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IP Telephony to Have a Dramatic Impact on Asian Voice, Data Communications Markets

Madanmohan Rao reports from the first iLocus Internet Telephony conference in Bangalore

It won't be fully legal in India until April 2002, but Internet telephony is already changing the face of voice and data communications in countries across the world—from Chile and China to Brazil and Belgium.

And a new generation of start-ups—the dot-telecoms—is driving yet another wave of innovation in consumer markets, enterprise markets, and local and international markets.

There are over 1,800 companies operating in the IP (Internet Protocol) telephony market today—most of which were launched less than two years ago, according to Jahangir Raina, director of iLocus, a London-based market research firm. The company recently hosted India's first IP telephony conference in Bangalore, which was attended by more than 250 delegates and exhibitors who represented 140 companies and 20 countries.

"Asia is the most promising region for the growth of IP telephony due to increasing deregulations in voice and data communication markets, coupled with the maturation of IP telephony technology itself," Raina said. Eastern Europe and Latin America also have potential for IP telephone growth.

"The service sector for IP telephony was worth US$1.8 billion in 2000, with a compound annual growth rate (CAGR) of 120 percent. The equipment market for products in this sector was worth US$2.08 billion last year," said Raina.

As of December 2000, IP telephony networks—based on data packet-switching as opposed to traditional circuit-switching—accounted for an estimated 1.6 billion minutes of traffic per month. Executives in countries around the world are already leveraging the gains of voice-traffic over managed IP networks, followed closely by consumers making voice calls over the public Internet.

Leading players in this market are IP-public switched telecommunications network (PSTN) gateway vendors (Cisco, Clarent, Nuera, Vocaltec, Lucent, Sonus, Unisphere, Convergent Networks), carriers (ITXC, Genuity, NetVoice, Net2Phone, iBasis) and network operators (such as Concert, PointOne, China Telecom). Two of the fastest-growing technology companies in North America over the last three years are in the VoIP (voice over IP) market: ITXC and iBasis.

Nearly half of the carriers use Cisco gateways; the company has a diverse portfolio and is also able to finance start-up carriers. Clarent, Sonus and Nuera are strong in Asia.

Lucent has good relationships with almost all incumbent telecoms and usually takes up large and long-term orders. Net2Phone has excellent marketing prowess, and has formed strategic alliances with major portals like Yahoo, AOL, Netscape, and MSN.

Key challenges for telecom operators will lie in ensuring seamless migration paths from existing legacy infrastructure to IP technology. Major incentives for them to migrate include: better functionality at lower costs; faster deployment; potential for new applications; and the emergence of a new generation of computer-friendly users.

"By 2010, all voice traffic will be over IP networks," said Tom Evslin, chief executive officer of ITXC, the largest wholesale carrier of IP telephony traffic in the world, with 466 points of presence in 263 cities and 96 countries around the world.

IP infrastructure can simultaneously handle the needs of both voice and data communications, and it is advisable for companies entering recently deregulated telecom markets—such as India—to seriously consider choosing IP telephony solutions, Evslin said.

"We entered China two years ago when deregulation permitted IP telephony for carriers China Telecom and China Jitong. Today, more than 18 Chinese cities have IP telephony connections. We may see even more explosive growth here in India, regulations permitting," said Evslin.

IP telephony is explicitly legal in 15 countries, including much of Western Europe and North America, and parts of Asia like Japan, Korea and Singapore. It is illegal in another 15 countries, and the rest of the world falls into a gray regulatory area.

High telecom rates for domestic and international long distance calls are detrimental to commercial growth in a fast-paced global economy. At a time when capital markets are drying up and making it difficult for telecoms to raise money to build new infrastructure, the significantly lower costs of IP telephony make it a better alternative, says Evslin.

Founded as recently as 1997, ITXC has forged alliances with most of the leading telecom carriers in the world as well as numerous start-up carriers. The New Jersey-based company has grown to 270 people with US$26 million in revenues in the first quarter of 2001.

The company has been granted five patents for its best-value routing technology, and has filed for a dozen more, according to Evslin, who was formerly with AT&T's internet service provider WorldNet. ITXC claims that it has the capacity to deploy full gateway solutions for carriers in 6 days flat.

According to research firm Telegeography, three percent of international phone-to-phone calls travel over IP networks today; ten percent of the calls from the United States to Mexico are already traveling over the Net. "We would like to see the other 97 percent of international traffic also move to IP networks," said Evslin.

According to the World Telecom Policy Forum, IP telephony will account for 25 to 40 percent of all international voice traffic by 2004.

Contrary to popular misconceptions, the quality of VoIP service has actually improved dramatically, and the major carriers of the world have been steadily incorporating IP networks; many people today may not even be aware that part of their long distance voice traffic is being carried over IP networks, said Evslin.

"India may be one of the countries to benefit most significantly and quickly by VoIP services, since teledensity is at a mere three percent today and there is a huge emerging market for value-added services like call centers. In fact, by 2005, we may see the majority of international voice traffic for India going over IP networks," Evslin said.

IP telephony is already making a big splash across the border in China. Launched in May 1999, China Unicom today has the world's largest VoIP network implementation in the world, accounting for usage of over 2.5 million minutes a day, ten million calling cards, and revenues of US$200,000 a day.

IP telephony application service providers (ASPs) are driving new applications for VoIP markets in areas like Web interfaces, call roaming, distance learning, and electronic customer relationships management (eCRM), said Srinath Beldona, a consulting engineer for Cisco Systems.

Such dot-telecom startups include BeVocal, PhoneTree, Edge2Net, MediaRing, eYak, Pagoo, and Go2Call.

It would be advisable for emerging private players in India to develop shared infrastructure, said N. P. Sen, managing director of S. M. Telesys in New Delhi, and a former Department of Telecommunications (DoT) manager.

"Every operator wants to have his own private fiber network and not buy anything from the competitor," Sen said. There will also be challenges in devising low-cost IP phones which still work when electrical power is cut, as with present phones.

Existing telecom players like BSNL in India will also be reluctant to switch completely to newer IP solutions. As such, there will be a need for managing hybrid networks with switches from different generations.

VoIP is already allowed in India in closed user groups, but not for the average consumer using the public Internet, said Vijay Yadav, country manager in India for CommWorks, a wholly owned subsidiary of 3Com.

Huge markets will open up in India for services like PC to phone communications, unified messaging, network-based call centers and clearing houses based on open settlement protocols, Yadav said.

While many VoIP players seem quite bullish about the Indian market, some like Jan Burdinski, director of Berlin-based Gecco.net, are more wary. "The Indian market will not open up as fast as everybody would like to believe," he said.

Telecoms will also have to deal with shorter network planning cycles and short equipment depreciation periods, said Venu Sriperumal, CEO of Amoeba Telecom in Coimbatore.

And return on investment on equipment has dropped from expectations of ten years to three years, added Manoranjan Mohapatra, chief operating officer of Hughes Software Systems in Gurgaon.

Fortunately, there is more standardization of equipment and services in VoIP as compared to other telephony devices, thanks to interoperability fairs called 'bakeoffs.'

"With proper partnerships, we shall see a surge in demand for value-added services like talking yellow pages, map and direction services, scheduling meetings within specified distances, and click-to-dial," said Mohapatra.

In a world of shifting alliances and changing technologies, 'coopetition' will be a key requisite for VoIP players, said Lena Chung, managing director of Hong Kong-based Concert Global Clearinghouse, which offers multiple termination options with transparent fees for VoIP carriers and telecoms.

Concert, a joint venture of AT&T and British Telecom, offers international services for call-routing, usage recording and inter-network authentication.

Many Asian regulators and monopolies seem nervous about emerging technologies and dropping telecom rates, Chung observed. "But take a look at China—long distance call rates were recently cut by 50 percent, but traffic growth increased so much that profits continued to flow in for the telecoms," she said.

Incumbent Indian telecom players may certainly lose traditional revenues—but they gain new markets in the process, Chung said.

"Voice commerce or voice-assisted Web browsing for online shoppers is a good example of new revenue streams via VoIP," said Ira Palti, president of VocalTec in Israel.

Now supporting over 100 telephony protocols, VocalTec was one of the earliest pioneers of VoIP way back in 1995, and has a strong presence in the PC-to-phone and Web call center markets. Its clients include carriers; leading ISPs; call-back companies; mobile carriers and calling card companies. The roster spans Deutsche Telecom, AT&T, France Telecom, China Telecom, and Marconi.

Voice will become yet another application on IP networks, in addition to news and weather; VoIP will eventually become "the world over IP," Palti said.

"By 2010, the telecom market worldwide will be open and hyper-competitive with many-tiered operators. End users will have unprecedented control over their telecom service packages. Carriers of today must reinvent themselves for tomorrow," he said.

The recent VoIP experience of other Asian countries like Thailand should also be informative for India, said to Vorasakdi Arora, Bangkok-based managing director for the Indian Ocean region at iBasis, a leading wholesale VoIP carrier.

Thailand has introduced VoIP services in rural areas, enabling rural users to make long distance calls at one fifth of the normal cost. "Price per minute certainly falls, but call volumes also increase," Arora said.

Users will also benefit from Internet-based applications. Thanks to the global nature of the Net, users of VoIP services will be able to tap applications from around the world and not be bound to their local service providers in the PSTN model, said Gene Cohen, cofounder and chief technology officer of IPX, a VoIP clearing house based in New Jersey.

As a major call center destination, India stands to gain a lot from VoIP, said Keith Fiveson, founder of the IT Enabled Services Alliance in New York. The number of call centers worldwide will increase from 100,000 today to 300,000 in year 2004.

"Competition has intensified in the global village, and there will be a growing need for 24X7 customer service. IP telephony has made outsourcing and offshoring of CRM an important option for major global players," said Fiveson.

By 2005, 35 percent of call center agents worldwide will be using IP telephony solutions, according to market research firm Ovum.

Technology has matured to the point where all information about a customer is available on one single system, said Bart Bartolozzi, director of strategic development at Net2Phone, whose VoIP CRM solutions clients include Avis, AT&T, and several airlines and brokerages. M-commerce solutions can integrate voice, which can also activate other applications like calendaring, he said.

"For call centers, every cost is cheap in India except telecommunications. These costs must come down and be integrated with IP if India expects to remain a significant player in this market," said Nick Lau of Vocaltec.

International VoIP is growing at a CAGR of 278 percent, according to Avinash Vahistha, managing director of IT services firm neoIT.com in California. In Asia, emerging economies like Malaysia are already issuing VoIP licenses.

By 2005, 50 percent of the private branch exchange market of telecoms will be captured by IP PBX devices, said Rupa Rao, senior project manager at Bangalore-based TeleSoft, which specializes in Web-based network provisioning systems for VoIP.

One of the spectacular success stories of VoIP in the consumer market is DialPad, which registered 13 million online users in its first year of operation, with one million users signing on in the very first eight weeks of launch in 1999.

"We have over 15,000 users signing up each day now," said Venkat Ganesan, international business development manager for DialPad in Santa Clara, California.

"VoIP disrupts the existing cost structures of telecom calls, and telecom incumbents always fear disruptive technologies and innovations," Ganesan said.

DialPad has 46 percent of the global retail market share of VoIP, and 22 percent among global VoIP carriers.

"There is a concern in India that the country's gross domestic product will drop if Videsh Sanchar Nigam Limited (VSNL) loses revenues to VoIP companies. But new markets actually open up, and the decrease in cost will be passed on to the end-users," Ganesan said.

Calls from the United States to India used to cost US$2 per minute in 1998; now they have dropped to 55 cents a minute, and people are actually talking more and spending more on calls, according to Ganesan.

"VSNL may continue to block our user datagram protocol packets, but Indian users are still using Microsoft and Yahoo to make phone calls over the Net," he said.

Ganesan added that cybercafés in India have very good potential for launched value-added VoIP services further on down the road; an estimated 60 percent of Indian users access the Net from cybercafés.

Small infostructure providers like cybercafés and public call booths will play a key role as resellers of VoIP services in the future, said Ryan Hendricks, founder of VoIP start-up STDbooth.com in Mumbai.

It's like 1981 all over again, when the PC era dawned; the same paradigm shift is hitting the telecom industry and a global rebalancing of players is beginning, he said.

"You can't stop VoIP, just as you can't stop call-back services. India is already five years behind China and will soon be two years behind Nepal and Pakistan on the telecom regulatory front," according to Hendricks, who formerly launched a VoIP company in Hong Kong.

"India should not become the black hole of south Asia in terms of telecom obstacles. Banning VoIP merely hits small and medium-sized enterprises and workers and encourages voice pirates who siphon off precious revenues. I support VoIP in India but do not want to become a voice pirate and spend time in telecom jail listening to VSNL theme music," joked Hendricks.

The writer can be reached at madan@inomy.com