VoIP in Public Services: Facts, Fiction and Myth

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VoIP in Public Services: Facts, Fiction and Myth

  1. 1. Research Publication Date: 2 December 2002 ID Number: AV-18-6958 VoIP in Public Services: Facts, Fiction and Myth Alex Winogradoff While wholesale voice over Internet Protocol quietly flourishes and mainstream carriers now offer retail VoIP, the lack of compelling benefits is still limiting adoption by enterprises. © 2002 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.
  2. 2. ANALYSIS Introduction It is only over the last year and a half that voice over Internet Protocol (VoIP) has emerged as a viable quality alternative to the traditional circuit-switched public switched telephone network (PSTN) — especially in underdeveloped regions or newly developing areas of the globe where there is little legacy infrastructure. The reasons for the increase in usage and visibility of VoIP services are more subtle than overt. Incumbent operators are starting to interconnect to VoIP carriers in the backbone to lower the cost of international interconnection, thus helping them to compete more effectively with next-generation carriers and each other. In terms of developing regions, VoIP, in addition to mobile telephony, provides a quicker way of expanding the reach of telephony in domestic markets and to help propel economic growth, in addition to the lingering perception that VoIP does not yet meet PSTN quality standards. Depending on the country, some governmental and regulatory forces are against fully sanctioning VoIP, although this is starting to wane. In a closed or highly autocratic society governments want to control and monitor communications, which is difficult — if not impossible — when the Internet is used for voice communications. Also, potential regulatory impediments prohibit bypassing local operators (often partially or fully owned by the government) because VoIP is not measured or taxed (Internet access is taxed, but not voice usage), thus reducing the tax revenue available to local authorities, which are often used to fund public telecom projects or universal service. VoIP Reality vs. Myth Fear of Cannibalizing Profitable Revenue Streams Incumbent operators have been reluctant to embrace VoIP as a retail offering for fear it will cannibalize highly profitable revenue streams. This is the same argument that has been used whenever a new technology reduces the cost structure of a service (for example, analog to digital, dedicated vs. packet and so on). While on the surface it is a legitimate concern, it quickly becomes moot when a viable competitive threat to their revenue exists as customers leave for lower-priced/differentiated service offerings. Poor Quality A strong perception among enterprises is that VoIP quality is poor, and it is often cited by incumbent carriers as a reason to delay the introduction of VoIP. While this may have been a valid reason a few years back, VoIP quality on effectively peered and well-engineered IP networks is frequently now at, or near, par with PSTN voice quality. In fact, in countries with an underdeveloped telecom infrastructure and in remote regions of developed countries, VoIP may well even outperform existing circuit-switched services. This may be true even in developed countries where elements of the network (for example, backbone or switches) may be poorly engineered. VoIP History and Reality VoIP today is often used in broad terms to cover all forms of IP packetized voice transmission (over private, managed IP-based networks or the public Internet and PC-to-PC, PC-to-phone or phone-to-phone). Thus, confusion between IP telephony, Internet telephony and VoIP often exists. IP telephony refers to the delivery of the telephony application (for example, telephony features) over IP instead of circuit-switched or other modality. Internet telephony, on the other hand, refers Publication Date: 2 December 2002/ID Number: AV-18-6958 Page 2 of 7 © 2002 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
  3. 3. exclusively to when voice traffic is sent over the public Internet. In the early development of Internet telephony it was a PC voice card and proprietary software/protocols that could interconnect only with PCs that had similar software. Internet telephone applications then evolved in PC-to-phone, and finally telephone-to-telephone communications, where the voice traffic was converted from traditional circuit-switched or time division multiplexing (TDM) protocol into IP packets at the network access point for transmission over the public Internet, whose quality was typically unpredictable. Internet telephony is a struggling niche business that still is quality challenged, and with precipitously dropping prices for higher-quality calls, the future does not bode well for this VoIP segment. Usually, VoIP transmission starts with some customer premises equipment (CPE) interface to the public or private network that has been IP-voice-enabled (for example, voice-enabled router, integrated access devices [IADs] and so on). Driving that interface are IP-enabled traditional circuit-switched PBXs, IP-PBXs, Session Initiation Protocol (SIP) phones and gateways. On the other hand, PBXs and key systems send voice as circuit-switched, TDM, frame or asynchronous transfer mode (ATM) calls to the first public network access point (central office [CO], hub or network aggregation point), where gateways convert these protocols to IP for delivery over IP backbone networks. Major carrier IP networks are typically managed with minimal handoffs to ensure a minimum number of router hops for reduced latency and provide voice packets with priority treatment to reduce jitter. The Holy Grail, however, is not VoIP, but network convergence of voice, data and video over IP. True IP network convergence, in which all traffic types are handled on the same network efficiently while delivering the required quality of service end-to-end, for the most part remains an elusive dream. The benefits of converged networks for carriers are still far off; today's solutions to deliver quality VoIP services primarily consist of "throwing bandwidth" at the quality issue (low network efficiency), dedicating facilities to voice, and controlling/managing network quality end to end on one's own network. Standards for VoIP are still in flux and evolving. Even multiprotocol label switching (MPLS), Diffserv, Resource Reservation Protocol (RSVP), H.323, SIP and other "standards" are not universally applied and more interoperability standards are required; only limited interoperability across different carrier networks is possible today. Achieving the kind of interoperability that exists within the PSTN will likely not be achievable during the next 10 years (0.7 probability). Gartner Perspective and Recommendations Steady but slight worldwide migration from the PSTN to IP networks exists. It is an evolution of the PSTN — not the revolution that was anticipated three to four years ago. Retail adoption continues to ride the Hype Cycle (see Figure 1), while wholesale VoIP adoption quietly flourishes and is becoming an important market segment — representing between 4 percent and 6 percent of total international minutes. Publication Date: 2 December 2002/ID Number: AV-18-6958 Page 3 of 7 © 2002 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
  4. 4. Figure 1. The VoIP Hype Cycle Visibility Now to One Year One to Two Years Two to Five Years Softswitches More Than Five Years Service Creation VoIP IPv6 IP Telephony Wholesale Enterprise Hosted Voice Managed VoIP Services GMPLS Applications MPLS IP Centrex Enterprise VoIP Nets IP PBX IP Telephony Consumer IP Telephony IP-Enabled PBX All Optical Small Bus As of June 2002 Network Peak of Technology Inflated Trough of Slope of Plateau of Trigger Expectations Disillusionment Enlightenment Productivity Maturity Source: Gartner Dataquest (October 2002) Retail VoIP today is predominantly a niche and mass-market phenomenon (financially challenged segments, calling-card users, international bypass and "technophobes"), where price is still the key market driver. While VoIP is a cheaper long-distance calling alternative to traditional PSTN services, it is not necessarily marketed as VoIP. Yet, for these segments, VoIP or the term "Internet telephony" does not carry a negative connotation. In fact, these segments recognize and seek out VoIP offerings precisely because they are cheaper than traditional calling and accept lower quality. For the enterprises market, quality concerns and lack of compelling benefits for the most part still inhibit VoIP adoption to a significant degree. The quality perception, however, is starting to change. In fact, most global carriers such as AT&T, Infonet and Global Crossing are starting to offer VoIP services. Equant is even going so far as to no longer offer circuit-switched voice but voice only on its MPLS-based network. In addition, many global carriers are using VoIP wholesalers, such as ITXC and iBasis, as backup or to complete PSTN calls to less-developed countries. The operational benefits of VoIP to end users have been well-documented (for example, reduced operating cost and head count, flexibility to perform adds/moves/changes, ease in deploying new customized and integrated services and multimedia application, lower telecom usage costs, and so on), but today, not necessarily effectively experienced — it is an enterprise-by-enterprise decision. The adoption hang-up is predominantly on when key differentiating applications become available to drive this market. During the next two years, end users will require compelling reasons to displace existing circuit-switched or TDM voice technology with IP. For VoIP and convergence to take off, end users must be convinced that VoIP is not just a tactical return on investment (ROI)-based decision but a strategic decision and commitment that will involve some risk. Publication Date: 2 December 2002/ID Number: AV-18-6958 Page 4 of 7 © 2002 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
  5. 5. For carriers with an embedded infrastructure, limited VoIP benefits exist today except in greenfield situations or when access network expansion or enhancements are required to support customers. The longer-term strategic benefits of IP (for example, product differentiation and operational cost savings) as a replacement of circuit-switched networks won't be realized for some time; thus, incumbent carriers are reluctant to invest now when the timing of payback is questionable. What can key telecom stakeholders do to proactively move VoIP to a higher level of adoption without compromising their financial discipline through overinvestment and overcommitment? Enterprises' interest in VoIP solutions is often based on voice quality considerations, existing carrier relationships, the comfort level with currently deployed technology, total cost of ownership (TCO) considerations as well as management preference. To play a pivotal role in stimulating development and deployment of VoIP, enterprises should be encouraged to: • Include requests for VoIP alternatives/solutions in all of their requests for proposals (RFPs) involving voice • Entertain RFP responses only from carriers that submit complementary VoIP solutions or alternatives to address their voice network needs (including contact centers and remote access) VoIP vendors are at the top of the food chain for VoIP and therefore must: • Become more cognizant of end-user needs — the needs of the carrier's customers — which, during the next few years, are clearly capital and expense savings-oriented, focused on core business, promoting customer retention and growth, positioning against competitors and competitive offerings, achieving customer service excellence, and easy to do business with. • Better understand the challenges faced by carriers to reduce operating expenditure, minimize capital expenditure and grow revenue. Don't sell products but concentrate on developing VoIP or converged solutions that help address these key concerns with near- term ROI. Solutions must be comprehensive (for example, they must have the ability to easily integrate with existing operations support systems [OSS], ordering, monitoring, maintenance and management systems, and so on). • Work more effectively with industry standards bodies to eliminate proprietary interfaces, help promote open, interoperable and consistent standards in all areas of signaling, routing, billing, management and so on, and particularly to create standard application programming interfaces (APIs) for service creation platforms. Incumbent carriers, because of their capital expenditure clout, are in the position to either accelerate or throttle back the development/deployment of VoIP and converged networks. Thus, they must invest not only in financial capital but also in taking an industry leadership role, which will be vital to the success of VoIP in the near term. Incumbent voice service providers should prepare now to complement their retail portfolios with VoIP solutions to provide differentiated and tiered-pricing alternatives, especially for international calling. Additional service offerings such as pre- and post-paid calling cards, based on VoIP, could also re-establish stronger presence in important ethnic markets. • Incumbents must commit/spend risk capital to upgrade their network not only to be price- and service-competitive but also to lower their cost structure to meet operating margin requirements. Publication Date: 2 December 2002/ID Number: AV-18-6958 Page 5 of 7 © 2002 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
  6. 6. • They must demand from their vendors the development of open and interoperable VoIP systems that are upward compatible and upgradable to the latest standards, as they evolve. The Achilles' heel of circuit-switched central-office-hosted applications (for example, Centrex) — inflexibility and feature insufficiency — can finally be overcome with the advancement of softswitch technology and standardized service creation platform interfaces. Telecom operators must actively encourage the immediate development of robust and flexible IP Centrex solutions to guard against losing all existing Centrex customers and to position hosted applications to garner a greater share of enterprises' budgets. • While they must insist on the development of the full complement of support systems, they also must commit long-term to a level of capital expenditure investment for the development of these capabilities. • They also must become more marketing-savvy in "selling" the benefits and developing creative offers for network-hosted applications. To this point, incumbents have not seized the high ground for hosted voice applications and have dragged their feet in having vendors develop robust solutions to help them attack the vulnerable CPE market with network-based VoIP solutions (for example, IP Centrex, unified communications and call centers). Next-generation VoIP carriers (such as Level 3, Genuity, Broadwing, Global Crossing and wholesalers such as ITXC and iBasis) have been catalysts in effectuating change in the long- distance (mainly international) market. They are important contributors to the significant decline in long-distance-per-minute prices. They have been accepted by incumbent carriers as important partners and have given VoIP legitimacy by debunking the quality concern in long-haul through creative engineering to the point that incumbents are now active, albeit for the most part still- tentative participants, in this market. • These carriers must continue to provide quality alternatives to remote regions of the globe, where the more mainstream carriers are not likely to invest. • They must look creatively at solving the retail market quality issue for the mass market. • While they will be catalysts, they can never expect to achieve an industry leadership role, except to continue to be the first adopters. But to survive the eventual commodity crunch from the "volume" wholesalers, they must move toward a more value-added wholesale portfolio with in-the-clouds voice application solutions. As VoIP becomes a more ubiquitous retail offering displacing PSTN-generated minutes and revenue, the government and regulators must reframe their measurements to be able to harvest telecom taxes for universal service obligations and so on. Most importantly, these entities must encourage rather than hinder the development of VoIP as a viable alternative to traditional circuit- switched telephony. Therefore, they should not single out VoIP and give it separate telecom tax treatment or impose technology restrictions that would minimize its effectiveness and ubiquity. Instead, regulators should measure a carrier's total revenue — voice, data and other telecom income — rather than tax on a per-minute basis to support their social policies. None of the carriers should be exempt — retail or wholesale. While opposition to VoIP carriers and Internet telephony is waning, WTO and other global regulatory or policy-setting bodies should consider developing guidelines that will specifically encourage the development/protection of VoIP carriers in member countries. This is good for customers — providing choice and more competitively priced services — and will encourage incumbents to upgrade their networks faster. Publication Date: 2 December 2002/ID Number: AV-18-6958 Page 6 of 7 © 2002 Gartner, Inc. and/or its Affiliates. All Rights Reserved.
  7. 7. Features “Wholesale VoIP: The Secret Ingredient in International Voice” — Wholesale voice over Internet Protocol (VoIP) is becoming an increasingly important cost-cutting aspect of the international carrier service mix, accounting for a fast-growing proportion of international minutes worldwide. By Katja Ruud “U.S. Wholesale VoIP Models: Domestic vs. International” — A few IP-based next-generation carriers in the United States are using their networks to provide domestic wholesale VoIP; however, the use of wholesale VoIP domestically on a substantial scale will likely await action by large carriers. By Steve Koppman “Wholesale VoIP in Western Europe” — Several traditional wholesale operators in Western Europe have embraced wholesale VoIP. Their approach to VoIP depends on wholesale voice market maturity, wholesale offerings, and competition aptitude and readiness to adopt new technology and the current infrastructure. By Katja Ruud “Asia/Pacific VoIP: A Change of Heart” — VoIP, which has been struggling to get off the ground for a long time, is beginning to take off in the Asia/Pacific region, especially in the developing and tightly-controlled markets. By To Chee Eng “Retail and Wholesale VoIP in the Middle East and Africa “ — VoIP has gained momentum in several parts of the Middle East and Africa this year. By Katja Ruud This research is part of a set of related research pieces. See "VoIP: Beyond the Hype " for an overview. REGIONAL HEADQUARTERS Corporate Headquarters European Headquarters Asia/Pacific Headquarters Latin America Headquarters 56 Top Gallant Road Tamesis Level 7, 40 Miller Street Av. das Nações Unidas 12.551 Stamford, CT 06902-7700 The Glanty North Sydney 9 andar—WTC U.S.A. Egham New South Wales 2060 04578-903 São Paulo SP +1 203 964 0096 Surrey, TW20 9AW AUSTRALIA BRAZIL UNITED KINGDOM +61 2 9459 4600 +55 11 3443 1509 +44 1784 431611 Publication Date: 2 December 2002/ID Number: AV-18-6958 Page 7 of 7 © 2002 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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