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Carriers Cured of VoIP Phobia
High Demand, Low Costs Lead to Embrace of New IP Services

By Richard Martin / VON
February 12, 2010

After many years of mostly ignoring new voice-over-IP services and providers, and hoping they’d go away, major carriers have finally begun to embrace the possibilities of this paradigm-shifting technology. They’ve done so not only by introducing their own VoIP-capable bundles (such as U-Verse, from AT&T (T), and Verizon’s FiOS), but through acquisition – meaning we could see more innovative VoIP providers snapped up in the coming year.

Now where does this VoIP go?
“There’s no question that in the long term we see VoIP capabilities being the main communications mode, including for mobile,” Joyce Kim, chief marketing officer at Global IP Solutions – which provides application-platform software to service providers and developers – told VON. “To date, carriers haven’t embraced VoIP capabilities, but that has to change. They can only bury their head in the sand for so long.”

AT&T last month said its U-verse Voice digital home phone service had reached the 1 million subscriber mark, two years after it was introduced. Indeed, the former Ma Bell is now so committed to IP-based services that it has petitioned the Federal Communications Commission to devise a plan to “sunset” the PSTN in an orderly fashion.

Beyond that, though, carriers have found success with an “if you can’t beat ‘em, buy ‘em” approach to adding VoIP services, which are often seen as cannibalizing existing revenues from their core businesses. BT Group (BT) two years ago acquired VoIP provider Ribbit, in one of the first major acquisitions of a VoIP startup by an established carrier. Last month Telefonica (TEF), a major Euro telco, finalized its purchase of U.S. VoIP startup Jajah.

Cable companies are also moving rapidly to build out their VoIP capabilities. Comcast Corp. (CMCSA) – already the leading provider of VoIP in the country, with 7.4 million subscribers – said last week it would acquire wholesale VoIP provider New Global Telecom Inc.

The new openness to IP-based services is one of the markers signaling a “second phase” of development and deployment of VoIP, according to Robert Poe, an analyst-at-large for research outfit Heavy Reading. In the first phase, “VoIP ... have largely emulated traditional phone service,” Poe wrote in a recent report, “Disruptive VoIP Services: What Carriers Need to Know.” “As a result, VoIP’s disruption of the traditional telecom services business has to date been far less dramatic than many expected.”

That is set to change. “The last few years have seen the development of new kinds of VoIP services with great potential to disrupt the telecom market,” Poe concluded. “In this phase, innovators are attempting more deliberately to undermine the technical and commercial models of traditional telephony.”

The Heavy Reading report sees four main shifts that this new second phase will bring for traditional telcos:

Invest & They Will Come
Decentralization, or virtualization of the ways in which applications are delivered, bringing with a dramatic reduction in the cost of entry in the telecom services market
Democratization of app development and delivery. Because developers no longer have to spend millions on networks and switching platforms, “a far broader range of potential providers” has entered the picture.
Hybridization/integration of apps and services – the “voice is just another app” slogan is finally becoming a powerful reality.
Enrichment of apps and services. HD voice, integrated video, presence and location information, incorporated widgets: All are being incorporated into rich platforms that add to the user experience, and to operators’ bottom lines.
To this list could be added “de-coupling” of providers and core networks, specifically the PSTN. Now the “largest provider of cross-border communications in the world, by far,” according to research firm Telegeography Research, Skype accounts for 12 percent of all international voice traffic – much of which never touches the core networks of traditional carriers. There are several companies and alliances active today trying to devise new and more robust ways to bypass the PSTN altogether.

At the same time, carriers have seen the light (literally, in the case of operators laying fiber-optic networks) in terms of infrastructure. While overall carrier investment in infrastructure has been down the last two years, carrier VoIP equipment spending held steady in the second half of 2009, at around $1.2 billion, and is poised for growth in 2010, according to Infonetics Research. Demand for new VoIP services is too great, and revenue-generation too large, for the carriers to ignore any longer.

“Really the POTS lines have been showing their age for a long time,” said Greg Collins, a vice president at research firm Dell’Oro Group. “The large carriers realized that they can’t put all these great new services on top of that narrow pipe, so they’ve started investing in fat pipes. Cable has done a great job of that, and the telcos are really starting to do so as well.”

Those investments should start to pay off in 2010. According to a new Dell’Oro report on carrier VoIP, “During 2010, VoIP subscriber growth is expected to accelerate due to an improving housing market and aggressively priced bundled service offerings from service providers.” Carriers should see single-digit subscriber growth over the next few years, Collins added.

VoIP Phase 2, in other words, is well underway.