Monday, October 25, 2004

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.

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October 7, 2005 at 6:30 PM  

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