Andy Grove, when Chief Executive Officer of Intel, wrote a book called "Only The Paranoid Survive". At the heart of this book was the concept of the strategic inflection point (SIP). What is this?
He said that: "A strategic inflection point is a time in the life of a business when its fundmentals are about to change. That change can mean an opportunity to rise to new heights. But it may just as likely signal the beginning of the end".
Grove offered another way of looking at this concept. A strategic inflection point occurs when a very large change - what he calls "a 10 X change" - occurs in one or more of the forces that determine the competitive well-being of a business.
How does one know whether a change signals a strategic inflection point and when fundamental change is necessary in the company's strategy? Grove answered bluntly: "You can't wait until you do know: timing is everything. If you undertake these changes while your company is still healthy, while your ongoing business forms a protective bubble in which you can experiment with new ways of doing business, you can save much more of your company's strength, your employees and your strategic position".
But he gave some tips for recognising the advent of a SIP. Ask questions like: "Is your key competitor about to change?" and "Do people seem to be 'losing it' around you?". Listen to the warning voices of the Cassandras in the organisation and the sales and marketing people who are closest to the customer.
It is the central contention of this paper that Voice over Internet Protocol (VoIP) represents such a strategic inflection point for all incumbent telecommunications operators like BT and that consequently the company and its staff face major challenges but also some significant opportunities.
What is VoIP? Why is it so important? How will it challenge the likes of BT? These are the issues that form the core of this paper.
Circuit v Packet Switching
First, a fundamental distinction.
For more than a century, the public switched telephone network (PSTN) has used circuit switching whereby, for each telephone call made, circuits are switched in the intervening telephone exchanges to create a physical connection between the caller and the person being called for the duration of the call. The great advantage of this type of switching is that call quality is extremely high because a dedicated line is being devoted to the call. The major disadvantage is that this type of switching is expensive because it requires considerable capacity in the network as most of the time most of the capacity is not being used.
The alternative to circuit switching is called packet switching and traditionally this has been used for data networks connecting computers. In such a network, data is divided up into small packets which are given identifying information and then sent over the network by a variety of different routes, before being reassembled at the end into the format of the original message. Packet-switched networks do not use an elaborate system of switches or exchanges but a much simpler system of routers.
The great advantage of this type of switching is that it is very cost-effective, making much more intense use of the network, by routing packages along the least busy lines. In the past, packet switching was not used for voice because the breaking up and reassembly of the packets would cause an unacceptable deterioration in quality, notably because of the variable delay in the packets. However, increasingly these delays can be engineered out and indeed systems can distinguish between packets that are voice and packets that are data and give priority to the former.
In the late 1990s, worldwide the volume of data traffic overtook that of voice and increasingly carriers are now looking to integrate voice into their data networks.
The Nature Of Voice Over IP
What is Voice over Internet Protocol (ViOP)?
Ever since the Internet 'took off' as a data network - for sending e-mail and browsing web sites - companies have been exploring the option of putting voice traffic on to the Net or other networks deploying the same technical specifications. Since the Internet uses particular protocols (known as Transmission Control Protocol/Internet Protocol or TCP/IP), this development is called Voice over Internet Protocol (VoIP).
So one could define VoIP as voice services over networks which use the Internet Protocol (IP) which might be the public Internet itself or public or private communications networks. A key distinction is between circuit-switched calls (PSTN) and packet-switched calls (VoIP)
What does VoIP look like?
VoIP services can take many forms:
What does VoIP sound like?
One way of characterising the different grades of VoIP service is as follows:
The Benefits Of Voice Over IP
Businesses are rapidly to VoIP because there are compelling advantages.
Firstly, and most obviously, there are significant financial savings on running the network itself. One infrastructure carrying both data and voice, provided by one supplier, can be managed, maintained and upgraded much more efficiently than two separate networks for voice and data.
Secondly, and more importantly, while each network has its own value, that value is maximised when the two systems are consolidated. Computer applications and communications technologies can be intelligently linked to streamline the working environment.
Thirdly, VoIP allows organisations to integrate their telephone, fax, e-mail and other applications to capitalise on the benefits of unified messaging. Such a system can eradicate unnecessary interruptions while ensuring individuals always receive information in the most convenient format wherever they are in the world.
Fourthly, the system can be used to support flexible working practices, whereby members of staff work from home or in dispersed, 'virtual' teams. Using the VoIP network, team members can see when their colleagues are logged on to the LAN or using the telephone. VoIP offers improved bandwidth capabilities and makes video-conferencing a viable and cost-effective option for discussions between dispersed team workers.
Fifthly, VoIP technology can contribute to an effective knowledge management strategy. The larger the organisation, the more information that must be shared, so an efficient communications system is particularly important. The VoIP network provides individuals with the opportunity to tap into colleagues' areas of specialism, allowing them to search for experts according to specific criteria.
Sixthly, an organisation can also use VoIP to enhance relationships with its customers. For example, converged call centres, or 'IP contact centres', allow agents to answer all customer enquiry mediums, including telephone, e-mail, fax, web call back, web chat and instant messaging. Customers appreciate the flexibility of interacting with an organisation that can handle feedback from a range of different sources, and are even more inclined to do business with those who can offer an integrated response.
To summarize: VoIP networks provide cheaper means of carrying voice but more importantly provide a much enhanced range of services. As an OECD paper of December 2001 put it: "The potential for IP-based voice as a cheaper alternative to traditional telephony is considered to be less important than the opportunity for the integration of voice in new IP-based applications that are considered drivers for broadband services".
Increasingly, residential consumers too are taking up the option of VoIP services. For them, such services offer:
The Obstacles To Voice Over IP
For new entrants, the main obstacle has been the lack of availability of investment capital as a result of the collapse in the dot com boom and the lack of favour in which the telecommunications industry has been held by analysts and investors. However, there is now a slow recovery in confidence and capital availability.
For traditional telcos, the obstacles to investing in VoIP have been the massive sunk costs in legacy networks, the high initial capital costs in creating new networks, and the lack of implementation of gateway protocols to allow integration of VoIP with legacy systems. However, incumbents now face increasing competition from rival carriers and the protocol issues are largely resolved.
For business customers, in the past, IP telephony has been plagued by doubts over line quality by end users and concerns about relying on one network (instead of deploying dedicated voice and data networks). However, these problems are now diminishing, as a result of improved technology and greater investment in in-house systems. The major remaining problem is the much greater cost of handsets.
For most domestic customers, VoIP currently means using a pair of lightweight headphones with a PC to make and receive calls at nil cost even if these calls - as is usually the case - are international. However, it is already possible to make VoIP calls over a traditional analogue telephone provided one has a special adaptor connected to an ASDL or cable broadband service. In future, residential customers will obtain VoIP packaged as a standard item with their broadband provision.
However, a major unknown is how quickly and how comprehensively broadband will penetrate the consumer market. In both the UK and the USA, there is evidence of a trailing off in the take-up of narrowband services at around the 55-60% penetration level so that, even if every narrowband customer up-graded to broadband, a sizeable proportion of the population could not avail itself of services like VoIP.
Furthermore, in the residential context, there are a few special problems with VoIP such as ensuring a secure emergency call service, since VoIP requires mains supply and uses equipment - such as an adaptor or PC - that may not be wholly reliable. However, since most homes now have at least one mobile, this may prove not to be a significant deterrent.
Current Position In The UK
Organisations which are currently switching to VoIP are those moving to or opening a green field site, when the cost of abandoning a current traditional telephony system does not apply, and those - such as local councils - which wish to provide call centre services linked to data bases when the much more sophisticated handsets provide enhanced services. Indeed most large organisations that use corporate networks are now considering moving over to VoIP and BT is already a major supplier of such networks. The crucial point is that BT provides so much capacity for broadband customers that VoIP traffic can be carried at the margin.
BT is already offering VoIP solutions for all businesses from SMEs to the corporate enterprise. BT Business Information Systems has selected Cisco Systems and Nortel Systems to provide "new wave" products to complement its existing portfolio.
Cisco's IP PBX provides customers with a revolutionary option for their communications, bringing IP telephony to the desktop over a single network infrastructure, one that would normally be used for just data applications. The highly scalable IP PBX will be built around Cisco's CallManager and IP telephone sets from Cisco's AVVID range.
Nortel Network's IP enabled Meridian 1 and the Business Communications Manager (BCM - previously known as Enterprise edge), are also available to provide existing customers an evolutionary path into an IP future. Business Communications Manager will complement Norstar, which will continue to be developed and enhanced. BCM will provide an easy migration path for existing and future Norstar customers into the convergent voice/data world by allowing them to retain and re-use some of the investment they have already made in their Norstar system.
The sort of contract that BT is now seeking and winning is that from Abbey National. The company has appointed BT to install and manage a consolidated, company-wide integrated voice and data telecommunications solution. The five year contract is valued at £125 million. The implementation of a new IP VPN (Internet Protocol Virtual Private Network) will modernise Abbey National's telecommunications infrastructure, increasing efficiency and facilitating delivery of its strategy in UK personal financial services.
BT intially launched a consumer VoIP service in areas where there is a heavy concentration of cable users. Customers connect to the service via a special adapter to connect their telephone and broadband line and do not have to reconnect directly to BT, enabling them to retain their other cable services. The service costs £7.50 per month with free weekend and evening calls up to one hour, and 1p per minute thereafter, with daytime calls costing 3p per minute with a 5p minimum charge.
The next stage was for BT to offer a nationwide VoIP service branded as BT Broadband Voice and available to anyone with a broadband connection. There are two calling plans to choose from:
BT is positioning these services as a second line, as users will not be able to use them to contact the emergency services, one of the difficulties being experienced with VoIP, or premium rate services.
In July 2004, BT in conjunction with Yahoo! Messenger launched a new mass market VoIP product called BT Communicator. This new product will, for the first time, allow consumers to manage all their home communications - phone calls, webcam, emails, texts and instant messaging - together in one place on their PC, with multi way video calls expected to be added in 2005.
Meanwhile BT will face a growing number of rival VoIP providers. The best-known American provider of VoIP service to residential customers - Vonage - plans to open a service in the UK around Easter 2004.
In Britain - as in other countries - the move to VoIP has to be seen in the context of BT's moves to what it calls "the 21st century network" (21CN) and what is more generically known throughout other telcos as "next generation networks" (NGN). There is no agreed definition of Next Generation Networks but, at the heart of the concept, there is the integration of existing separate voice and data networks into a much simpler and more flexible network using packing switching and IP protocols. This will enable voice, text and visual messages to be carried on the same network and for each type of message to be responded to in any of these formats on that network.
This is sometimes characterised as a move from the existing model of a smart network and dumb terminals to a new model of a dumb network and smart terminals. In fact, the NGN will be far from dumb, but it is true that, compared to the existing PSTN, there will be much more intelligence in terminals.
There are still many technical issues to be addressed and resolved both nationally and internationally. For instance, NGN will require many more IP addresses, whereas the current Internet Protocol (version IPv4) is running out of addresses. However, version 6 (IPv6) has been in development for a decade and may well be set for rapid adoption.
The current BT telephone network is an elaborate system of some 5,600 local exchanges, 1,200 DSLAMs (Digital Subscriber Line Access Multiplexers) and 25,000 RCUs (Remote Concentrator Units) with 170 core switches. The future network will look very different and much simpler with perhaps no more than 10 core routers.
Although BT has been planning its 21CN for at least a year, its first detailed public announcement was made on 9 June 2004. BT's 21CN programme aims to migrate the company's existing multiple, service specific networks to a single converged multi-service IP based network. It includes work towards increasing the bandwidth of services provided over the copper access network as well as the trials of fibre deployment.
The company has confirmed that it will maintain capital expenditure at some £3 billion a year, but explained that, from the financial year 2004/05, some two-thirds of this expenditure will be devoted to 21CN and other new intermediate technologies. This proportion is expected to grow and the majority of customers are expected to be on the new network in 2008. This implies a 21CN expenditure programme totalling £8-10 billion.
This capital programme is expected to result in a reduction in expenditure of around £1 billion a year by 2008 - that is, a savings of around 30-40%. This £1 billion figure is likely to comprise about one-third capital savings and two-thirds current savings. Most of the current savings will be staffing costs, suggesting further significant staffing reductions.
The 21CN project is envisaged as a five-year programme. Mass migration of customers onto the new network will start in 2006, with the majority of customers expected to be on the network in 2008.
As a precursor to large scale migration of voice and other PSTN based services from 2006, the first stage in the migration pilot will involve the bypass of the core PSTN network link between two major network nodes at Cambridge and Woolwich. An extension is planned later to Faraday exchange in London.
From October 2004, BT will divert voice calls between these network nodes to the 21CN specific IP network. Calls will be carried using IP packet technology rather than the circuit switched technology used on PSTN.
The next stage of this pilot involves the installation of new equipment at 18 exchanges in South East London, Kent and East Anglia which are connected to the network nodes in Cambridge and Woolwich. This equipment, known as multi service access nodes (MSANs), will carry voice and data services onto the core IP based network, initially for 1,000 customers by January 2005.
Current Position Worldwide
While Asia leads the worldwide roll-out of VoIP, North America is catching up fast, followed rapidly by European countries like Sweden and Austria. The lead shown by Asia is explained partly by the higher call charges than in industrialised countries, partly by the lesser investments in legacy networks compared to Europe & North America, and partly by the greater cultural willingness to embrace new technologies.
A snap shot of the position in a number of major countries looks like this:
According to consultancy TeleGeography, one-eighth of international long-distance telephone minutes this year are running over IP networks, up from one-tenth last year and much smaller proportions in previous years. TeleGeography said IP probably will "transform a century-old business in just a few years".
Broadband analyst Dave Burstein forecasts that, by mid 2004, there will be 10M broadband voice users throughout the world. A report by the Yankee Group, released in October 2003, states that 83% of European operators surveyed by the group are expected to be offering VoIP services within two to three years. The main reasons given are more cost-effectiveness, ability to bundle voice and data services, and provision of more compelling broadband services.
BT itself is planning to be a VoIP player in other countries. It is already a major provider of MPLS services to corporates outside as well as within the UK. Indeed it has probably the most successful MPLS service in Europe with orders increasing at 45% a quarter. In the course of the next financial year, BT plans to launch IP solutions in Ireland, Spain and the Netherlands.
Meanwhile a peer to peer (P2P) telephone service launched in September 2003 is shaping up as a serious threat to conventional telcos. Called Skype [http://www.skype.com/skype.html], the system delivers VoIP telephony over a P2P network with nodes linking dynamically to handle traffic routing and processing without needing central servers. The system was developed by the people behind KaZaA - the popular file-sharing software that allows Internet users to find and download music held on other people's PCs. KaZaA co-founders Niklas Zenneström and Janus Friis say Skype will "challenge the outdated business models and rip-off tactics of legacy telcos". They plan to "bring global unmetered communications to people everywhere".
This sounds somewhat bombastic, but (as July 2005) some 140 million - including many UK users - have already downloaded the software.
It will be clear from this review that we are dealing with a worldwide phenomenon that is about to overtake all industrialised and developing countries. The great unknown is how quickly VoIP will happen.
On the one hand, Ovum has predicted that there will be no more PSTN traffic by 2010. On the other hand, Forrester Research - looking specifically at Western Europe - had argued that it will take until 2020 before a complete en-to-end VoIP service is in place. Vendors like Alcatel, Cisco and Siemens will not be ready with carrier class, scaleable and cost-effective equipment for another couple of years. Ultimately a lot will obviously depend on customer perceptions of quality and service and the investment community's willingness to fund the new networks.
Crucially important to note, however, is that VoIP will not develop steadily; it is likely to develop quickly for on-Net business traffic (with the speed being mainly determined by how quickly PABXs are replaced) but slowly at first in the mass market while most calls still have to be terminated on the PSTN network and then very much more rapidly once it becomes possible to complete a high proportion of call free on-Net.
Regulatory Implications Of VoIP
VoIP is a truly disruptive technology and one of the early challenges it will pose is to the existing regulatory frameworks and rules. Since telecommunications is a (tightly) regulated industry and the Internet is totally unregulated, the key issue is whether VoIP should be regulated. The voice element suggests that it should, while the IP element suggests that it should not. Incumbents are likely to press that it should, while new providers will certainly insist that it should not.
This is already the subject of debate and representations in the USA.
On 10 September 2003, Frontier Telephone Company of Rochester filed a formal complaint charging Vonage Holding Corporation with the "unlawful provision of local exchange and interexchange telephone services… in violation of the Public Service Law and other statutes, regulations and orders".
In a submission of support dated 31 October 2003, the Communications Workers of America (CWA) urges the New York State Public Service Commission (PSC) to uphold Frontier's complaint, find that Vonage is violating the Public Service Law and other statutes, regulations, and orders, and mandate Vonage to comply with such statutes, regulations and orders. The CWA argues that failure to take such action would significantly harm the public interest by undermining public safety, consumer protection, fair competition, the equitable and fair treatment of providers and consumers, and the PSC's ability to regulate telecommunications in New York.
On 27 October 2003, the CWA made a separate submission to the Federal Communications Commission (FCC) arguing that the Commission should deny the Vonage petition requesting preemption of a Minnesota Public Utilities Commission order requiring Vonage to comply with state laws governing providers of telephone service.
The CWA submission points out that, in the "Universal Service Report", the Commission addressed the proper regulatory treatment of VoIP. The Commission identified computer-to-computer IP telephony as an "information service". Regarding phone-to-phone IP telephony, the Commission repeated at least eight times that it is a telecommunications service. Vonage itself admits to meeting key criteria of a phone-to-phone IP telephony telecommunications service.
In its submission, the CWA identifies some of the key regulatory issues involved: obligations for universal service support, support of telecommunications relay services (TRS), access for people with disabilities, inter-carrier compensation (access charges), public safety obligations such as E911 and CALEA, privacy protections, advance notice of termination of service, and other consumer protections.
The FCC is seized of the need to take a clear view on whether and, if so, how VoIP should be regulated and it recently held a special open Forum on the subject. At this event, the Chairman of the FCC Michael Powell declared: "No regulator, either federal or state, should tread into this area without an absolutely compelling justification for doing so".
However, California Public Utility Commissioner Carl Wood argued at the forum that regulators have an obligation to oversee telephone services, whether they travel over traditional lines or the Internet: "The advent of [Internet phone calls] does not in and of itself exempt it from telecommunications regulation". He pointed out that the National Association of Regulatory Utility Commissioners has voted in favour of regulation of such services.
Here, in the UK, the regulator Ofcom launched a formal consultation on what it now calls "new voice services" in September 2004. In this document it is explained that Ofcom recognises that a balance needs to be struck between creating the right conditions in which new voice services and new providers can enter the market, and ensuring that consumers are properly informed and protected. Ofcom favours an approach that allows new services to enter the market, while enabling consumers to make informed choices and take advantage of these new services. In particular, Ofcom's initial views are:
Therefore the answer to the question “Is VoIP going to be regulated in the UK?” is somewhat complicated. VoIP itself is not to be regulated because it is simply a technology. VoB services - which are a sub-set of VOIP - may or may not be regulated depending on whether they are what the EU Directive describes as a Publicly Available Telephone Service (PATS). PATS services are subject to a number of general conditions, several of which impact on consumers.
The most important of these is uninterrupted access to emergency services. Others include operator assistance, directory enquiries, and special measures for those with disabilities including free directory information and text relay services.
The general thrust of discussions with potential VoIP operators is that they would not want to be subject to PATS requirements, although they would probably want to meet most of the conditions required of such operators. The exception is 999 services where current technology would make it prohibitably expensive to provide access to emergency services of a reliability comparable to current PSTN networks.
Ofcom favours co-regulatory approach with warnings to customers of VoB services at both the point of sale and the point of use about the limitations of such services, notably lack of access to 999. Ofcom wishes to have a dialogue with the industry. Such a dialogue should be assisted by the recent creation of an Internet Telephony Service Providers Association (ITSPA) co-ordinated by Kim Thesiger of Gossiptel.
The main regulatory issues around VoIP are as follows:
Financial Implications Of VoIP
Historically telecommunications has been about the growth in basic fixed telephony, a market that provided steady growth and profitability for many decades. In the UK, this has been a £7 billion market, so it has been fundamental to BT's survival as the major market player.
However, in the past 10-15 years, BT's volume growth and profitability have been severely challenged by a combination of ferocious competition, excess capacity and tough regulation. The latest challenge for the company has been the introduction of carrier pre-selection (CPS) which is beginning to bite heavily into the company's revenues - over 3 million customers have already been lost and the former regulator Ofcom expected 5 million to be lost by the end of 2004.
The switch to VoIP will further diminish the core revenues of traditional telcos like BT. VoIP customers will not pay by calls made, but instead pay a flat-rate charge for unlimited calls along the current model for broadband Internet. In the USA, the analysts UBS wrote in a November 2003 report entitled "Sayonara To Voice": "VoIP technology has the potential to do to wireline carriers what file sharing is doing to the recording industry", while Goldman Sachs said in July 2003: "Lost telecom revenues could reach the billions in a matter of years".
Consequently the whole basis on which tariff structures have traditionally rested could be swept away. Already there are tariff options which are not based on numbers of calls (such as BT Together). Within five years, telco customers will not buy lines or calls at all, but packages and bandwidth. Telcos increasingly will not sell calls as a stand-alone service; instead they will bundle calls into offerings which include narrowband or broadband Internet connection and other services such as firewall protection and security.
This will have enormous implications for how telcos market their products and account for their revenues. It will also affect regulatory controls, since market share will no longer be measurable by call volumes.
The challenge for the traditional carriers will be whether they stand aside from the technology and watch competitors offer VoIP and further reduce their revenues and market share or whether they themselves launch a VoIP service and in effect cannibalise their own revenues. In the short-term, the latter course would accelerate the decline in the core business but, in the medium term, it would drive their broadband business to new heights.
In August 2003, NTT of Japan became the first incumbent carrier to launch a VoIP service which it did to business customers in competition with Yahoo BB. In October 2003, France Telecom announced that it would provide a VoIP service to business users.
A further challenge for BT - compared to many other (especially European) incumbents - is that it no longer owns a mobile network, having disposed of O2. Existing 2G and future 3G networks will remain stand-lone from New Generation Networks for some time, although 4G networks will be IP-compliant. Therefore VoIP competitors will not provide the same threat to mobile operators as to fixed-line operators. But, of course, BT does not have major mobile revenues to 'cushion' it from the loss of fixed-line revenues, although it has now teamed up with Vodafone to become a virtual mobile provider.
Consumer Questions On VoIP
It is evident that there are many potential benefits to consumers from using VoIP services. However, consumers will need to exercise some care in chosing a VoIP service if they are to ensure that they - and visitors to their home - know exactly what the service does and does not provide. The British comunications regulator Ofcom has provided a helpful checklist of issues to be considered by consumers:
We stand today with VoIP something like where we stood with the Internet in the early 1990s. The speed of development and the widespread impacts of VoIP will be comparable to that of the Internet. VoIP is truly a disruptive technology that will pose many challenges to BT, its staff and its unions.
The year 2003 saw VoIP move from being a fringe interest of high tech enthusiasts to a concept central to the planning of all major telecommunications operators. We shall be hearing a great deal about VoIP in 2004 in the technical media, in discussions with BT, and in discussions with members.
However, in some ways, VoIP is the froth on the wave and the wave itself is the 21CN/NGN. VoIP is the most predictable growth feature of the new network, but there will be many others. Here, in the UK, 2004 also sees a strategic review of telecommunications by the new super regulator Ofcom - the most fundamental examination of the regulatory structure since the duopoly review in the early 1980s. Consequently 2004 could well prove to be a watershed year for all concerned with the British telecommunications industry.
Last modified on 22 July 2005
Ofcom frequency asked questions on VoIP click here
Ofcom Consumer Panel seminar on VoIP click here
Federal Communications Commission Panel on VoIP click here
Wikipedia page on VoIP click here
OECD paper on VoIP click here
Vonage - The Broadband Phone Company click here
MediaRing VoIP service click here
Skype P2P VoIP service click here
"Next Generation Networks" click here