I want my VoIP

It's been 20 years since the breakup of AT&T, and with it, the arrival of the first wave of deregulation in the modern era of digital communications.

A year after that 1984 breakup, Dire Straits released their biggest hit, "Money For Nothing," with the never-can-get-enough mantra "I want my MTV."

Fast forward to 2004, and with the recent flurry of news from virtually all the major North American telecom and cable operators, one would think the world was singing a different tune--"I want my VoIP."

		Get Up to Speed on... VoIP Get the latest headlines and company-specific news in our expanded GUTS section.

For a variety of reasons, not the least of which is the emerging view that the Federal Communications Commission will leave voice over Internet Protocol unregulated, the telecommunications and cable companies have all decided this is the year for VoIP.

The domino effect of recent VoIP announcements is not unexpected, and has elicited a huge collective sigh of relief from the vendor community. For the most part, their promise and hype has been replaced by performance, and VoIP solutions have now matured to the point where the value proposition can move beyond cost reduction to revenue generation. Indeed, the stars seem to be aligning in 2004.

For some time, we have been advocating that the biggest holdback for VoIP was not technology--it was the lack of competition. Market power has long been in the hands of a few service providers, whether for local access, long distance, wireless, Internet service providers (ISPs) or cable.

So why are the RBOCs (regional Bell operating companies) and Canadian incumbents getting serious about VoIP now? Competition.

So why are the long-distance carriers (IXCs) getting serious about VoIP now? Competition.

So why are the cable operators getting serious about VoIP now? Competition.

What has changed to create this environment? The 1996 Telecommunications Act served to address the shortcomings of the 1984 breakup by encouraging competition. Early on after 1996, this was the case, but most efforts failed, and what we're left with is a world that looks more and more like it did before 1984.

The incumbents still control local access, the IXCs (inter-exchange carriers) still control long distance, and in the cable world, a handful of multiple-service operators (MSOs) still dominate. Furthermore, this concentration of market power makes life nearly impossible for new entrants, leaving it largely up to the incumbents to determine how far to go in living up to the spirit of the 1996 Telecom Act.

For vendors, the scenario is quite similar. The next-generation market initially supported a healthy vendor pool, but the reduction in capital expenditures by major telecommunications and cable companies, and subsequent absence of revenue for next-generation vendors, has led to the inevitable winnowing out, where only the strongest survive.

IP is very quickly changing the ground rules.

For the tier one service provider market, this essentially translates to the incumbent vendors such as Nortel and Lucent, and a handful of next-generation vendors whose technology has proven too effective to ignore. Vendors such as Sonus, Veraz, Telica and VocalTec certainly come to mind in the latter case. Cisco is in the mix as well, but even it is having trouble penetrating North American carriers.

Back to the question. Why now for competition driving the market? What is different this time around? In short, two words: VoIP and Vonage.

VoIP was not enough of a factor to drive competition in 1996, but it is today. Since that time, carriers have successfully used VoIP to reduce costs--not so much to create competition, but to gain efficiencies, and essentially maintain the status quo among incumbents. However, VoIP is turning out to be very pluralistic, and in our view, will be the great leveler in creating a dynamic marketplace.

VoIP is really a double-edged sword, since it allows carriers to become more efficient, but it also enables other carriers to compete in areas that were not previously viable. IP is very quickly changing the ground rules, as everyone is now competing against everyone else, and challenging the very definition of a carrier. What's the difference among RBOCs, IXCs, ISPs and MSOs, when they can all offer the same set of services?

Vonage is the second answer to the question of competition. More than any other entity, Vonage has validated two critical success factors for VoIP. First, it has demonstrated that real alternatives exist today to conventional circuit-switched voice, and second, it has proven there is a market of consumers out there who are willing to pay for such as a service, and even forgo their RBOC ties.

This scenario was inconceivable even a year ago, and the speed with which it is happening is proving to be a real wakeup call for carriers. Of course, Vonage shares the stage with similar offerings such as 8x8, VoicePulse, VoiceGlo and Galaxy, as well as the even more disruptive, free VoIP services, namely Skype and Free World Dialup. The common denominator here is proof-of-concept--VoIP works, people are using it, and consumers are saving money.

All of this grassroots activity is putting VoIP on the map, but in time, we believe facilities-based carriers will supplant these pioneers. Aside from having deep pockets, they will counter with a more reliable offering that travels over their own managed networks rather than the "best efforts" public Internet.

Out of this milieu, we are now hearing the first cries of "I want my VoIP."

Until then, however, this first wave of VoIP providers is the real vanguard that is creating a nascent market, developing a viable business model and accelerating the demand for broadband, upon which the future of VoIP for everyone depends. Out of this milieu, we are now hearing the first cries of "I want my VoIP."

Just as MTV was viewed as a radical way to experience music back in 1981, VoIP will provide an equivalent jolt to the way we experience communications. The process is just beginning to unfold, and Vonage et al are much like the indie video producers, who helped shape a new visual vocabulary in the 1980s. Of course, the music-video business looks very different today, and we expect VoIP will follow the same path.

Broadband pure plays such as Vonage will pave the way, but we believe that facilities-based carriers will prevail and upstarts will be acquired, or find a solid niche in the tier two and tier three markets. However, there will be many twists along the way, including new entrants trying to cash in on the gold rush. With the barriers to entry being low, and regulatory restrictions being few, we are already seeing new Vonage-type offerings from start-ups, as well as established service providers offering VoIP for the first time.

These are exciting times for VoIP, and while only a handful will survive, there no doubt is more than one aspiring Vonage wanna-be out there humming along with Dire Straits' Mark Knopfler, thinking "that ain't working, that's the way to do it, your money for nothing..."