What is the current state of VoIP technology? Where is it headed? Who will emerge as winners and losers? What role will regulators play?
These were among the questions a distinguished panel of telecom executives examined several weeks ago when America's Network sponsored its first VoIP industry summit in the Washington, D.C. law offices of Swidler Berlin Shereff Friedman. The freewheeling, roundtable discussion was directed by William Wilhelm, a telecom law expert with the firm. The discussion was co-chaired by Al Senia, the managing editor of America's Network.
The VoIP roundtable lasted more than two hours. Edited excerpts of the questions and answers follow. A fuller, more detailed discussion is available at America's Network Web site (www.americasnetwork.com).
Q: What kind of features are VoIP users most interested in?
DONDERO: We've done research on that with enterprises and consumers. We did it a few years ago and we're just redoing it now. So features like video calling among consumers. We were quite pleasantly surprised, frankly. We saw a significant interest in that sort of communication. The ability to manage call lists, control your calling, route your calls to your cell phone and provision that in real time.
In a collaborative environment, things like video chat, teen chat lines. We really do see a lot of interest in that. And in Asia Pacific markets where video is dominant, (there's) a lot of interest in those sorts of technologies there.
ATTWOOD: SBC is, in fact, in the business market now, the small-medium business markets, selling precisely those mobility applications, collaborative applications, personal productivity enhancements.
But I'd also say one of the great things about the IP platform is that, in fact, as new applications come online, the incremental ability of the end-user, the customer, to customize that service, to add a feature, is really what distinguishes this kind of service from some of the traditional services. The customer is able to customize what they need, their communications needs.
SORGI: I think one thing that's incredibly important is not to tie customers to one provider, but to let customers not just add whatever features I might offer them, but to pick and choose who they want for their ISP, who they want for their broadband connection. Until we liberate consumers in that way, we're not going to have the explosion, even with what may be a killer Voice over IP. We're not going to have the explosion that I think people are hoping for. We need consumer choice to be maximized. And that's not happening now.
CARLISLE: Well, the other trend that we're seeing is the development of incredible end-user technology consumer premises equipment that is (not) going to drive deployment of facilities, but also is going to going to drive a take rate for both broadband and these services.
CITRON: I think people are starting to see here, with applications, really two kind of discrete sets. There's Voice over IP applications that are truly applications having nothing to do with replacing your phone service, and there's Voice over IP applications to replace your phone service. And I want to be mindful that they are separate.
Q: How do you expect VoIP technology to evolve?
DONDERO: We see immense opportunity out there and very much agree with the notion of the creation of a wide variety of new innovative service, which will create new forms of bundling. We're certainly starting to see that emerge right now over broadband, new services that we can't imagine: triple-play bundles, quadruple-play bundles that are based on VoIP.
The whole notion of openness, as well, the ability of third-party application developers to create and write wholly new applications--again, things we haven't dreamed of yet--certainly is going to be significant for the industry, for consumers and business alike. So it's a great opportunity.
ATTWOOD: The (Federal Communications) Commission and SBC as well have identified this as really an IP issue, not (just) VoIP. Service is one piece of it, but the services and applications are really IP-enabled services. And that's what the promise is.
SORGI: The new thing here isn't voice over IP. That's been around for a while. The new thing is broadband enabling of this application. And so for us, and I think for most of us who are in this world and will be in it more, it's the FCC's job, regulator's job, is to make sure that broadband is open and that all comers can get it and compete on it. And so it's about the access layer, distinct from the application. I think the buzz around VoIP has been around the application. But the real interest here is the broadband world that we're all in.
Q: Will there be an open set of standards so that third parties can interface or plug in their applications to providers?
DONDERO: That's happening today with the SIP protocol. That's been embraced as the protocol of choice for multimedia applications. And you see Microsoft adopting that for new versions of XP and other applications, and just a whole slew of application providers emerging embracing that technology, which really fundamentally enables these new multimedia services and peer communications and the ability to run multiple devices at the same time and things like that.
So that absolutely is happening today, and we support that effort and that movement.
Q: Is VoIP over-hyped? Is it awaiting some killer app for widespread adoption?
CITRON: I don't think it's an "if" anymore. It's clearly a "when." And in the case of basic IP connectivity and solutions, it's really happening already. There is no hype. I mean, Vonage is out there, we're signing up a lot of people. Our sales rates are growing very quickly.
But there are these really cool advanced applications like video, which are probably still some time off. And the video is something that probably is a lot more hype than reality because the realities are, many people in this country can't get enough bandwidth to make video telephony work. A lot of people in this country can't get broadband alone. They don't even have enough bandwidth. And the cost of buying these devices are still cost prohibitive.
DONDERO: I think there's a lot of confusion certainly in the marketplace about what VoIP is. There's a perception that it's all voice over the internet as opposed to voice over managed IP network, which is what a lot of the larger carriers are rolling out, with the reliability and security that consumers and businesses expect and a lot will insist upon. And that absolutely is happening as well.
ATTWOOD: At SBC, for example, we have a world-class voice network for our mass-market customers. And thus far we haven't seen the business case to move into the mass market because of the issues that a residential customer, for example, their reliability questions are still being worked through, the questions about emergency preparedness are still being worked through.
We're certainly seeing it in the business market because those are where the applications and the customers are demanding kind of higher applications and service enhancements that an IP network can make.
Q: What are the major constraints to VoIP adoption?
SORGI: I think the constraint on Voice over IP really proliferating will be the constraint on broadband being an accessible platform that all competitors can have access to. The Bells obviously want to conflate. They want to attach their ISP and their broadband services to their network and deny all comers access to their network.
We prefer a different model, obviously, where all comers have access to their network at fair prices and the applications are unregulated. If that doesn't happen, then you will end up with a duopoly offering broadband, and most people can't even access the duopoly at the residence/small-business, and that's not very interesting. And the prices will never come down to the level that a competitive market could drive them to to make adoption widespread.
CARLISLE: Well, what I'd like to do is address your original question about hype. I think we're a cynical society now having seen the Internet bubble come and go and sort of seeing people make incredible claims about how technology was all of a sudden going to change our lives. And we didn't get the videophones or flying cars or anything like that, and we're very cynical about these claims....
I think VoIP ... is a technology that is going to change the way people communicate. It will be a gradual change, it will take place over time. It will be subject to diffusion across the country. But essentially it's going to take the decisions about the services that I have and put it in my hands rather than in the hands of a centralized bureaucracy. And it will give me an ability to have those choices follow me around wherever I happen to be on the network. That's really powerful.
ARMSTRONG: From an industry analyst perspective, we fully expect Voice over IP to gain widespread adoption. And we look at trials that Time Warner Cable has drawn up in Portland, Maine, which may not be the best indicator of sort of the perfect sample market, but within 10 months, they've taken 25 percent penetration on top of their cable modem program, which is the only place they're really advertising.
And so is that the perfect example of what type of penetration we should assume in the U.S.? Probably not. No real competitive response from Verizon. But I think it does tell you that the consumer appetite is there for this type of service.
Q: Is there some concern that perhaps the providers of facilities will be essentially the operating system and applications and there's perhaps a way to engineer the facilities so that it doesn't work as well with other applications that ride over that?
ATTWOOD: From a perspective of a provider that has obligations to accept all comers historically from its common carriage obligations, let me just address the business model for us. We, in fact, will grow our product by having product differentiators on our network. I actually think this issue is a unifier for the industry. But we can't fall victim to going back to kind of old lines being drawn. We have now unaffiliated ISPs on our network. There is nothing keeping Vonage or anyone else from in-jacking a box and hooking it into their broadband connection.
We have to work through issues about making sure that the compensation model works since we're providing carriage there and our compensation comes from the carriage that we provide.
CITRON: I do want to highlight one thing on the access layer, that there is still a problem in this country--and it's not to bash any company for it at all--but if you have a competitive application layer, you have to get rid of time between the applications and access.
Today, one of the biggest problems that Vonage faces in deploying Voice over IP is not really in the cable area from any kind of competitiveness or degradation of service on bits. It's actually on the DSL side where it's very difficult for our users to take Vonage's services, to keep their phone number, and to be able to maintain the DSL service. As a matter of fact, if a customer comes to our site and wants to keep their phone number and has DSL services, they can't. We have to turn them away. They have no competitive choice in that case. The only option that we can afford them is essentially to try and convince them to switch their access provider to cable, and then on that--of course, cable is an open platform today--and allow for us to provide Voice over IP. That's an arduous process that acts as an amazing barrier ...
ATTWOOD: Well, it's not an access problem, though. What you're talking about is the question of service offerings ... That's what a competitive market does. It inspires that kind of strategic relationship. Let me also say there is nothing keeping your customer from going to Radio Shack, buying your little product and hooking it up.
CITRON: Well, the problem is that the customer has a phone line in their home, and they want to abandon that phone service, that application, from a common operator. And they can't do that because they can't transfer that phone number to Vonage services. Local portability is impeded when trying to move to Vonage services because if you do move the phone number, it terminates both the DSL portion and the application voice phone number. It's actually a DSL-tying issue.
ATTWOOD: Let me just say that I don't think tying is--I mean, "tying" is a term of art. It's an antitrust term. I'm going to say to you what you're really suggesting is that there is an objection to SBC and others similarly situated to SBC offering a voice service along with its DSL service. These are both service offerings. Now, let me also suggest that DSL is a competitive offering. It is a service that, in fact, we do not have a monopoly control over.
What we are doing is we're looking and seeing what kind of services do our customers want? We are not keeping any provider, any ISP, any applications provider, from in fact, working with our customers, our shared customers, and selling that service. Jeff is suggesting that he would like to see his customers be able to have the phone number. And I'd say look at the wireless model ...
WILHELM: Right, but that didn't happen without the intervention of the regulatory agency; I mean, number portability in the wireless market.
ATTWOOD: I'm suggesting that in the context of the numbering obligation, that is something where either the customer inspires the regulator or inspires the marketplace to product differentiate in that way.
CITRON: Yeah, but in terms of just competition in the marketplace, the marketplace can never develop in order to inspire anyone if you have a barrier put up. I'm not saying there's anything wrong--and I want to be clear. I think it's great that SBC offers both voice services and DSL as a bundled offering. All we're suggesting is it's impossible today to go about stand-alone DSL, or if you have already have that bundle, to break the bundle apart and move the phone service--cancel the phone-service portion while maintaining DSL.
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And when there are places where my customers want to get Vonage service, which is good for competition, they want to use stand-alone DSL, but they can't. They can't do it. And it's highly problematic. And you're never going to see the marketplace demand it until you let there be demand. So you make a problem. Because customers are going to stay and do what? Call you up and say, 'I want standalone DSL'? How many customers have contacted SBC and asked for stand-alone DSL?
ATTWOOD: I wouldn't know, because I'm here.
CITRON: I don't know if anyone would ever know.
ATTWOOD: I disagree with you about customer desires. I think customers are very clear about where they drive us. And, in fact, that's where you're seeing the growth in IP services. To the extent that customers are driving us there, I would suggest that is a very healthy dynamic in the marketplace that would say, 'If you offer a product that my customers want and I will retain a relationship with them as well,' that's going to drive the development of those kinds of things.
CITRON: It's an interesting observation, but years ago, nobody wanted competitive phone service because no one even knew that it existed or that it could even exist. Because years ago there was Ma Bell and everyone just happened on Ma Bell. And years ago everybody had a little black phone.
ATTWOOD: That's not my company!
CITRON: Yes, it is! People don't know what they want until they're given a choice. And it's a problem to imagine what the choice will look like until it's presented to them. Sometimes there will be a little forward thinking. We know people want choice.
ATTWOOD: But that's a remarkable concept from a guy who just started a company and got--how many customers do you have?
Did you have to go and say, 'Wait a minute. Let me see if I can manufacture that'? You were driven because of the customers. You offered a product that the customer found to be one that inspired them to take your service. Nobody had to show them that. In fact, you put it out there. I mean, that's remarkable to me.
CITRON: Actually, that's a really great point because, in reality, we had to show the customer that. Before Vonage started service, there was no demand for replacing your current wireline service with VoIP service. No one was asking for it, no one was writing articles in the newspaper about wanting that service. There was no press talking about it. We didn't hear people saying to the FCC, 'We demand Voice over IP services today' because it didn't exist yet. Vonage created something--
ATTWOOD: Right.
CITRON:--then exposed that creation in a forward-thinking manner to the marketplace, that the marketplace then wanted.
ATTWOOD: Without the regulator--
CITRON: Yes.
ATTWOOD:--by creating a product that the customer said, 'I want.'
CITRON: I think consumers need the opportunity to have access to freestanding DSL. And I think if you put it out there, you're going to see a lot of demand.
ATTWOOD: I also say, if he has hundreds of thousands of customers that are interested in buying stand-alone DSL, that is exactly the kind of market dynamic that says, okay. You then have an offering to make a strategic relationship with companies, and I think that's competition at its best.
CITRON: Is that an offer?
Q: Are you suggesting a strategic partnership here between Vonage and SBC? Would that be possible?
ATTWOOD: Of course it's possible.
CITRON: Absolutely, on my side.
Q: What impact will the FCC's recently released NPRM (Notice of Proposed Rule Making) and the various state regulatory activities have on VoIP adoption?
CARLISLE: Well, very briefly I'd say that the NPRM is a fairly remarkable document in that you have a regulatory agency, whether it's federal or state, actually saying, 'Here's a major potential change in technology. We should really ask whether we continue to be relevant in this environment.' Not relevant overall, but certainly relevant with regard to deployment and regulation of this technology.
The point of structuring it as an IP-enabled services NPRM as opposed to simply a VoIP NPRM is to acknowledge what we were talking about earlier in terms of multimedia services. And if we just look at VoIP and don't have some concept that this is going to be VoIP plus video services, which may morph into something completely different down the road, what we need to do is have a consistent intellectual construct for that so that we don't end up with perpetuating the same sort of stovepipe regulation for different iterations of IP-enabled services that has been the feature of the legacy regulatory environment.
It essentially says, look, there are two different types of regulation. There's regulation that is intended to constrain the power of a monopoly utility provider, which is sort of the classic Communications Act regulation which harkens back to the days of regulating the railroads ... Does that make sense in the market environment that we see VoIP operating in?
That's separate from the second type of regulation which I'll generally lump under the concept of social policy regulation, that there are things that as a society we have decided to apply to anybody who provides a voice service, regardless of whether they're dominant non-dominant and regardless of what technology they might use. For example, universal service, which backs up the concept that all Americans should have access to affordable telecommunications service; law enforcement access to electronic communication, those sorts of regulatory concepts.
DONDERO: I think it's all about a single federal policy and the state issues--it's creating confusion, just massive uncertainty, which is stifling innovation. And I think we need to move to a single federal policy with state preemption and provide that clarity which will fuel the innovation and move things forward.
ARMSTRONG: Without advocating one side or the other, what we need is a clear policy in place fairly quickly. From our perspective, what we do is value cash flows. We figure out what companies are worth. We figure out where financing should go. And so as we look at it, if there's greater risk around future cash flows of a company, which I think is what people perceive now, not only the start-ups, changes in access-charge regimes, changes in the surcharge regimes can change business models literally overnight.
And so I think the need for a real clear policy is necessary at this point, otherwise you're going to continue to see what we've seen over the past few years which is risk premiums in telecom are higher than most other industries. Because of that, access to capital is a little more limited.
SORGI: I think that the jurisdictional issue absolutely needs to be resolved, and I'd like to see the FCC step out and resolve it sooner rather than later for all the reasons that have been articulated. And we've been publicly supportive of that.
On the other hand, the states, in their own right, on other issues, on bundling issues, correct-pricing issues to enable VoIP competition, have been the best friends of competition in many, many ways. And they have legitimate interests in getting issues like universal service resolved. And I think if we are respectful of the state concerns and resolve those issues responsibly, some of the sting of the jurisdictional decision goes away.
I think we need to move quickly to resolve those legitimate concerns and give clarity on the jurisdictional issue. We're very supportive of this being resolved at a federal level.
Q: We've recently seen some additional investments with smaller players in the VoIP space, Speakeasy and Skype and some others. What are your thoughts about the investment opportunity in voice-over-IP facilities or non-facilities-based providers?
ARMSTRONG: The one thing holding it back is, indeed, probably the regulatory paradigm. Without certainty on access charges, surcharges, all the other social issues, that's probably holding us back at this point. As far as consolidation, that's not something we see in the near-term. Consolidation tends to happen in telecom at extremes.
Consolidation could happen if you've got proven business models. For me, Voice over IP hasn't faced really the cable competition yet. A company like Vonage is not necessarily fully on the RBOC radar screen yet, so you haven't had a full RBOC retaliation.
When you get Time Warner Cable in the market, when you get Comcast in the market with Voice over IP, that's when I think the war really heats up. And so consolidation ahead of that, where, as an investor, you don't know what you're paying for, you don't know if the customers that are carried by independent companies right now are going to be there when this war heats up. I think it's a little early for that.
CITRON: Well, I would take offense. I mean, you're right. I mean, we don't see consolidation until the back end of an industry. Right now there is quite a bit of uncertainty on what's going to happen. So we're a while off, but that's a good sign. This industry can absorb an enormous amount of capital. There's a lot of ticking on the sideline. Vonage has seen that capital on the sideline, and we know that that capital is not going to flow to us or anyone else in any real, substantive form until such time as regulatory questions are answered.
ATTWOOD: When we say we need regulatory certainty, we need certainty that there is no regulatory requirement. We all see a world where you're talking about a minimal federal regulatory framework that deals with the public-policy issues, not the economics and economic-type regulation.
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CARLISLE: One thing that's fascinating about how the market is developing now with the competitive providers is that it's much more mature.
I think seven years ago there was the myth of doing everything. There were these companies coming into the market that might be very good at one thing. And the problem with those business models is that they were patently unrealistic. They weren't based on a concept. Many of those models were not based on whether they could realistically execute on doing partnerships in the industry.
What you're seeing now is much more of a mature and sophisticated sense of, okay, we're only going to survive in the market if we can sell what our value-added is to everybody else in the world. Because the cable companies might not be able to handle the customer service associated with doing a telephone network, or the RBOCs may not have developed, within their organization, the ability to execute on an enterprise-based VoIP model or something like that.
ATTWOOD: People are building on core competencies.
CARLISLE: Right, exactly. And so I think you're seeing actually a much more exciting competitive atmosphere and a more realistic competitive atmosphere than before. I would agree that regulatory certainty would help the competitive environment significantly and we'll work on it.
Q: AT&T recently announced a major VoIP initiative. How much of an impact do you think that will have on the industry?
CITRON: I think AT&T, who has never really done this kind of service before, will have a wide awakening call to how hard it is to go get a million people within a 12-month period of time starting from a stopped, standstill, zero starting point.
But even looking at what Time Warner's done, the cable guys have a lot of experience in this. I just don't believe that a million customers is realistic for any one provider.
Q: Who you each of you stay awake at night worrying about from a competitive standpoint?
CITRON: Well, me, SBC and all the RBOCs. They have millions of customers. They already have the customer base. The cable guys have the customers. I will not spend a dollar trying to go after a cable telephony customer, because it's not an efficiently spent dollar. My dollars are spent going into the mass market, million access lines.
ATTWOOD: Well, I don't know. Every day I open the paper and there's some story about how my company's doomed. It's doomed from cable, it's doomed in non-portability on the wireless. I think that what you're seeing is an industry in flux. And the question of who do you lose sleep over, all of us lose sleep as companies in making sure that we actually can execute and provide product to our customers.
SORGI: I think that's really true. That's what MCI CEO Michael Capellas says to us every day internally. He says he doesn't lay awake at night worrying about someone else. He worries about execution. Can we do it?
DONDERO: Certainly from the equipment side, we see that too. I mean, the conversation we have with the customer, and increasingly now, is can we collaborate together to create new services.
CARLISLE: Government is a service provider, believe it or not. But the ones I worry about, the ones I stay awake at night worrying about are the alternative service providers known as the circuit courts. Sometimes they're with ya, sometimes they're not. I'm worried about it when they're not.
To respond to this article, send a message to lettertoeditor@advanstar.com
Panel Participants:
* Jason Armstrong, associate, Goldman, Sachs & Co..
* Dorothy Attwood, senior vice president, Federal Regulatory Strategy and Integration, SBC Corp.
* Jeffrey Carlisle, senior deputy chief, Federal Communications Commission, Wireline Competition Bureau and co-chair, Internet Policy Working Group
* Jeffrey Citron, president and CEO, Vonage Holdings Corp
* Jim Dondero, vice president marketing, wireline networks, Nortel
* Donna Sorgi, vice president, Federal Advocacy, Law and Public Policy, MCI