Voice Over Everything: Here, there and everywhere, VoIP is cropping up all over. But what’s driving the hype behind it? –

Buzz and excitement. They have been in short supply in the telecommunications industry for the past few years, but they appear to be coming back. At least this is true in the case of VoIP, more formally known as voice over Internet Protocol.

Favorable discussion amongst the technology media and Wall Street traders has caused VoIP-related stocks to catch fire. In the fourth quarter of 2003, companies such as Vonage – a privately held carrier with close to 100,000 subscribers – were touted to be the next incumbent local exchange carrier (ILEC) killers. AT&T, Time Warner and Comcast have also put their weight behind the technology.

Indeed, hype is back. But is it justified?

Reasons for Hope

In almost every segment of the telecom networking sector, reducing provider or customer costs and introducing new services are critical objectives. The ability to combine these objectives simultaneously is what’s driving the excitement over VoIP, and it makes the argument for the adoption of VoIP even more convincing. The mass adoption of various enabling technologies and other favorable industry developments has given VoIP the legs it needs to fulfill its promise.

Examples of such developments include the following:

Proliferation of broadband: Jupiter Research has reported that the number of broadband users in the United States jumped to about 21 million in 2003. By 2008, about 46 million households, or half of all online households, are expected to have broadband connectivity. In Europe, the absolute numbers are expected to parallel those of the United States.

In some international markets, the percentage deployment of broadband is even greater. Business Week reported that South Korea leads the world with nearly three-fourths of all its households connecting to the Internet via broadband. In many cases, high-speed Internet connections overseas can be as much as 40 times faster than the typical DSL or cable connection available in the United States, but for roughly the same price. Japan is purported to have some connections as fast as 26 megabits per second.

The proliferation of broadband is important for the adoption of VoIP because of quality problems with dial-up connections. Internet-based phone calls via dial-up connections are prone to drop calls, and the low bandwidth makes for poor-quality conversations. Broadband solves many of these problems by making the calls crisper. Plus, broadband reduces connection problems, and the hassles are greatly reduced by an always-on, high-speed medium.

Enterprise adoption: Corporate customers have been at the front line in adopting VoIP, helping to proliferate it in corporate local area networks and wide area networks.

The transformation of the private branch exchange (PBX) industry is a good example of corporate VoIP adoption. A PBX is a switch that is owned, operated and maintained by a business or organization, as opposed to a phone company. In 2003, IP-enabled PBXs represented more than half of all the new lines shipped. And the industry continues to grow as a percentage of total lines shipped.

Lower costs for moves, adds, and changes, the creation of a single voice/data network, and the draw of innovative services that increase employee productivity, are the main reasons why enterprise adoption of VoIP has been on the upswing. Surveys of enterprise customers continue to show that larger businesses are adopting, testing or planning to implement some form of VoIP.

Technological improvements: A number of carriers and service providers have used packet technologies in various segments of the telecommunications industry for years. However, competing standards and a lack of equipment interoperability often made networks difficult and costly to interconnect. New technologies, such as session controllers, allow for network peering at both the network core and the edge. As such, it has become easier to interconnect disparate VoIP networks, be it a carrier network or an enterprise network.

Proliferation of 802.11: The combination of wireless fidelity (Wi-Fi) and broadband access will make VoIP offerings even more compelling. As the various Wi-Fi standards continue to proliferate, manufacturers are upgrading Wi-Fi routers and telephones to be VoIP compatible. VoIP over Wi-Fi connected to a cable modem will finally give the cable companies a real platform from which to attack the voice monopoly of the ILECs.

Quality of service: The quality of VoIP calls has improved dramatically thanks in large part to improved technology and increased bandwidth. In fact, more often than not, a call will traverse a VoIP network without the caller ever knowing. For example, today it is likely that most international calls will travel a VoIP network for at least part of their journey. Quality of service is still a challenging subject for the industry, particularly for calls over public networks, but VoIP is closing the gap quickly.

User adoption: Consumer end-user adoption is on the rise, as well. Vonage, for example, recently signed its 100,000th customer. Further, Skype – which makes consumer peer-to-peer communications technology – is educating tens of thousands of users about the merits of VoIP. At the same time these services are beginning to desensitize customers to the benefits of life line and remote powering services, which are features that have long been important differentiators for traditional phone networks.

The Road Ahead

Fulfilling the potential of VoIP has not been without obstacles. And challenges are certain to remain.

For the past few years, numerous public and private equipment providers have quietly been working to solve the industry’s thorniest problems. The greatest challenges, and why these areas offer the greatest opportunity for investment, revolve around network and equipment interoperability and security. A final concern is the impact of federal regulation on the entire sector.

Interoperability challenge: Anyone familiar with traditional telecom networking knows it is a hodgepodge of proprietary signaling systems and disparate networks. This is true in the VoIP world, as well, where newer signaling technologies, such as Session Initiation Protocol (SIP), are making inroads. However, the majority of VoIP networks that have been implemented still use the more traditional H.323 in its multiple variants. As a result, technologies that allow for both SIP and H.323 interworking have become critical in order to allow VoIP carriers to share minutes across networks.

At any network boundary where VoIP traffic is handed off from one network provider to another, issues of peering, interworking, signaling, routing, settlement, and billing must be resolved among carriers. Key issues that must be dealt with include technical considerations such as firewall traversal and network address translation, as well as business considerations such as billing and settlement for calls handled by multiple carriers. These issues will provide equipment makers with significant opportunity for improvement over the coming years.

Security challenge. Security is a concern for all IP-based networks. The more traffic carried over VoIP networks, then the greater the concern for security vulnerabilities similar to those experienced on data networks. Given the fact that VoIP quality of service is highly susceptible to packet delay, or latency, VoIP networks may be particularly vulnerable to denial of service attacks.

How the industry copes with myriad potential security issues, including firewall traversal, proxy services, and media encryption to name a few, may ultimately determine the rate of VoIP adoption.

Fed challenge: Federal regulations represent the final wild card for VoIP. But first, the government must define VoIP. Is it a voice service – and subject to regulatory jurisdiction – or is it a data service that is immune to certain regulations? Initial indications from the Federal Communications Commission suggest that the agency is disinclined to regulate VoIP for fear of stifling competition and progress. The matter, however, is far from being resolved in both the legislative and executive branches of government.

Final Thoughts

When all is said and done, it’s easy to become cynical about the prospects of VoIP based on its investment and media hype. After all, why should a set of technologies used by carriers with fewer than 200,000 primary consumer subscribers be taken seriously as an ILEC killer?

But it is worth paying attention to VoIP because it is more than just a set of technologies aimed at alternative carriers trying to bypass the ILEC monopolies. VoIP continues to gather momentum, and its growing market share is on the verge of reaching early critical mass in certain segments of the industry, including international long distance and enterprise networking. As a collection of technologies that simultaneously reduce costs while providing the ability to offer new and innovative services, VoIP has ensured that it will not simply be a blip on the radar.

With overwhelming conviction, the entire telecommunications supply chain is pouring billions of dollars into VoIP and the technology that enables it. The sheer amount of money going into VoIP implies this is far more than a blind leap of faith. It is not merely the next step in the continued evolution from analog circuit switched networks to all digital packet-based networks. Rather, it also represents a belief that the benefits of VoIP, in terms of expected network efficiencies and product innovation, must be adopted by all service providers that expect to remain competitive and viable.

Ultimately, the litmus test to determine if VoIP is successful is when the average household or business uses the medium without even knowing it is doing so. By that measure, VoIP is well on its way to succeeding, and the momentum that has built will begin to justify the hype.

What Is VoIP?

Voice over IP (also known as voice over packet, voice over Internet Protocol, or VoIP) is a transmission and switching technology that converts a voice signal into a stream of packets on a packet network and back again. VoIP allows voice and data, such as fax information, to coexist and travel over a packet data network concurrently with traditional data packets.

There are many advantages to a converged network. For ordinary consumers, their phone service doesn’t have to come from the phone company anymore. Also, the costs of phone calling will be reduced because voice and data traffic can be merged onto one broadband connection. Lastly, a uniform format allows for the adoption of new features and services, such as integrated voice mail and email.

Other new applications, such as Web-enabled call centers, remote telecommuting, and personal productivity applications such as “follow-me” services and unified message handling, are all part of the VoIP sea change.

 

Pascal Luck is a managing director with Core Capital Partners, a $170 million private equity fund that invests in early-stage technology ventures and provides expansion capital to growth companies. Based in Washington, D.C., Core Capital focuses on investments in information technology, communications, software and business services. On the Web: www.core-capital.com.