and the impact on the existing interconnection regime.
Reaching for the Skype
You've not tried Skype? OK, you're in the majority, but some 5% of all Internet users, or 32 million people, have downloaded the free Skype application.
That makes it the one of the most popular-ever Internet downloads, and doubtless the world's most viral telecom service. Marcomms managers, pay attention: Skype hasn't spent a penny on promoting the product, but has had up to a million people online at the same time.
Your humble correspondent joined the Skype-ists recently, when a dodgy local line put my fixed-line out of service. The first thing you quickly discover is that a lot of your friends, and lots of their friends, are also in the Skype club.
It's a rapidly-growing universe, but that still leaves you without access to the universe of 3 billion mobile and fixed phone numbers. Prompted by a sudden spike in my phone bill, I took the plunge with a subscription to SkypeOut, which interconnects with the PSTN. After one week of using the service daily, I've spent a grand total of 1.65 euros. Is that affordable or what?
It's not totally reliable. Probably one call in five doesn't get through the first time. On two occasions I've had to give up and call later, and I find myself starting too many calls with, "Can you hear me?"
Perhaps it's the secondary things that make it attractive. Like any prepaid service, I'm paying only for usage and I know exactly how much I've spent. Using a quality headset is more efficient than a phone; no need to hunch the shoulder while trying to get an extra hand free.
Would I junk my regular phone service for Skype? Not yet. I can't walk around the house talking on Skype and the quality isn't quite there, while local calls are cheap enough and vastly more convenient.
But Skype has signed up 290,000 users to its SkypeOut commercial service, which is at least 3 million euros in revenue straight off. It's here for awhile. So is this user.--Robert Clark
