Prickly Business

Feeling a little pressure in the voice-over-IP market? Here's how to pinpoint new opportunities.

By many accounts, 2001 will be a watershed year for the deployment of voice services over IP networks. Many of the key technical pieces are in place, or will be shortly, and the benefits of carrying voice traffic over IP are gaining greater credence. But just like acupuncture, its all about needling your way into the right spot. Would-be entrants into this market need to pick their targets carefully.

Stacking up as good bets are applications for value-added services, integration and hosting services, softswitch gateways, and communications infrastructure products. Assuming infrastructure issues such as performance, compatibility and scalability can be dealt with, advanced services promise to generate high demand.

"The long-term success of Voice over IP (VoIP) has been tied by many to the development of enhanced services and new applications, because the margins for service providers for voice transport are thinning," says Tom Valovic, an analyst with market research firm International Data Corp. (IDC), in Framingham, Mass. "And even if they were to sell VoIP, that would still be the case. I think the challenge is to come up with some real applications in this space."

Other opportunities exist in products and services synchronizing voice and data, and managing mixed networks, as well as those providing voice response and text-to-speech translation.

As in other IT sectors, VoIP vendors, channel players and services companies need to cater to customers with a range of technical and fiscal resources.

While cost reduction is a fairly universal goal, some customers require prefab and pretested applications—and a minimum of customization services—while others call for more tailored solutions. Throughout the market, though, the onus is on suppliers to adhere to standards and ensure interoperability where possible.

Regardless of how quickly carriers and customers adopt VoIP technology, heterogeneity will be the common denominator all down the line (so to speak). VoIP will coexist with traditional voice networks; voice will need to be integrated and managed in mixed IP networks; and even within the VoIP product and services sector, integration and compatibility issues present major challenges—and opportunities.

According to one VoIP player, the lack of widespread adoption in the enterprise IT sector is not so much a reflection of technical barriers as budget priorities.

"I dont think its a question of technology. The entire industry has matured past the technology barrier. Its becoming more and more a question of investment, because there are investments in replacing your equipment and deciding to convert your data and voice networks, [as opposed to] purchasing another billing system." Thats according to Gal Miara, director of strategic accounts and business development at mind C.T.I., a vendor based in Yoqneam Ilit, Israel, that offers billing, CRM and other applications for IP service providers.

Nevertheless, adoption is expected to spread incrementally from the departmental level out.

Its a Sticky Problem ... Briefly stated, VoIP refers to the addition of voice communications to Internet Protocol networks, and the integration of those networks with the public switched telephone network (PSTN) and private phone networks.

The products connecting callers via IP and managing the related processes span PSTN-to-IP gateways, computer telephony equipment and applications, digital signal processors, voice-enabled network routers, switches, network interface cards, unified messaging applications, multimedia applications, directories, and IP-based PBXes (iPBX), among many others.

Voice traverses IP networks in a number of ways. One conduit is provided by VoIP voice trunks, replacements for private trunk lines connecting a companys PBXes, or PSTN trunk lines, which link PBXes to carrier networks. In such a setup, voice packets are transferred between predefined IP addresses.

The earliest means of chatting vocally over IP networks was PC-to-PC voice communications, via multimedia systems. This all-IP method involved no PSTN traffic.

A third model of VoIP is basic telephony, through which regular phones make use of IP networks. As with PSTN, gateways are needed to hook IP networks to standard phones.

Specialized IP phones are expected to become more widely available this year, and they need to connect directly to an IP network. They are, however, likely to be too expensive initially to catch on quickly, and standards support is also key to their use.

On the software side, a voice-processing application readies voice samples for transmission as IP packets. Call-processing software, sometimes referred to as "signaling software" is the signaling gateway for calling over an IP network. A packet-processing module hands off voice and signaling packets to the IP network, and a network management module, as the name suggests, handles such tasks as configuration, security and directory services.

Waiting for Relief VoIP technology has yet to crack the corporate IT sector for widespread adoption, due to persistent questions, including quality of service, interoperability, scalability, ROI, legacy support, the availability of skilled technicians, cost-benefit questions for carriers and other interrelated variables. The smaller corporation may be a richer area for providers to concentrate their efforts. The coming months will be critical for the establishment of a broad-based market.

Interested parties can add to the list of issues they need for resilient, reliable networks and equipment. Just ask people who are experiencing Californias "rolling blackouts." Traditional phone networks and equipment are designed to operate during blackouts.

Prognosis Looks Good Economic trepidation notwithstanding, analysts appear fairly bullish on VoIP.

Market researcher Gartner Group, in Stamford, Conn., has estimated the total IP telephony infrastructure to represent $19 billion in 2003.

Boston-based market research firm The Yankee Group predicts that VoIP will figure prominently as a competitive weapon in the ongoing telecom convergence, with such applications as IP fax, Web-based call centers and unified messaging finding a receptive audience in the business market.

In terms of infrastructure, The Yankee Group expects more than 2.4 million new VoIP extension shipments into the voice equipment marketplace in 2001, accounting for 15 percent of overall new extension shipments. Beyond that, Yankee expects shipment of IP PBXes to surpass those of traditional PBXes by 2005.

"There are between 15 and 16 million phone system extension shipments each year in the U.S. By 2005, more of those shipments will be Voice over IP than circuit-switched," says Joe Gagan, a Yankee Group analyst.

IDC projects the worldwide market for VoIP gateways to eclipse $2.1 billion in 2004 but warns of slower growth in the coming years.

Still another sign of high expectations for the VoIP market this year is the outlook for softswitching technology, the catch-all for software that handles the routing of voice, data and video traffic.

The Yankee Group foresees stronger demand for this technology later this year, as it gains the ability to serve up local and enhanced voice traffic in the enterprise setting.

In particular, softswitch vendors that can back their product with deep professional-service offerings are expected to do well, because, as in other IT sectors, expertise is in short supply, according to The Yankee Group. And, IDC predicts that the softswitch market will total $5.7 billion by 2004.

Crucial Points to Hit The basic arguments for VoIP include potentially cheaper calls, cost savings and network design advantages from consolidating voice and data management equipment, and the promise of advanced applications, such as videoconferencing, e-commerce call-center connections, and the like.

But the challenges for VoIP service providers include matching or surpassing the quality of service of current phone networks. "Some of the vendors have done a fantastic job of engineering, where the voice quality is the same as on the regular old switches. Some of them have not, and it sounds like youre in a tunnel," says The Yankee Groups Gagan. "Theres a disparity between the quality of the products."

Further, providers have to ensure reliable underlying network performance, integrate voice and data networks, and handle the operations, management and billing functions of a mixed environment.

Finally, the overall quality of IP network service has to be raised to the point that voice quality at least equals that of traditional voice service. Accordingly, demand for products and services that beef up network performance will increase, as VoIP proliferates.

Once the infrastructure exists and embellishments have been made to the basic IP network, value-added services and applications like conferencing, unified messaging and e-commerce call-center integration can be added.

One standard that promises to fuel the development of such applications is SIP (Session Initiation Protocol). SIP is an IETF application-layer signal protocol for Internet multimedia conferencing. This text-based protocol is an open IP standard designed specifically for initiating, managing and terminating interactive IP sessions, such as VOIP sessions.

In general, given the complexity and relative immaturity of much of VoIPs constituent technology, expertise shapes up as a key commodity, which spells opportunity for service providers, systems integrators, hosting companies and product vendors with strong services arms. Conversely, it threatens those companies attempting to play in this market without adequate human assets.