Struggling to Hear The VoIP

July 26, 2002

Two years ago, the Voice over Internet Protocol (VoIP) sector was riding
the crest of the dot-com wave with venture capitalists lining up at every
turn to pump hundreds of millions of dollars into start-ups. The technology,
we were told, would lead to the “transformation of telecom” and when AT&T
plunked down an estimated $1.4 billion for a 32-percent
stake in telephony pioneer Net2Phone, many bought into the hype that
traditional PSTNs voice systems would be replaced altogether.

What a difference two years makes. Once the ad-dependent media model
disappeared, two of the bigger consumer-focused telephony plays were forced
out of business — Dialpad filed
bankruptcy and PhoneFree abandoned the
space — and the survivors like Net2Phone and ITXC
Corp. rushed to tinker with business models to stay
alive.

Now that IP telephony targeting consumers has become one of those Internet
revolutions that never happened, Net2Phone has turned its gaze outside the
U.S., banking on the delivery of cable telephony and the deregulation of the
telephone industries in overseas markets, most notably in India, to find
profitable niches.

“The future is in broadband and the newly deregulated markets
internationally,” said Net2Phone spokesperson Sarah Hofstetter. “Those are
the big two areas we believe VoIP can explode. In India, for instance,
since the markets were deregulated on April 1, about a dozen ISPs have
signed up to resell VoIP telephony services. It is much easier to deploy
VoIP than traditional telephone service in those new markets,” Hofstetter
added.

Like Net2Phone, ITXC has undergone a makeover. The New Jersey-based
wholesale reseller of telephony services scrapped big plans to roll out
Vo-IP services for call centers and e-commerce operations and now focuses
largely on routing IP-based telephone minutes to international markets.

Cisco leads the pack

But, no company has made a bigger push in the space like Cisco Systems
, the Calif.-based networking firm which is spending
big bucks to develop and heavily market new VoIP products for the
enterprise market. And, those investments are beginning to pay off for
Cisco, the No. 1 maker of equipment that directs Internet traffic.

This past Thursday, Cisco unveiled lucrative deals in Singapore and the
United Kingdom, lending credence to Hofstetter’s argument that the market
for
VoIP services are ripest internationally. Singaporean voice and data services
Firm SingTel said it would build its new international wholesale voice
service, VoicePlus, around a “soft switching” VoIP product from Cisco.

The company said its international switching solution, which was customized
for SingTel, provides a standards-based platform that allows high-quality
voice termination in nine countries in Asia Pacific as well as in the U.K
and
in the U.S. It lets SingTel’s VoicePlus network interconnect with existing
PSTN networks as well as Vo-IP networks of other telecom carriers.

Separately, Cisco announced it would power a behind a new Vo-IP service from
British Telecommunications (BT) that would allow Microsoft Network (MSN)
users in the U.K. to make telephone calls from their computers. Once
Cisco’s technology is implemented, users would access the service via MSN’s
Passport secure server and have unmetered access to BT’s PSTN for a fixed
monthly fee.

The service, dubbed PC 2 UK, would be tied into Microsoft Messenger, the PC
client, to allow integration with instant messaging, multi-media services
and telephony under Microsoft’s Windows environment, Cisco said,
highlighting the transformation of telephony services from low-quality
PC-to-phone services to high-end technologies for enterprise clients.

Michael Ansley, head of Voice Technologies at Cisco said as much. “The (PC 2
UK) project is a clear example of how all the parties are using the
capabilities of new technology to bring benefits and services to their
customers. This is a very exciting project for the U.K market.”

Cable telephony

While Cisco racks up client wins, one-time
partner and bitter foe
Net2Phone is quietly pushing ahead with heady plans to make cable telephony
the next big thing.

The IDT-owned firm, which has headquarters in New Jersey, is riding the
coattails of Liberty Media , the cable company that sells
video programming, broadband distribution, interactive technology services
and communications businesses internationally.

“They (the cable company) already has the broadband pipe going into the home
so it’s natural to piggyback on that to deliver the triple play,” Hofstetter
told internetnews.com, referring to the plan to use cable boxes to
deliver voice, video and data to the consumers. “Our model is to become the
outsourced telecom provider to cable operators. Our first is with Liberty
Cablevision in Puerto Rico and we have some more announcements coming down
the pike,” she added.

With Liberty Cablevision of Puerto Rico, Net2Phone has partnered with
Motorola to launch a pilot test of an end-to-end IP
telephony service over the broadband network. The deal, the first of
its kind since Net2Phone announced
its cable telephony push, allows called to be routed directly from a cable
subscriber’s existing telephone plugged into Motorola’s CG4501 multimedia
terminal adapter (eMTA), over the cable Hybrid Fiber Coax (HFC) network
to Motorola’s BSR 64000 CMTS/router technology.

The call is then routed to a Net2Phone-managed softswitch and transferred to
the PSTN and directed to a regular telephone anywhere in the world. The
pilot test, which runs through October, is slated for 50-100 customers and
Hofstetter said it would give cable operators a glimpse of what the
technology can offer in the way of cost savings and add-on features for
their subscribers.

“We are positioning it now as a secondary phone line but it has the features
and functionality of a primarily line,” she said, noting that multiple
system operators (MSOs) can decide how to resell the telephony service.

Like Net2Phone, Vonage is also targeting
broadband users for its DigitalVoice, which is styled as an alternative to
traditional home telephone service. Vonage, which sells SIP-based VoIP
telephone services to consumers and small-to-medium sized enterprises
(SMEs), is using is using softswitch technology to sell bundled voice
services directly cable and DSL high-speed modem subscribers.

The company, which launched last year with $12 million in funding from
unnamed angel investors, offers calling plan packages ranging from $19.99
per month to $39.99 per month. Vonage’s pitch is consumers with high-speed
connections can get a cheap virtual second phone line that makes unlimited
calls anywhere in the U.S and includes standard features like call waiting,
caller ID, voice mail and call forwarding. To sweeten the pot, Vonage has
added Web-based access to voice mail, calling records and automatic credit
card billing.

Vonage, which is spending big on an ad campaign that threatens to rival the
Verizon behemoth, appears to be targeting the consumer
market but a spokesperson said the long-term business plan includes deal
with MSOs looking to bundle VoIP telephony services with regular cable
television services.

The company said its target market was not limited to residential high-speed
Internet users but includes commission-based resellers at Web portals,
Network Service Providers (NSPs), local ISPs. It is also hawking back-end
technology to Regional Bell Operating Companies (RBOCs), last-mile IP
network operators and MSOs looking to extend their existing brands into the
residential and SME telephony space.

Some CLECs and ISPs have also tinkered with selling Voice-over DSL (Vo-DSL)
services for small business customers but that side of the business has also
fallen on lean times. Dave Burnstein, who runs the popular DSL Prime newsletter, admitted making a
“major
mistake” in predicting that VoDSL was going to be the next big thing.

“The problem wasn’t technology; that’s been solved, although some latency
and signaling problems proved tricky. But CLECs died like flies, taking that
market away. The ones who remained discovered that VoDSL carrying the calls
to the switch was just the first step toward telephony, with billing, OSS,
customer support and marketing far more difficult,” Burnstein said.

The outspoken Burnstein, who tracks the digital services line (DSL)
industry, said remaining CLECs, including companies like Broadview Networks
and Network Telephone in the U.S. constitute “a much smaller market,”
nothing that VoIP and softswitch vendors are all quickly filling the gaps.

Improved call quality

Of course, for the industry to finally take off, everything hinges on call
quality improving to the point where the end user should not be able to tell
whether the call is being routed over a packet-driven IP network.

In the past, consumers complained on heavy feedback and tinny sounds on
calls routed via VoIP technology but, according to a recent report by
Boston-based research firm Aberdeen
Group, that issue has been resolved. The study said the “the impasse
between QoS (quality of service) and VoIP has been resolved” to the point
where carriers are beginning to accept that quality is no longer an issue as
they move away from running VoIP via asynchronous transfer mode (ATM)
switching technology and toward true VoIP.

“The improvements in VoIP call quality, based on broad support in today’s
IP networks for differentiated services and other quality of service
mechanisms, have eliminated the need to rely on ATM to provide (improved)
QoS,” Aberdeen said.

The research firm a survey of enterprises and service providers found that
VoIP technology had “proven its business value” and the potential savings
from using the technology was “too great to ignore.”

While the VoIP showed growth in 2001, the Aberdeen Group said widespread
adoption in the U.S remains very slow, a point echoed by Net2Phone’s
Hofstetter. “International resellers and channel distribution partners
overseas account for the bulk of our revenue,” Hofstetter said of Net2Phone,
which raked in $30.6 million in the third quarter this year.

The Aberdeen report blamed the slow adoption in the U.S on the fact that
companies here aren’t keen on discarding existing (and functioning)
telephone systems to migrate to VoIP services. “We’ll see slow, not
explosive, growth. Most companies will not turn to Vo-IP until they have
outgrown their traditional system, when a PBX has past its life cycle, or
when they move to new offices,” the group said. Hofstetter agreed but noted
that most new buildings in major markets are being wired exclusive for
IP-based communication devices.

A look at cable telephony and improved call quality…