Posted: 10/1997

Major Carriers Ready as Internet Telephony Prepares to Soar

By Gary Kim

Only a small portion of today’s $71.2 billion of domestic U.S.
long distance phone calls are made using Internet Protocol (IP)
software. Quality and ease of use are clear problems, so far. So
most observers don’t think IP-based telephony will be that big a
deal in the near term, at least in the domestic U.S. market,
where pricing already is competitive. Over the next four to five
years, the potential impact of IP voice and fax is valued at a
few billion dollars, according to industry analysts.

But that isn’t the case for international communications,
where the opportunities for pricing arbitrage are much higher. As
the growth of the international callback market suggests, there’s
significant room for lower-cost calling options. The
international fax market alone is estimated at $25 billion,
according to Arthur D. Little director Martyn Roetter.

U.S. INTERNET TELEPHONY SPENDING, $ BILLION

Source: Forrester Research, Inc.

Last May, for example, VocalTec, Ltd. announced that Taiwan
Telecommunication Network Services Co., Ltd. (TTN) would be
offering an Internet telephony service between Taiwan and the
United States. TTN is the fourth national communications
company–following Telecom New Zealand, Dacom Corp.’s Dacom
International subsidiary in South Korea, and Telecom Finland–to
offer Internet telephony services based on VocalTec’s products,
says Elon Ganor, VocalTec chairman and CEO. "TTN customers
spend 10 million minutes per month calling the United
States," says Joseph Chou, TTN president.

Watch for the four largest U.S. long distance carriers to move
cautiously. They will be in no hurry to promote a technology
whose effect will be to put greater pressure on profit margins.
Nevertheless, all of the major carriers are positioning for IP
voice and data.

IP voice and fax will siphon off about $3 billion a year in
long distance revenues by 2004, or about four percent of U.S.
long distance revenues in total, says Christopher Mines, senior
analyst for Cambridge, Mass.-based Forrester Research Inc. Of
that amount, about $2 billion is IP telephony revenue paid to
carriers, while another $1 billion represents avoided cost for
U.S. companies, says Mines.

In terms of traffic volume, "the Internet will pass by
the phone network sometime around 2000 or 2001," says MCI
executive Vint Cerf. "Pretty quickly thereafter, voice will
really just be ancillary traffic."

The Internet telephony market could grow to 16 million users
by 1999, say International Data Corp. analysts. Though Internet
telephony market revenues stood at only about $3.5 million in
early 1996, revenues could skyrocket to $560 million by 1999, IDC
analysts predict. Analyst Jeff Pulver, Pulver.com owner, also
believes that Internet telephony software and hardware will be a
$500 million business in 1999, up from $80 million in 1997.

What all this means for the largest tier of carriers is:

Look for a move to IP faxing before IP voice, especially by
firms with heavy international fax traffic, says John Wilson,
vice president at Toronto-based brokerage concern Bunting Warburg
Inc. "Fax may represent 20 percent of the bits carried over
the wide area network," Wilson says. "Corporations will
move their data traffic over to IP, and then it’ll make sense to
put the fax traffic on the same network."

IP voice, on the other hand, will be slower to develop,
primarily because of latency and delay issues which now afflict
IP networks. Innovations such as the Resource Reservation
Protocol (RSVP), which will offer quality-of-service guarantees,
will be a major development in that regard. "We’re at least
three years away from cost-effective offerings and much longer
than that before IP voice can be rolled out on a large
scale," Wilson says.

Most of the IP telephony activity will be driven by businesses
who "see broad possibilities in connecting their PBX systems
to IP networks," says Mines. While few big companies are
making major commitments yet, close to half of 50 companies
interviewed by Mines expect to experiment with IP voice and fax
within the next two years.

Domestic U.S. calling patterns probably won’t drive the
market, however, in large part because rates already are fairly
compelling and look to get even more attractive. But three types
of traffic seem especially well-suited for IP transmission:

Hilary Mine, Cedar Knolls, N.J.-based Probe Research senior
vice president, is a bit more optimistic, suggesting that by 2000
the U.S. IP voice market could amount to 5.8 percent of the total
minutes of use. That would represent about 32.2 billion out of a
total 555 billion minutes of use. By 2001, IP voice could
represent 7.1 percent of the market, she says. By 2005, the
percentage could skyrocket to 30 percent.

But IP voice and fax are just part of a larger shift of voice
traffic to fast packet transport, such as voice-over-frame relay,
Mine says. "End users don’t want to manage two separate
networks (voice and data) and voice-over-data works," she
says. With new international standards being settled, equipment
should be in place within two years. Once that happens, the major
U.S. carriers will roll out IP voice over their own networks.
"AT&T has built the models," Mine says. "They
know how to do it and what it’ll cost. They’ll deploy when they
have to." Moves in the IP telephony direction already are
underway. In late July, for example, AT&T and VocalTec
Communications Ltd. announced an agreement with ITXC Corp., a new
company that will provide interexchange services to Internet
telephony service providers (ITSPs). ITXC, stands for Internet
telephony exchange carrier, and its new CEO is Tom Evslin, the
AT&T vice president formerly in charge of AT&T WorldNet,
that firm’s Internet service provider business.

MCI earlier had announced VAULT, its architecture for
providing Internet fax and messaging, collaborative multimedia
and integrated Internet and voice capabilities. VAULT converts
communications traffic into IP packets and then sends the packets
over MCI’s Internet backbone using a single line, rather than
using separate lines and networks for data and voice.

Like MCI, a major underlying carrier for Internet traffic,
Sprint stands to gain from an upsurge in Internet traffic and is
itself working on integrating IP voice, audio and call center
applications into its existing network.

WorldCom, partly on the strength of its UUNet and Metropolitan
Fiber Systems acquisitions, has announced a major IP fax
initiative. The idea: detect fax transmissions originating on the
circuit network and route them to the Internet. Messages then are
routed to a WorldCom point of presence (POP) and converted back
to standard fax format for delivery at the destination location.

Lucent Technology, for its part, is developing a new Internet
telephony server SP (service provider) that is scheduled for
general availability this year. The system is in field testing by
MCI and France Telecom. Lucent’s new server will enable service
providers to offer customers the option of placing voice and fax
calls using either the public switched network or IP networks,
including the Internet.

In addition to Lucent’s new entry, Siemens Stromberg-Carlson,
Boca Raton, Fla., is developing Internet telephony servers for
carrier/ISP networks, in conjunction with networking firm 3Com. A
similar partnership unites Alcatel and Cisco Systems.

Nortel, for its part, is developing IP voice capabilities for
integration with its family of private branch exchange (PBX)
products, says Phil Edholm, Nortel business development director.
In one configuration, a standard Meridian PBX is connected to an
enterprise local area network (LAN) using an IP voice gateway. IP
voice then can be sent out over an IP network using a Magellan
ATM switch.

Lucent, Nortel and Siemens also are working with the
Electronic Messaging Association to set standards for sending
voice mail and fax attachments over IP networks. This would save
companies money by moving their voice mail systems to the
Internet or private IP wide area networks.

Others are less certain IP fax or voice is an immediate
concern. Pacific Bell Chairman David Dorman, for example,
believes IP will emerge "as the de facto standard of
business communication." But Dorman doesn’t think that
necessarily translates into robust IP telephony usage. He does
acknowledge, however, that "it could be a threat,
eventually."

Still, PacTel executives acknowledge the IP market’s
potential. According to Michael Fitzpatrick of Pacific Telesis
Enterprises, traffic through the West Coast network access point
grew four-fold in 1996. Fitzpatrick estimates that MCI’s backbone
traffic grew 15-fold in 1995. In 1996 the number of commercial
World Wide Web sites grew by an order of magnitude, from 23,000
at the end of 1995 to 220,000 by the end of 1996, according to
IBM Chairman Louis Gerstner. SBC Vice Chairman Philip Quigley is
even more bullish, estimating there are now a minimum of 4.5
million Internet host computers, and more than 100 million
electronic mail (e-mail) addresses in use in the United States.

All of that leads some to project that the number of U.S.
consumers using IP networks (primarily the public Internet) will
climb to 40.8 million households by 2000, says New York-based
consultancy Jupiter Communications. That would represent no less
than a third of U.S. households. Cisco Systems executive Mike
Heller says the number of worldwide Internet users was 45 million
in 1996, with a growth rate in excess of 200 percent.

To be sure, not many consumers will want to mess around with
PC-based calling. But that isn’t the point. IP calls initiated
and terminated on a standard telephone set is where IP telephony
is headed. Look for IP telephony companies to emerge in 1999, say
researchers at Forrester Research. By 1999, 28 million U.S.
consumers and 800,000 businesses will be using the Internet.

Theoretically, at least, IP telephony offers new competitors a
lower-cost way to enter the long distance market. IP telephony
ought to cost less for several reasons. Signal compression and
packetizing, for example, can be used to reduce the raw bandwidth
needed to transport voice and fax signals. Montreal-based Voice
and Data Systems, for example, says it can send 16 simultaneous
faxes on a standard telephone line, reducing costs by 90 percent.

IP bandwidth also can be bought in bulk, as DS1s rather than
64 kbps circuits, for example, and shared. And though the
ultimate resolution of the access charge exemption for ISPs is
unclear, any access fees probably would only add a penny or so a
minute to the cost of an IP telephony call. America’s Carriers
Telecommunication Association (ACTA) estimates the average
long-distance phone call comes to 22 cents per minute, while the
average Internet call costs 3.3 cents per minute.

INTERNET TELEPHONY USAGE BY CATEGORY

Source: Jeff Pulver, Pulver.com