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Behind the telecom revolution
|
August 14, 1998 by Susan Breidenbach |
From...
|
(IDG) -- There is no escape. Convergence is coming, riding the IP wave high and hard.
Like the unseen yet powerful undertow that follows a wave, ever-expanding data networks are exerting a gravitational pull on voice, making the long-awaited convergence of telecommunications and computing a reality. With IP data packets increasingly dominating telephone networks, a circuit-switched infrastructure optimized for voice just doesn't make sense.
The only real difference of opinion revolves around how fast the IP wave is coming and how it will clear some significant obstacles. There are standards issues to be resolved, some of the enabling technology is missing or too expensive, and phone companies have billions of undepreciated dollars sunk in traditional analog voice equipment.
Optimists claim we could start seeing significant convergence as soon as six years from now, while other prognosticators say it will be closer to 20.
But nobody disputes that the convergence wave will eventually consume all in its path.
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Critical mass
The benefits of a combined voice/data infrastructure - simplified management, a single support staff, elimination of dual networks, productivity-enhancing applications - have been cited by network strategists for decades. ISDN was introduced 15 years ago with convergence in mind, and the industry tried again with ATM earlier this decade. In between we witnessed the failure of IBM's merger with Rolm.
How is it that IP - a thirtysomething technology designed with something entirely different in mind - is going to be the workhorse that finally pulls off convergence?
"What drives this industry is critical mass," says Herb Osher, vice president of marketing for Bell Atlantic Network Integration in Frazier, Pa. IP and the Internet reached a critical mass that sucked in investment dollars and application developers.
"IP may not be the best technology, but it's ubiquitous, it's the corporate
intercommunication standard and it's good enough," Osher says.
"Building up the telephone network to satisfy this kind of demand growth is
out of the question," says Peter Sevcik, an associate of Northeast Consulting
Resources in Boston. "That's why circuit switching is doomed."
Bill Hawe, vice president and chief architect at Bay, says the new "attack
carriers" are building networks under new rules. An emerging generation of
routing switches handles massive amounts of IP packets at a performance
and cost dramatically different from that of the past. In just the past year,
prices for data network equipment have dropped by a factor of 10, while
performance has risen by about the same amount.
"We've been calling this the new economics of bandwidth," Hawe says.
Investments in circuit-switching infrastructure aside, convergence is also a
potential cost saver for traditional carriers. Circuit-switched networks divide
bandwidth into rigid 64K bit/sec pipes and assume only a certain percentage
of subscribers will be accessing the network at once. Packetized voice allows
many conversations to take place over the same pipe simultaneously. And
what takes 64K bit/sec on a traditional voice network can fit into 8K to 12K
bit/sec without any loss of quality.
"Pure network economics says you want to travel on the largest network,"
says Tom Evslin, chairman and CEO of ITXC Corp., a start-up in North
Brunswick, N.J., that provides IP telephony services to carriers. "When we
packetize voice, we are using computing power at or near end points to
avoid using network bandwidth. And following Moore's Law, we get twice
as much for the same price every 18 months."
Packet nets are also more flexible than circuit-switched networks. A smart
PBX on an IP network can watch traffic levels and implement compression
mechanisms in real time when the network gets overloaded. The line quality
drops a bit, but everyone still gets a connection.
"Compressing voice in real time wasn't feasible even five years ago, but it is
now," Evslin says.
Convergence can also reduce operational costs for service providers.
Without it, ISPs might buy a variety of switches and routers that each have
different traffic-management mechanisms. IP provides a lingua franca that
enables unified traffic management from a single platform.
In general, carriers can offer multiple services more efficiently by moving
them onto a single, improved infrastructure. As bandwidth becomes a
low-margin commodity, service bundles and value-added features will
become imperative for survival.
"Convenience will win," says Hong Chen, president and CEO of Milpitas,
Calif.-based GRIC Communications, which provides network management,
billing and other services to ISPs and telcos around the world. "Every bill
costs the phone companies $1 to $2 to send and takes a similar hit on the
receiving side. And users also have to bear the cost of maintaining
relationships with multiple suppliers. There is a huge savings to be realized on
both sides by converging networks and services."
That's a significant change in thinking from just a few years ago when IP
telephony was first introduced. The voice quality of the initial products was
poor. As recently as 18 months ago, many traditional carriers comforted
themselves with the belief that IP telephony could not deliver business-quality
voice.
There have been big improvements since then, and on international calls some
of the products can give you about the same quality as circuit-switched
networks.
"When the carriers heard the voice quality we could deliver with our latest
generation of products, they went through a period of seeing IP telephony as
a threat," says Heidi Bersin, vice president of marketing for Clarent, an IP
telephony gateway vendor in Redwood City, Calif. "But now they see it as an
opportunity to get into new markets very quickly as the world deregulates.
That's going to happen anyway, so they have to offer these services or lose
their customers."
The traditional telcos realize the big growth is in data, not voice, and they are
pursuing data services aggressively. The telcos have to install big IP
infrastructures to handle the data traffic, and then it is a natural progression to
start offering some voice services over them.
Upstart carriers might initially install a network that provides IP telephony to
consumers via debit or credit cards. As carriers build out this network, they
can leverage it by offering virtual private network (VPN) services to
enterprises.
"Once these carriers have both consumer and enterprise networks, they can
let their enterprise customers make calls outside the VPNs to customers on
the consumer network," Bersin says.
In contrast, ISPs have been slow to offer telephony services.
"That's been the biggest surprise to me," Evslin says. "We're a wholesaler of
Internet telephony, and our initial assumption was that the first customers
would be ISPs looking to extend their traditional business to include voice.
But it's been the traditional resellers selling prepaid calling cards that have
moved quickly." Resellers have no qualms about IP because they don't have
to invest in the infrastructure to support it, and they don't have billions of
dollars in circuit-switched revenue to protect.
Others are surprised to learn that IP telephony isn't really about free phone
calls. To get free phone calls, both parties have to be using a PC as a phone,
which isn't very convenient. More commonly, IP telephony connects two
people who are using traditional phones. The IP telephony call may be
cheaper than a public switched telephone network (PSTN) call, but it's never
free. Someone still has to pay for the IP gateways on both ends and for call
termination by a local-access carrier.
Similarly, domestic IP telephony is not about arbitrage of high-priced PSTN
services and low-priced IP alternatives. Traditional voice service for
corporate customers is down to 3 cents per minute, and time-of-day
restrictions have disappeared. Carriers have even begun to offer flat rates to
major subscribers.
However, some of these issues don't play the same internationally. For one
thing, most of the rest of the world does not have free local calls.
Also, international settlements - regulated fees that phone companies collect
for terminating calls originating in another country - can be as high as $1 per
minute. International settlements amount to toll booths that IP telephony can
bypass. This government-induced distortion could disappear or change
overnight, but meanwhile it is providing a first-stage thrust to convergence.
In the corporate environment, convergence is at least as much about new
applications as it is about cheaper voice calls. Convergence enables
developers to build integrated voice/data applications that were impossible to
implement economically over discrete voice and data networks.
"Normally, we don't communicate only by using our voices - we use other
senses as well," says Elon Ganor, chairman and CEO of Tel Aviv-based
VocalTec Communications, an IP telephony gateway vendor with U.S.
headquarters in Northvale, N.J. "IP telephony brings us closer to that and
helps bridge the distance between people."
IP telephony also gets around the problem of islands created by PSTN voice
mail systems. IP voice mail would let you forward messages outside your
own system.However, conversing through point-and-click applications is not
necessarily cheaper than making PSTN calls.
"IP telephony is about productivity, not saving a few pennies on long-distance
calls," says Dave Schriftgieffer, director of data networking at
Lucent in Warren, N.J. Once workstations are enabled with H.323, an
emerging standard for multimedia communication across packet-based
networks, people can just click on a button to talk and enable a data or
video session. Remotely located co-workers can work on a draft
together instead of sending around various versions by e-mail.
"Once people experience this and see how much more productive they can
be, it will take off," Schriftgieffer says.
And such basic collaborative applications are just the tip of the iceberg.
Carriers are using the applications and low-cost telephony services to build
up an installed base of IP telephony users. When the base gets big enough,
carriers will be able to offer all kinds of new services - such as universal
messaging and truly integrated self-help videoconferencing - that were
heretofore technologically or economically unfeasible.
"The voice bits will be virtually free," says Thomas Fitzpatrick, group vice
president in charge of Nortel's Meridian Communications Solutions in Santa
Clara, Calif. "The carriers will make their money by offering enhanced
services."
Bill Jefferis, director of access services at Bell Atlantic Network Integration,
says convergence will allow carriers to better optimize their networks for
hosting applications for users, including directory services and
intranet/extranet offerings. "All this will be tied together with strong
quality-of-service [QoS] guarantees and service-level agreements both on
the applications and the network," he says.
"Convergence gives us a chance to rebuild the network infrastructure," says
Robert Lucky, corporate vice president of applied research at Bellcore in
Red Bank, N.J. "The fact that it's IP is almost incidental."
The big carriers have to figure out how to build a secondary network and
integrate it with their legacy infrastructures. But they have an edge: They
know how to operate a long-distance business and how to market. They also
have an embedded base of customers and a well-known brand in many
places.
However, the incumbents face eroding market share, and the stock market is
reacting accordingly. A Qwest Communications is valued on potential, while
an AT&T is valued on earnings. To turn and fight, the incumbents will have to
endure an earnings decline over several quarters, and that is unpalatable.
How much would they have to spend to overhaul their networks? No one we
asked would even hazard a guess.
"There isn't anyone who understands the economics of this," Lucky says.
"We're going to find out according to which companies go bankrupt."
Meanwhile, the start-ups with highly valued stock can go out and acquire
other companies. It's as if they have a different kind of money to play with.
With all the capacity the newcomers are adding to the traditional carrier
infrastructure, the backbones are in pretty good shape. And increasing
backbone capacity is a relatively simple matter. Wave-division multiplexing
and dense wave-division multiplexing are being used to boost the capacity of
existing fiber-optic networks by several orders of magnitude.
Fiber optics are on at least as steep a price/performance curve as electronics.
Fiber purity and transmission quality are improving, so signals can go much
farther before requiring amplification or regeneration. That saves on
equipment and the real estate required to house it.
Fiber-optic networks have been hampered by the lack of equipment that can
make routing decisions at speeds above DS-3, but this barrier is about to fall.
Tellium in Edison, N.J. - a recently formed commercial spinoff from Bellcore
- has a new optical cross-connect switch called Aurora that eliminates the
need to de-multiplex optical signals into an electrical cross-connect that can
only operate at DS-3 speeds.
"Before Aurora, the only way service providers could receive and transport
such high-speed data signals was to upgrade their networks to
SONET-based OC-192," says Farooque Mesiya, president and CEO of
Tellium. "This could easily amount to hundreds of millions of dollars."
Aurora can also make existing SONET networks more efficient by
eliminating the expensive demux/remux process that SONET multiplexers
and cross-connects require for every signal. Half to three-fourths of the traffic
on public networks doesn't really need processing at any particular node
because it's just passing through. Aurora off-loads this burden by handling the
pass-through traffic optically.
New and expanded fiber capacity may have carrier backbones under
control, but getting to and from the backbones is where oversubscription
occurs, causing real problems. If carriers don't oversubscribe the first hop,
you can get PSTN voice quality from IP telephony. If they do, the initial
router drops packets.
So the big infrastructure challenge is at the edge. The Telecommunications
Act of 1996
hasn't resulted in a lot of competition because the incumbent local exchange
carriers (ILEC) and interexchange carriers (IXC) have fought each other to a
stalemate. More competition in the local-access market would attract a lot of
private capital for building out the last mile.
The traditional LECs are doing quite well, largely because of the growth in
second lines to homes. Their long-term prospects are more questionable, but
local access is a tough market for competitors to crack.
IXCs face more near-term threats because long-haul service could become a
real commodity in the future and erode their margins.
"The TCI acquisition shows how worried AT&T is about all this," Bellcore's
Lucky says. The merger gives the long-distance giant TCI's cable TV
infrastructure, which it can use for the last mile, cutting out the PSTN. AT&T
is expected to run IP over these connections.
One of the inhibitors that all incumbent carriers face is their huge installed
bases of PSTN equipment. A lot of it is quite new, ironically having been
purchased to meet the demand for Internet access. It's not clear whether
telcos can get any real investment life out of this equipment, which they
typically depreciate over many years.
While depreciation schedules historically stretched to upwards of 30 years,
they have accelerated, down to as few as nine years. But even that is an eon
in Internet time and stands in stark contrast to the three-year depreciation
schedules for many data switches. In short, if forced to replace circuit
switches before they are fully depreciated, carriers will essentially be paying
for equipment they no longer use.
Depreciation inequities represent a significant handicap to incumbents, but
some experts say it will be less of an issue once competition really bites.
"Meanwhile, it's easy for them to say they can't do certain things because of
depreciation," says John Matthews, principal consultant for Ovum, a
London-based market research and consulting firm.
Another inhibitor is that while even modestly sized businesses often have
persistent IP connections, there is no such thing over the last mile to
residences. There are clearly opportunities for new access technologies,
especially since a lot of people are getting second lines that could easily - and
even preferably - be IP-based. But a huge investment is required to switch
over this last mile.
"There is no shortage of funds from the investment community, since people
believe that this is going to happen," ITXC's Evslin says. "If anything, too
much funding is available, because it leads to some crazy things."
ILECs and competitive LECs are touting a confusing array of competing
access options, ranging from traditional modems and ISDN to digital
subscriber line (DSL), cable modems and spread-spectrum wireless
technology. The front-runner for future buildout right now is xDSL.
"Last-mile services to customers must be integrated, providing both voice
and data, because the backbone is integrated," says Martin Taylor, chief
technology officer for DSL start-up CopperCom, Inc. in Cupertino, Calif.
"Modems and ISDN are too slow, and cable and wireless aren't there yet.
DSL is the only complete solution for the last mile."
However, even if DSL meets the most optimistic expectations, it will hook up
a mere one million or so subscribers over the next couple of years. There will
still be a vast number of people coming in over analog modems, and those
calls will have to be circuit- switched.
"The winner will be the service provider that hooks into the legacy edge
network, which has an aggregate $20 billion to $30 billion in assets, including
130 million copper pairs," says Ron Vidal, senior vice president of new
ventures for Level 3 Communications in San Francisco. "That's the big
opportunity in the voice business right now, and the Internet guys just don't
get it. They spend all their time worrying about sharing agreements in the
core, and little or no time thinking about peering at the edge."
Companies that want to provide IP telephony services need to get organized
as co-carriers so they can plug into the telco network as peers rather than
customers, Vidal says. As peers they have access to telephone numbers and
the Signaling System 7 (SS7) call signaling infrastructure, and can co-locate
equipment in telco central offices (CO).
Carriers also have to figure out how much it'll cost to run converged IP nets
and what to charge for services. Nobody claims to have the answers.
Before, pricing was based on time and distance, but that doesn't make sense
in the new order, where exponential expansion of network capacity is
collapsing time and space. Because certain overhead elements are constant
regardless of call length, it doesn't cost carriers twice as much to handle a call
that is twice as long - especially if plenty of available bandwidth is just sitting
there waiting to be used. And the availability of increasingly cheaper
bandwidth means it doesn't cost that much more to send something across
the country than across town, even on circuit-switched networks.
Traditional telcos are also caught in a pricing dilemma. They don't dare cut
prices across the board and thus lose revenue from customers who aren't
price-sensitive, or who don't have time to think about it. Similarly, the telcos
face the danger of cannibalizing their own installed base, so it's hard for them
to proceed aggressively. The newcomers don't have this problem.
The cost of customer care is one of the real imponderables that hangs over
the whole convergence issue. As more customers come aboard, the
customer base gets increasingly naive. The first users were technologically
savvy with high-end machines, and service providers had enough trouble
even with them.
"People can't stop to figure this stuff out," Lucky says. "We don't have the
time, and no one understands it in any case. We have a clean sheet of paper
here, and that's a scary thing."
Traditional carriers have huge businesses built on circuit-switching revenue.
The physical infrastructure, billing systems, order-entry systems, network
management and customer service are all organized around circuit switching
and have to be re-done. Apply that to 13,000 COs in the U.S. that differ
according to the equipment, copper and fiber lines they have and the services
they offer. The cost of replacing mere switches pales by comparison.
Another convergence impediment is the per-port cost of IP switches. IP
telephony equipment costs about $1,000 per line, compared with $150 for
analog lines. Transmission is cheaper, but the end-point equipment is still a lot
more expensive.
"The cost of the IP switches has to come down before we can expand our IP
telephony services broadly," says Howard McNally, vice president of
transaction services for AT&T.
Scalability is also an issue, although it is improving rapidly. PSTN circuit
switches typically have about 10,000 ports, but the highest density found in
IP switches is 96 ports. While IP ports handle multiple calls, the industry still
needs to come up with much bigger IP switches if they are to replace
traditional CO equipment.
IP equipment also has a ways to go in terms of software. In voice networks,
signaling data runs on a separate real-time network that provides added
security - the SS7 net. In the IP world, there is very little notion of signaling,
and everything is in the same hacker-vulnerable network. If the network
drops the message indicating the end of a session, the customer could get
billed for days instead of minutes.
Vendors are starting to incorporate SS7 capabilities into remote access
platforms. Ascend Communications recently announced a gateway module
that enables its carrier-class MAX TNT WAN access switches to
communicate with the SS7 net. Service providers can deploy the Ascend
switches to divert data traffic away from voice switches.
Such products aren't available yet, however.
"IP equipment still lacks a lot of the features and functions of circuit switches,
such as the ability to put a call on hold, or do call forwarding, credit card
calling or 800 numbers," says Michael Day, senior director of network
evolution planning for Alcatel Network Systems in Richardson, Texas. "It will
take some time to get a full set of voice features into IP equipment."
New bandwidth economics
Change of heart
Bridging the apps gap
Rebuilding the infrastructure
Getting to that point will require significant upgrades to carrier networks. But
carriers and investors, convinced the IP market will be huge, are building and
investing furiously.
The edge is the issue
No price list
Bigger, better switches