IP Fueling Strong Telco Comeback

Demand for IP telephony and convergence communications equipment are key drivers behind renewed growth in the telecommunications industry, according to an industry outlook report.

The annual report by the Telecommunications Industry Association (TIA) showed the most notable gains since the dot-com crash of the late 1990s.

The TIA 2005 Telecommunications Market Review and Forecast said the 7.9 percent growth the industry experienced in 2004 ($785 billion) marked the first year of spending increases since 2000. The report said an 8.7 percent increase is expected for 2005 with spending of $1.1 trillion on telecommunications goods and services.

One of the factors is that many companies are replacing dated PBX-based telephone networks with IP-based devices and platforms that can deliver next-generation services such as Voice over IP , audio- video- and Web-conferencing.

In addition to the transport cost savings through VoIP — which bypasses access charges — IP networks consume bandwidth more efficiently, the report states, and allow companies to outsource call center operations to remote locations around the globe, such as in Asia. A unified messaging system, as well, allows for applications that can run on multiple platforms.

The replacement demand for IP-based PBX systems is already outstripping demand for the circuit-switched PBX. According to the report, converged systems will expand at a 20.7 percent compound annual rate to $5.6 billion in 2008, accounting for 80 percent of the PBX/key telephone system (KTS) market, while traditional systems as a consequence will drop 14.4 percent annually to $1.4 billion.

“This is perhaps the most upbeat report that we’ve been able to do since 2000 [and] 1999, and it’s nice to see a market that is expanding,” said Arthur Gruen of Wilkofsky, Gruen Associates, one of the principal authors of the comprehensive report. “We expect that to accelerate going forward.”

According to Gruen, the reason for the dramatic turnaround in IP vs. PBX systems is that when converged technology equipment was first rolled out in the 1990s, many companies were already locked into leases with traditional telephony systems or had just bought new equipment.

“There was a lot of new equipment that was being purchased so that enterprises, and carriers for that matter, weren’t in a position to really move into convergent solutions because they had a lot of new equipment that was working fine as it was,” he said. “The potential cost savings for convergence would be cannibalized by not capitalizing on the investment that had recently been made, so there wasn’t much movement on that score until 2004, late 2003.”

That, coupled with the economic downturn in the early years of the millennium stopped many from making the switch. Statistics showed PBX system unit purchases peaked at 37,600 in 1999. But since then, purchases have been sinking, and will continue to sink in the near future. The report predicts unit purchases to drop to 2,900 by 2008.

Enterprise adoption of IP-based telephony, along with rollouts by telephone companies and cable operators, are expected to spur VoIP adoption in the mainstream. The number of VoIP access lines, at 6.5 million in 2004, is expected to grow dramatically to 26 million by 2008, the report said.

The report offered a mixed outlook on the growing popularity of wireless technologies, which includes cellular, digital and Wi-Fi subscribers, as the sector reaches new levels of maturity. While the number of wireless phone subscribers in the U.S. came in at 163.1 million, an increase from 2003’s count of 148.1 million, the revenue growth carriers can expect to garner from customers will flatten.

The statistics, complied by the Cellular Telecommunications & Internet Association (CTIA), Federal Communications Commission (FCC), TIA and Wilkofsky Gruen Associates, show that revenue growth is on the decline and will flatten out in the next three years among wireless carriers. In 2000, wireless communications services revenue growth peaked at 31.1 percent and has dropped in each successive year to 2004, which saw 14.8 percent growth. Between 2005 and 2008, the compound annual growth rate (CAGR) is expected to hover at 10.4 percent. The wireless communications services market is expected to bring in $149 billion in revenues in 2008.

Other findings in the report include:

  • The cable industry, which is bundling local and long-distance telephony services with its TV and broadband Internet, is experiencing gains. The number of cable telephony subscribers, 3.3 million in 2004, is expected to grow to 7.4 million in 2008.
  • While network equipment manufacturers will likely never again see the spending it saw in 2000 ($51.9 billion), growth is re-emerging. In 2004, $15.8 billion was spent — primarily to support video, VOIP, metro Ethernet and broadband — and is expected to reach $17.3 billion this year.
  • Wireless communications, though the growth rates have dropped, are still experiencing double-digit growth at the expense of their landline equivalents. The report concludes that VOIP and flat rate local and long-distance bundling will stabilize the landline market.
  • 3G , Wi-Fi and WiMAX will fuel wireless handset equipment growth, from approximately $22 billion in 2004 to $29 billion in 2008.
  • International telecommunications spending is growing at a slightly higher rate than the U.S., with growth projected at 10.2 percent through 2008.

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