Voice over IP has reached some major milestones in 2008 — in both the enterprise and consumer ends of the market — but how long can traditional telcos continue to fight against this disruptive technology?
At the end of 2007, according to analyst group IDC, the install base of IP Telephony systems (IP PBXs) in Australian enterprises hit the 50/50 mark with traditional circuit-switched systems.
Skype customers have made more
than 100 billion minutes of calls
Earlier this year, eBay subsidiary Skype announced that its 276 million consumer users had made 100 billion minutes of Skype-to-Skype calls, while local ISP's iiNet and Internode announced the roll-out of "Naked DSL" services — broadband connections that would no longer obligate consumers to pay line rental fees to Telstra.
It's a done deal. IP PBX is here to stay.
IDC telecommunications manager, David Cannon
A December 2007 report by telecommunications regulator ACMA found that there were some 269 VoIP providers operating in Australia. Ovum telecommunications analyst David Kennedy says that these operators are launching VoIP "primarily as a means of challenging the PSTN dominance of the incumbents".
He predicts that while the fixed-line revenue of carriers will "remain fairly flat", the percentage of calls being made over VoIP will increase from under five per cent to around 20 per cent by the close of 2011.
These statistics bode very well for VoIP, but not for the telecommunications carriers — knowing that their traditional "cash-cow" PSTN networks are gradually being circumvented as users discover cheaper and more functional alternatives. Around one-third of Telstra's revenues are derived via its PSTN network.
But to date, the carriers don't seem to have suffered financially from VoIP's growing popularity. Its maturation hasn't led to the catastrophic drop in carrier revenue many predicted.
In Telstra's results for the six months to December 2007, PSTN revenues fell by 2.1 per cent. That is a marked improvement on the 5.8 per cent drop during the same period in 2006 and the 7.8 per cent figure reported in 2005. Overall revenues rose 6.2 per cent.
"Telstra's fixed line (PSTN) business continues to defy the downward trends of our global peers," says a spokesperson for Telstra. "Not only did our revenue decline continue to slow [in the last half-year results] but the number of retail customers increased and our ARPU [average revenue per customer] increased."
The telcos have had ample time to adjust their business models — and not just survive, but thrive.
VoIP in the enterprise
IDC telecommunications manager David Cannon sees 2007 as "the point in which TDM lost the race to IP PBX."
Over 50 per cent of seats in Australian enterprises are using an IP-enabled handset, he said. That represents some six million VoIP handsets sitting on user's desks.
"It's a done deal," Cannon says. "IP PBX is here to stay."
"We don't see any new tenders going to market for a PBX without IP Telephony as a component," agrees Bjarne Munch, telecommunications analyst at Gartner. "It seems pretty accepted that if you replace your PBX, you replace it with IP."
IP's dominance is such, that many traditional PABX systems are no longer supported by their manufacturers. "In a few years time, vendors will not support any TDM infrastructure," IDC's Cannon predicts.
Originally, the main drivers to adopting IP Telephony within the enterprise were lower costs — its ability to enable you to skip carrier tariffs by making free inter-office calls over the WAN (wide area network).
But gradually, Cannon says, this driver is taking a back seat as enterprises realised the increased functionality IP Telephony can provide.
Functionality has to take the fore because carriers have competed aggressively on price to protect their revenues.
As predicted back in 2004 by telecommunications analyst Paul Budde, carriers have offered significant pricing incentives to large organisations to keep calls off the data network — with cheaper call rates or flat monthly fees between sites.
That strategy, notes Ovum's Kennedy, has...
..."reduced VoIP's cost advantage".
Simultaneously, the carriers have been adding value-added services around PSTN calls to prolong the life of their old networks.
Telstra's drop in fixed-line revenue may only have been 2.1 per cent but local call revenue was actually down by more than 10 per cent. The reported fixed-line figures were made to look far less drastic thanks to a 7.2 per cent rise in revenue derived from value-added services associated with the PSTN line — such as Messagebank, silent numbers, and calling number displays.
Most organisations won't have the skills to do things like unified communications in-house.
Gartner telecommunications analyst, Bjarne Munch
Optus, meanwhile, reports that it is actually winning voice revenue in the business market. In the carrier's last two financial quarters, Optus posted gains of 4.7 per cent (Q2) and 5.3 per cent (Q3) for fixed voice among its business customers.
Optus's gains in the enterprise market, no doubt at Telstra's expense, are attributable to a partial acceptance of its customers' desire to migrate to IP.
"Our customers are getting more sophisticated in terms of network design," says John Boothroyd, general manager of products and services at Optus Business. "They are asking for more flexible numbering across their sites. They are cutting down on the number of PABX's — rather than having a PABX on every site and lots of analog lines going to branch sites, they may opt for one or two PABX's, and are connecting from those branch sites using IP VPN."
"Optus has responded," he said. "We have been building flexibility into the telephone service to help rationalise that infrastructure."
He acknowledges that these "more sophisticated network designs" are primarily being sought to make inter-office calls at lower cost.
"Yes, that has reduced the size of the overall [fixed line] market," he says. "The market trend is for fixed line revenues to be eroded by IP Telephony. But it isn't a problem for us. Optus has been helping its customers consolidate their network, which has enabled us to grow our revenues. We are winning voice business from our competitors."
Cannon notes that after years of sticking their head in the sand and simply lowering their PSTN rates, carriers like Optus are starting to recognise that the move to IP Telephony — within the business world at least — actually presents new opportunities.
"It's becoming a source of revenue for them," he says. "Data revenues are rising — carriers are selling more capacity on the data network. When you place calls over the WAN, you require more [network] capacity on the data network. You are simply shifting a bucket of money from one place to the next."
For the last two quarters, Optus's data/IP business has grown by between 8.3 per cent (Q3) and 19.7 per cent (Q2). Telstra's IP/data access revenues are also on the up, growing at 21.5 per cent according to their latest figures.
The other big growth area is managed services. Both carriers are experiencing growth in services revenues, albeit from a small base, that is easily outstripping their overall revenue growth. For the last two quarters, Optus's managed services business has grown by between five per cent (Q2) and 20 per cent (Q3), compared to overall growth of 3.6 per cent.
These revenues will only increase, says Gartner's Munch, as organisations realise that the high-end applications that VoIP enables — such as unified messaging — require the assistance of an integrator to set-up and maintain.
Both Telstra and Optus have acquired systems integrators in recent years to round out their services portfolio, such as Telstra's purchase of Kaz in 2004, and Optus's takeover of Alphawest in 2005.
Ian Smith, general manager of technology services at Alphawest, says the integrator has doubled in size in the 18 months since being acquired by Optus, and its projects around IP Telephony are driving that growth.
The enterprise market, he says, has moved out of a "tactical" approach to IP Telephony to a more "strategic" one.
"During the tactical phase, decisions were made and projects initiated based on the promise of a reduction in call costs ... now companies are thinking more strategically about using IP Telephony as the foundation for creating a collaborative work environment," said Smith.
VoIP, says Smith, is the last step in the journey to "unified communications" — the creation of single point of contact for any individual across fixed and mobile phones and internet/email applications. With unified communications, he says, comes "the mobilisation of the workforce", and the ability to present voice, video and data at the same time — enhancing both productivity within an organisation and the customer experience it offers.
"Most organisations won't have the skills to do things like unified communications in-house," Munch said. "There will be a much stronger need for managed network providers."
But Munch believes that neither of the two main carriers have built up the necessary skills to take advantage of this opportunity.
"The carriers have good experience with managing voice and video on a wide area MPLS (Multi Protocol Label Switching) network," he says. "But the future of IP telephony requires...
...integration into enterprise applications like unified messaging — areas the carriers do not have experience."
Further, these skills are being embraced by traditional IT integrators such as IBM, CSC, EDS, Commander and Dimension Data — many of whom have done a better job than the carriers in building up their skill-sets.
If you look at who will save the most money from VoIP, it's not the enterprise market — they are not paying a heck of a lot for calls these days anyway.
Jim Kellett, product manager for ISP Internode
VoIP in small business and consumer
Small businesses are also starting to embrace VoIP, says Cannon. Networking vendors, he says, are now focused on the small- and medium-sized market. IDC reports a 40 per cent increase in SME purchases of IP PBX systems in the last quarter of 2007.
Further, there are an increasing number of VoIP services coming to market specifically geared towards small businesses. Optus and iiNet, for example, have started offering multi-line VoIP services for as few as two to three lines.
Optus launched a product called ipPhone (a softphone product catering for two to six lines) and a VoDSL service (a voice and broadband bundle over the DSL network offering 4-8 lines). The carrier plans to add a voice module to its "Optus Evolve" business-grade IP-VPN product, built on an application-aware MPLS network that guarantees quality of service.
Neither carrier, however, has any plans to launch a VoIP service for the consumer market.
"If you look at who will save the most money from VoIP, it's not the enterprise market — they are not paying a heck of a lot for calls these days anyway," says Jim Kellett, product manager for ISP Internode. "The real savings are for the residential [and small business] markets — because of the cheaper call rates and the number of calls they make."
A simple comparison illustrates this succinctly. Telstra's cheapest home phone plan (HomeLine Budget) charges $19.95 per month for line rental, with 30c untimed local calls and 37c per minute calls to mobiles. The cheapest VoIP alternative, offered by GoTalk, is significantly cheaper — a flat $14.95 monthly fee for all-you-can-eat calls to any device.
Munch says he doesn't expect carriers to risk "cannibalising what is now a pretty good cash cow" by offering consumers any alternative to the PSTN network.
"We haven't seen any players offering VoIP services encroach on our revenues," says Optus's Boothroyd. "When it comes to public VoIP, customers are concerned with quality and tend to stick to a trusted supplier."
It's pretty simple — most people want quality, reliability and simplicity of use. VoIP usually doesn't provide any of that.
"It's pretty simple — most people want quality, reliability and simplicity of use," said a Telstra spokesperson. "VoIP usually doesn't provide any of that. If your computer is off, so is the service. If the electricity goes out, so does your phone. Who wants that?"
Consumers aren't interested in VoIP, says Telstra, because of "confusing offers from different vendors, complexity of set up, technical and security problems, quality of service issues, incompatibility with existing services, availability and patchy support to name a few. This sometimes outweighs any cost-savings that might be available."
This defensive position is, from a Telstra shareholder perspective, understandable. The PSTN network, according to Kennedy, is still a major source of competitive advantage for the carriers — even if the revenues derived from it are falling. The PSTN line can be used for telephony and as the conduit for ADSL connectivity, fax machines or Pay-TV access.
"A carrier with a huge switch that's already paid for itself can just sit on it," says Kellett. "They don't need to react quickly to VoIP. It's only when it starts to cause them pain through an erosion of revenue that they have to fight back."
The carriers may soon have to fight a little harder. In the last six months, ISP's such as Adam Internet, iiNet and Internode have trialled a new service called Naked DSL — a fixed line broadband service which no longer requires Telstra's PSTN.
Many residential users have only remained on fixed phone lines to use them for DSL broadband in the home. But as consumers continue to rely more on mobile phones as their primary means of staying in touch, the fixed device at home is getting used far less. Many would be happy to skip Telstra's monthly line rental charges if given the choice.
Yes, it's got to be cheaper but also better.
Jim Kellett, product manager for ISP Internode
Internode claims that its trials of Naked DSL have been wildly successful. The response to its barely advertised product launch in March "outstripped expectations" in terms of subscriber numbers. Kellett expects that a higher percentage of these customers are coupling Naked DSL with a VoIP handset.
For now, the carriers are fighting to keep PSTN relevant — bundling fixed phone services as part of the total communications package. This gives the consumer the convenience of a single bill across home phones, broadband connections and mobile telephony. In the face of such convenience, consumers tend to resist any temptation to change.
"You won't see the carriers go down the VoIP path all guns blazing," says Kellett. "I think it's more likely they will offer more fixed price bundles like Optus Fusion. They will keep phone calls on their old infrastructure as long as they humanly can."
"The common trend across all large carriers across the world is that by 2010-2012, all will be migrating their data services to IP," Munch says.
One would expect that once this investment is complete, carriers will start offering the very public VoIP services that they so vehemently write off as unworkable today. In the meantime, they will continue to drop PSTN prices to hold off the VoIP threat.
"That's why VoIP, to be successful, has to deliver something the older networks don't," says Kellett. "There has to be a focus on value-added services. "Yes, it's got to be cheaper but also better."