Saturday, June 28, 2003

The Calm before the Storm (NGN2003)

In talking to many people about the current state of the network and
telecom industries, there seems to be a general perception that things
are returning to "normal." As in the pre-bubble days, people are once
again focused on long-term sustainable business models instead of the
quick hit. Most of the service provider bankruptcies likely to happen
have now taken place, many of the "me-too" startup network equipment
vendors have fallen by the wayside, and the funding of investments has
returned to early-to-mid 1990s levels. While some further industry
consolidation is still likely to occur, the industry appears to be

So what does this mean for the future of the industry, including
opportunities for next generation technologies, products, and services?
Does recovery from the telecom bust and a return to a sense of normalcy
mean stability? Will it limit the potential for innovation or new
business models?

If you followed my (Dave's) 3-part series earlier this year in Business
Communications Review: "The Future of the ILECs," it should be clear
that the current business model of the local carriers is not
sustainable. The ILECs are currently suffering from flat or declining
revenues, high debt, UNE-P penetration by competitors, losses on DSL,
cable broadband competition, wireless services substitution, high cost
structures, inefficient operations, and competing demands by unions,
stockholders, customers, regulators, and politicians. While the ILECs
have some opportunities to grow their data services revenues and expand
their entry into long distance, these services are unlikely to offset
the expected continuing loss of voice phone lines. The health and
welfare of the ILECs are particularly important in understanding the
future of the telecom industry, as the ILECs are often viewed as models
of stability relative to the other carriers, and they tend to dominate
CAPEX spending, even in its current depressed state.

But the biggest challenge to the ILECs hasn't really hit them yet - the
disruptive impact of IP on voice. With the rapid growth and penetration
of residential broadband in many geographies, there will soon exist a
critical mass of potential customers for a new service: consumer IP
voice over broadband. With residential broadband, voice becomes just
another application running over the subscriber's broadband Internet
connection, albeit one that providers can charge additionally for. Many
ILECs are interested in the "triple play" of bundling voice and video
along with broadband Internet access.

However residential VoIP also represents a major threat to incumbent
voice carriers - witness how Yahoo Broadband has been hurting NTT in
Japan. There may be minimal barriers to entry for new providers to
independently offer phone services over the broadband services of the
ILECs (i.e., DSL) or cable providers. This is already starting to
happen in the US with services from like Vonage and Packet8.

As more cable companies and larger enterprises implement voice over IP,
an increasing percentage of their phone calls will be established
between IP telephony users, yet these calls today are forced to traverse
the PSTN with costly, inefficient, and performance-robbing
packet-to-circuit-to-packet conversions, requiring multiple media
gateways. Thus there will be a large incentive for these organizations
to establish direct VoIP peering relationships based on standards like
SIP and ENUM, bypassing the traditional carriers and leading to a
decline in traditional carrier voice revenues. As standards like ENUM
gain traction, the potential will exist for anyone to become a "phone
company." All it will take is a broadband connection, a DNS server
containing ENUM records, a voice call-control server (such as
Microsoft's upcoming "Greenwich" Real Time Communications Server
incorporating voice, video, data collaboration and presence management),
and a VOIP media gateway with a few phone lines.

As if this weren't enough of a threat to the core business of the
carriers, the growth of SIP-based IP telephony will facilitate the
convergence of voice communications with user instant messaging/presence
applications and services. As this happens, we may have to start
thinking of Microsoft, AOL, Yahoo, and other organizations that operate
public "buddy list" directories as phone companies.

The existing telecom regulatory framework is woefully inadequate to deal
with this new user/consumer-driven voice over IP environment, and the
incumbent carriers will use every power at their disposal - including
government regulation and legislation - to try and slow their loss of
voice revenues. But it will be awfully hard, if not impossible, for
them to avoid the approaching VoIP storm. The current relative
stability being enjoyed by the ILECs may be just the calm before the

What opportunities will be generated by the convergence of IP voice with
IM/presence, SIP, ENUM, and residential broadband, and how can or should
the carriers respond? At our upcoming 18th annual Next Generation
Networks conference, November 3-7 in Boston, MA, we've organized
multiple sessions to address this key issue area, including Consumer
VoIP: Opportunities and Approaches; Enterprise Voice: SIP, ENUM, and
Other Developments; the debate Network Convergence: Now or Never; and
Service Provider Business Issues: Leaving the Bottom Behind. More
information about NGN 2003 is available at

We look forward to seeing you this fall.

Dave Passmore
NGN2003 Conference Co-Chair
Research Director, Burton Group

John McQuillan
NGN 2003 Conference Co-Chair
President, McQuillan Ventures

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