As Goes VoIP, So Grows Softswitches

By Ron Miller

The market for softswitches , the platforms that connect wireline phone calls to IP networks for Voice over IP, is poised for explosive growth through 2008, after a jump of more than 42 percent in 2003, according to In-Stat MDR.

But all that growth is contingent on how fast VoIP goes mainstream. Norm Bogen, director of networking for In-Stat MDR and the author of a new report about the softswitches (“Softswitch Architectures Evolve as VoIP Goes Mainstream”), said he expects VoIP to hit the mainstream sooner than expected.

“All of the major carriers are deploying it on a trial basis or for real revenue right now. They are all going to do it and they will all need these switches,” Bogen said.

He said he expects to see a compound annual growth rate (CAGR) of 64.6 percent, between 2003 and 2008, resulting in revenues of $2.05 billion in the softswitch market.

Up until fairly recently most phone traffic was run on hardware
switches. “In the old days companies bought a circuit switch from Nortel or Lucent which housed the hardware, control software and any
applications in a big box or series of humongous boxes,” Bogen said.

The softswitch, on the other hand, provides a way to provide all of the same services (and more) on a software platform, and a way to execute more sophisticated services including multimedia at a much a lower cost of implementation.

“Software switches basically sucked the intelligence capabilities from the old hardware switches — which were sometimes the size of a city block — and put it into a couple of [server] racks,” said Jeff Paine, vice president of strategic marketing at softswitch vendor UT Starcom of China.

“The initial market for softswitches was largely outside the U.S. [because] there [were] millions and millions of potential subscribers in China and Brazil that didn’t have basic phone service. In Brazil, they found that there were six million subscribers for cable TV, three million of which didn’t have a phone in the house. These markets are best served by softswitch technology,” Paine said.

In spite of the growth prospects, however, Bogen said he doesn’t believe softswitch revenue will come close to replacing the old $30 billion-a-year hardware switch business. But $2 billion in revenues by 2008, however, is enough for the sector to help telecom providers.

“Telecom had hit bottom and is in recovery and softswitch technology is part of the reason why, but as old stuff declines and this increases, you still have flatish to 1 percent growth,” Bogen said. And don’t look for “double digit growth in service writer revenue or equipment sales,” he added.

Still, as providers move to softswitch technology, the lower switching costs will result in lower long distance costs for consumers, as well as more sophisticated services. They will include what UT Starcom’s Paine called “selective call forwarding,” a service that lets you refine exactly who can reach you, where and when.

“For example, only my wife could find me at the fishing cabin in Maine and everyone else [would go] to voice mail,” Paine said.

According to the In-Stat MDR report, wireline switches will account for the majority of softswitch sales in the U.S. between now and 2008.

Paine pointed out that in many areas of the world where wiring is not possible, softswitches become the conduit to help deliver phone service.

The softswitch market was originally dominated by startups, but In-Stat’s Bogen said he sees traditional switch vendors such as Nortel, Cisco, Siemens and Lucent, along with startup Sonus Networks, positioned to catch the wave of growth.

On the provider side, Bogen predicted that cable providers will be the big winners because they bring what he called “the triple play,” a combination of voice, data and video, to consumers.

Traditional telecom vendors will hold their own in this regard, he said, by replacing old long-distance revenue with new revenue. He also said pure play VoIP providers such as Vonage will do fine, but will have to figure out how to compete with a bundled range of services from traditional carriers.

Bogen predicted that in the end, softswitch growth — and VoIP for that matter — will depend on a regulatory wild card. “How [governments] choose to tax this will determine the pace of growth. Choosing not to tax it is [already] fueling growth,” Bogen said.

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