Monday, October 25, 2004

Qwest Begins Direct IP Voice Service

Qwest bows VoIP termination service

Jeff Baumgartner, CED
“Qwest Communications International has launched a termination service it will offer to wholesale customers that carry VoIP traffic.
The Qwest IP Voice Termination Service is designed to help those providers terminate voice calls worldwide without taking a transition that typically involves three steps: converting IP to time division multiplex, conversion back to IP for traveling long distance, and then converting back to TDM for termination on the telephony network.
With the termination system, Qwest said its customers can hand over IP voice traffic directly to the telco, which, in turn, will transport it over its OC-102 network and terminate the calls to the public switched telephony network.
Qwest said it can terminate calls in 250 countries. “
This is groundbreaking news. For the first time, a major carrier will be forgoing standard telephone lines and their associated charges in favor of direct IP interconnection. This is simply brilliant strategy. It should also send a clear signal to investors of companies such as Vonage that they are soon fall behind in the VoIP customer land grab. Is the direct interconnection of carriers through IP transmission far behind? Broadband Parasites will no longer have an advantage over the RBOCs, ILECs and CLECs. Cable companies will be able to interconnect to last mile carriers through IP as well, dramatically increasing the quality of the voice connection. All carriers should immediately convert to VoIP systems or face massive loss of customers to the far lower cost of VoIP service.

VoN Conference 2004 and the State of the Industry

The VoN 2004 conference was held in Boston last week. The event was heavily attended in comparison with past years, which were sparse at best. This conference of voice-over-packet evangelicals has not yet achieved the status of a SUPERCOM or CTIA, but it will undoubtedly be THE conference in 2005.
There was no shortage of VoIP solutions for the enterprise and small business customer. There were even a few turnkey vendors represented as well. I consider these companies more of a VoIP To-Go vendor. They are the ones that set up all of the equipment and back office. You do the sales and marketing, billing and customer support. It will be interesting to see how this PSINet version of VoIP works out. There were many problems with the PSINet model, not the least of which was porting customers to another platform once a company’s critical mass was reached. PSINet tended to own the customer through IP addresses. I suspect the same will be true of these new VoIP service providers.
The state of the industry and the rapidity at which real phone companies are converting to VoIP is perplexing. I was fortunate enough to be able to speak with several principals with the major manufacturers of switching technology. They all said the same thing. Carriers are installing VoIP switches just enough to make them operational, but are not readying their network infrastructure for purely VoIP traffic. They are sitting on the investment, more or less. But why would RBOCs, ILECs and CLECs go to the trouble of installing these systems without deploying products? The answer is rather complex.
Vendors are currently selling most of their wares to “Greenfield” operators in Asia or Eastern Europe. These are the same areas where wireless service greatly expanded in the 1990’s. In a “Greenfield” operation, one can install a VoIP switch, network infrastructure and OSS, back-office and billing systems with relative ease. Since no service previously existed for these customers, they are not as exacting with regard to quality. In many respects, the unrefined network carrying VoIP traffic begets a call quality similar to that of a wireless phone anyway. Customers are happy with what is perceived to be land-line quality that is just as good as the wireless phone; the exact opposite of the North American paradigm. Most vendors agree that these sales have seen their apex and are on the wane. So when will North America see a VoIP revolution?
Large enterprises are a target market for most of the switch manufacturers. However, an increasing number of “Broadband Parasites” are opening for business. These companies are Vonage clones that buy a small VoIP switch on credit, hook it up in the cheapest CLEC collocation site, and begin offering service that amounts to a shared VoIP PBX. The service is attractive because it is cheap and somewhat novel at this point. There are several negatives to the long term outlook for these companies.
First, these companies are typically in violation of Federal law in that they do not offer any CALEA safeguard, no E911 capability and are spoofing the Caller-ID at layer 5 to avoid paying termination charges to the last mile carrier when the call (usually) goes off-net. CLECs are desperate for the revenue and turn a blind eye to the practice. The CLEC will offer cheap PRI service to the Broadband Parasite and treat them as if they were a private PBX. To prove my point, just try to return a call from a VoIP user by using the Caller-ID you get when receiving a call from them. You are usually connected with the main desk of the Broadband Parasite. This is outright fraud and is costing RBOCs, ILECs and some facilities based CLECs Billions of dollars per year. For some reason the US Department of Justice has failed to pursue these companies. This fraud is being practiced by most major long distance carriers as well. Actually, the little guys learned it from the big guys who have been ripping each other off for years.
The next problem with Broadband Parasites is a looming inability to gain free access to transport providers’ networks. The transport provider is any company that connects a home or business to the Internet. These are either DSL or cable modem service suppliers. For the most part, this is the group of all cable TV, phone and DSL companies. When KaZaA (the forerunner to SKYPE VoIP service) was at its most popular, bandwidth utilization on most transport providers’ networks was at a peak. Nearly every RBOC, ILEC, CLEC and cable company had extreme customer dissatisfaction due to KaZaA, edonkey, morpheus and many other peer-to-peer services taking up all of the available bandwidth. Packet shaper technology was introduced from companies such as Packeteer. Packet shapers allowed a transport provider’s customers to use the service, while making those customer’s computers undesirable as sources for “entertainment” content. Transport networks were virtually unusable without packet shapers protecting the network borders. There is a parallel with VoIP expansion.
Transport providers will upgrade their networks with Session Border Controllers. The best of this class of packet traffic shapers will permit deep packet inspection at layer 7. Transport providers will undoubtedly control the flow of traffic through their network. If that traffic does not generate revenue for the RBOC, ILEC, CLEC or cable company, it will be at the bottom of the quality heap. The transport providers will control call quality and certainly favor their own VoIP offering in the packet flow.
Most carriers are in agreement that the Broadband Parasites will grab a certain amount of the “early adopter” market share. As call quality and support become an issue due to packet shaping by the transport provider, Broadband Parasite subscriber numbers will taper off. VoIP customers will begin to favor their transport provider as the better value. At this point, the Vonages of the world will sell their customers to the highest bidder in a classic exit strategy. Due diligence regarding the network design and infrastructure of these Broadband Parasites will be critical in the acquisition of VoIP customers. Carriers that do not currently have their own VoIP infrastructure will assume they can assimilate their new purchase into one big happy company. This will be possible only after extensive IP network redesign. One could get away with simply linking the networks, but the resulting call quality would be undesirable. What this all amounts to is a back-door sale of a switch to the RBOCs and ILECs that purchase VoIP customers as assets.
What will the rise of VoIP look like in the industry? First, the Broadband Parasites will rise. This is already in motion. Then the transport providers will see their bandwidth become over used by non-revenue generating outsiders. Transport providers will implement session border controllers (SBCs) to restrict access by Broadband Parasites while finally offering a VoIP product of their own. Customers will remain rather static until the transport providers begin to buy up the Parasites for their customer base. Transport providers that fail to begin to change their network transport infrastructure now, will find it nearly impossible to do so under the strain of assimilating the VoIP Parasites. Those companies will lose their market share, and most likely their companies to the opposition. The opposition in this case will be the cable service provider, wireless data provider, ILEC or CLEC that has the ability to serve the same customer.

Monday, October 18, 2004

New VoIP Billing Systems: Another Stake in the Heart of the Old Guard

The Internet boom of the late 1990s brought about some interesting changes to the IT paradigm. You know the one where there had to be a highly paid CIO and armies of IT techno-weenies running the billing system, customer contact/care systems, etc.? Tape transfer, re-coding and printed bills ruled the day. Billing errors cost shareholders of the big companies millions every fiscal year.

The first true white knight was Portal’s Infranet product. However, at a $1 million plus price tag and video “convergence” zealots ruling the IT wings at many carriers, the larger companies shied away from complete billing system overhauls.

Fast forward to VoN 2004. Today we see PC and small server based systems that can use VoIP switch data over an Ethernet link. These systems cost a fraction of the old ones and require little if any maintenance. If one pairs these systems with terabyte storage systems from such companies as EMC, you have, quite literally, the exact same systems as the RBOCs currently have…..only better. The new Broadband Parasites will have a clear advantage over existing carriers. Their shareholders and customers will be the direct recipients of the advantage.

The new systems are so impressive, they should be considered for existing companies as well. They are cheap, reliable and easy to maintain. They use standardized operating systems (UNIX variants) and reliable relational data bases. This new generation of systems has superior customer support built-in. This alone should make the 21st century VoIP carriers better suited to deal with disgruntled RBOC, ILEC and CLEC customers yearning for the days when they could actually get a problem solved when they called their carrier.

So, what do we now have with regard to VoIP solutions?
1. Less expensive voice switching systems due to lower hardware, feature and maintenance costs.
2. Less expensive operational systems due to better integration with network management systems (better technical problem monitoring and resolution).
3. Less expensive billing and customer support systems.
4. Lower operating costs with respect to SG&A.
5. Newer, faster product development.
6. Increased revenue due to removal of target market boundaries.

Look for VoIP pricing to hit $19.95 before the end of the year. Companies could add a suite of VoIP components in 2005 and begin writing off the old assets as they fall into disuse in the subsequent fiscal years. Shareholders would see constant improvement in margins and revenue over a multi-year period.

TI Draws First Blood in VoIP Architecture Battle

"Fall VON, BOSTON (October 18, 2004) -- Texas Instruments Incorporated (NYSE:TXN) (TI) announced today its next-generation architecture for Voice over Cable (VoCable) products, extending its strategy to provide cable operators with feature rich technology for integrated voice and high speed data services on a single platform. The single chip Puma IV architecture, built upon TI´s current market leading VoCable product offering, capitalizes on TI´s strength in DOCSIS® hardware and software, digital signal processor (DSP) technology and Telogy SoftwareTM for Voice over IP."

This is groundbreaking in that the speed of packet assembly and decoding will increase by an order of magnitude. This will directly improve the quality of the voice calls over the Internet and bring VoIP calls transmitted over a private network to carrier grade performance. I look forward to similar products from Broadcom, TI's main competitor.

Broadband industry leaders OCCAM and Paradyne have both standardized on the Broadcom chipset for ADSL2+ loop carrier systems. DSL modem manufacturers could use either the TI or subsequent Broadcom integrated chipsets to absolutely nail the quality of VoIP over open networks. This is as significant as CISCO's strides in MPLS technology.

The Weight challenged lady is warming up. Carriers need to forklift their old architecture ASAP!

VoIP Switches, Assest Write-Off and Carrier Response

The 2004 VoN (Voice over Network) Conference began yesterday in Boston. I plan to visit the exhibits on Wednesday. I expect to see all kinds of new and exciting equipment and services. What I do not expect to see is a forum regarding the mass adoption of VoIP technology by any telephone company.

It is not difficult to identify the immense savings a company can achieve through the rapid (during a single fiscal cycle) adoption of VoIP switches. However, the telephone companies see a large write-off of assets as being a large road-block to the rapid adoption of voice over network services. The assets written off would be the switches, installation, transport (ATM and SONET) and the oldest, non-GR303 loop carrier equipment.

Equipment manufacturers that have been manufacturing the old Class 5 switches will be dragging their feet as well. Those companies face the loss of billions of dollars in annual revenue if carriers relieve themselves of the burden of unreasonable maintenance and hardware upgrade fees.

VoIP is quite the populist movement in the US. I like using Jeff Pulver’s tag of Broadband Parasites to describe the new wave of companies that will offer 21st century services to both residential and business customers. These carriers will use the DSL line or cable modem of a subscriber and add the value of VoIP. Any person running a small office or home office will undoubtedly adopt Vonage or some other service within the next 18 months.

When this adoption takes place, the carriers that have not added VoIP service will lose those customers forever. They will be seen as the DSL supplier only. Those carriers will then have only one product to sell in a heavily contested marketplace. This has to be a far worse position to be with no hopeful prospects than the prospect of writing off assets.

It is critical that all carriers currently providing TDM based voice services shed the financial burdens placed upon them by Nortel and Lucent. This immense expense of operating the old technology will become so burdensome, companies such as Verizon, SBC and BellSouth will have to react to the change in the marketplace. Reacting after the fact has historically cost public carriers dearly. This is currently evident in the airline industry. The big boys are being beaten by “low cost” carriers. This revolution was brought about by new companies buying newer jets and systems that are far less expensive to operate. Airline hubs seat prices have dropped from nearly $1000 per seat, to about $150 per seat round trip. Sound familiar?

VoIP service will be adopted and will be adopted more quickly by a larger number of customers than previously projected. They will adopt it because the quality is acceptable and the price is about 25% of what they are currently paying. Carriers that simply graft on a VoIP switch to their current infrastructure will be carrying more expense than phone calls. Broadband Parasites will dominate the market. The investment community already believes in this trend and has awarded a record $105 million in new financing for Vonage. So why are the major carriers dragging their feet? Whatever the reasons, the VoN conference will be fascinating.

Thursday, October 14, 2004

VoIP Is The Next Internet Revolution

This year has seen a huge VoIP technology shift. VoIP is causing a smaller version of the economic boom similar to what the Internet caused in the 1990's. This tehnology revolution could greatly reduce expense and directly increase shareholder value within publicly held telecommunications companies. These gains have already been relaized to some extent within Level3 and Global Crossing. But what about the thousands of other RBOCs, ILECs, CLECs and rural telcos? Recent evidence suggests that there is a reluctance to change within the largely parochial telecom engineering community. This appears to be causing the US to lag behind most other countries in the world with regard to VoIP conversions. US telecom companies have been adding token VoIP systems to their networks, but have yet to perform a "Forklift" of their existing systems. There is a body of evidence to suggest that conversion to these newer technologies could achieve an order of magnitude in terms of expense reductions and shareholder ROI. So, the question arises "Why are they not converting older systems?"

Network equipment manufacturers, CISCO and Juniper, have solved the quality and reliability problems. I have heard the difference with my own ears. The technology even works well with legacy carrier systems. Why do these companies insist on maintaining older, very much more expensive systems?

The problem is not technical in nature. The VoIP switch and network equipment manufacturers do not seem to have project management teams as they did when they converted to the early Class 5 switches. Everyone from the smallest rural telco to the largest RBOC is in need of someone to hold the carriers' hands through a conversion to this new technology. The engineering staff in much of the industry is not IP centric and does not understand the basics of either telephony or Packet transmission. Professional Project Management may be the key. The solution lies in the management of projects, creating new products, redesigning outdated ATM and SONET networks, auditing current telephone switches, conversion to new technology, training and education of existing staff and converting older network management systems to newer and easier to maintain ones.

Where the previous revolution hinged upon the technology, the new changes will be brought about through project management. This Industry is in deperate need of a catalyst to pick it back up again. Investors are wary of a return of the corrupt practices of the largely shell telcos in the 1990s. These investors will return if they see a concerted effort on the part of boards and CEOs to re-define a company to meet the challenges of the new century.