The end of telephony(as we know it)

10 February 2006

Fixed and mobile telcos are waking up to the prospect of revenues going up in flames as voice calls are sent over IP networks - leaving customers as the likely winners.

Hospitals rarely welcome mobile phones. Even putting health concerns aside, the likelihood that signals will interfere with medical equipment means that phones are usually banned.

But not at the Credit Valley Hospital in Ontario, Canada, where hospital employees can stay in contact with each other for next to nothing. Soon, they will also be able to send notes, links and messages to each other.

How? The hospital is at the vanguard of the latest revolution in IT - using Voice over Internet Protocol (VoIP) technology, in this case supplied by networking equipment vendor Nortel, across a wireless local area network (LAN). Using the network, some 300 healthcare professionals can call each other from anywhere in the 440,000 square-foot facility.

Skype, the hype and beyond

The telecoms revolution is already underway, according to new start-ups such as Skype and Popular Telephony. Both promise free telephony over the public Internet, rather than private IP networks.

Software upstart Skype allows users to make unlimited free calls from their PC, PDA or (soon) dedicated wireless handsets to other subscribers on their network without any monthly fees. It claims over 15 million users and recently passed the benchmark of 1 million simultaneous calls.

Users must install client software, which resembles that used by instant messaging, and pick a username, rather than a number. Calls are then routed over the Internet using 'peer-to-peer' technology. Over 350,000 people already use the 'SkypeOut' service to call landline and mobile phones at reduced rates; soon 'SkypeIn' will enable them to call back.

"It's not the big that beats the small, it's the fast that beats the slow," says founder Niklas Zennstrom, also the man behind the Kazaa peer-to-peer filesharing service. Zennstrom says Skype will launch a business offering next year, with centralised billing, voicemail and conference call capabilities, but maintains that Skype will work alongside traditional telecom systems, rather than replacing them.

Skype's initial target market of workgroups and individuals rather than CIOs fits its current "under the radar" business usage. While Skype says half its subscribers have used it for business purposes, Meta Group, an analyst firm, has warned CIOs to "expunge" the program, citing "early indications" of a greater vulnerability to "spit" (spam over Internet telephony) and security vulnerabilities.

Another problem: Using the public Internet (rather than dedicated internal or tunnelled IP networks) means calls are subject to the same fluctuations in latency (the time it takes a message to reach its destination) and network availability that affect all public Internet users.

In spite of its limitations, Skype's success hints at the problems to come for the telcos. "Skype has got the big boys on the run," says Richard Webb, a telecoms analyst at Infonetics Research. "Users are going to be reluctant to move away from its service to paying for something. Skype may not be around forever but they're a real thorn in the side of the big corporate beasts."

Another Internet telephony startup, Popular Telephony, claims to have trumped Skype on reliability and manageability by developing peer-to-peer voice technology that does not needing a central server. Its "Peerio" technology, which can be installed as "middleware" into an IP phone or downloaded onto a PC, claims to enable calls to reach their destination without having to be routed or directed by a central computer.

If it works, and Peerio technology is incorporated into equipment from the networking giants like Cisco and Nortel as it hopes, Popular Telephony could be justified in billing itself as the new Microsoft - if its technology is not simply re-engineered and offered free over the Internet.

The hospital is a showcase, but it is not unique. Across the world, wireless VoIP networks are springing up, enabling workers to make free calls as they move around campuses and metropolitan areas. And increasingly, they can link these calls to documents, to web-based services and to collaborative applications.

This is the latest and perhaps the most powerful stage in the roll-out of not one, but two technologies that have been long in gestation but eagerly awaited: wireless IP networks (such as WiFi) and VoIP.

Both are enjoying huge demand and, in their convergence, analysts foresee yet another, major disruptive wave of technology that will revolutionise business communications.

"We're sitting at the bottom of the bell curve," says Infonetics analyst Richard Webb. "The ability to carry voice makes wireless LAN investment more justifiable and mobility makes VoIP more valuable."

Of the two, it is the sudden surge in VoIP take-up that is so critical. While wireless technology is a relatively easy move to make - the changes are made at an infrastructural level, rather than at the application or process level - VoIP is more complicated, disruptive and expensive to install.

But despite that, it is happening. A recent survey of 131 Global 2000 companies conducted by consultancy company Deloitte, for example, found that two-thirds expect to have started deployment of VoIP to the desktop by 2006.

Cisco, the market leader in networking equipment, says VoIP sales jumped 18% in its last financial quarter (ending October 2004), but orders are up 40%. "It's in the tornado, it's gone mainstream," says Nick Earle, Cisco's vice president for marketing, strategy and operations in Europe, the Middle East and Africa.

BUSINESS RATIONALE

Suppliers now see the business cases for employing VoIP and for installing wireless voice as intricately linked - part of a spectrum of benefits that begin with cost savings in voice calls and network management but which extend into the increased productivity resulting from flexible, collaborative working and "converged" modes of communication.

Analysis shows that, in some instances, up to two-thirds of business mobile phone calls are made from within the office or campus - often to colleagues working just a few floors away. Add sky-high rates for roaming mobile calls abroad, and businesses are left with a huge cost burden. Wireless VoIP means calls can be routed over a private IP network - eliminating call costs at a stroke.

But currently the promised benefits, albeit sometimes exaggerated, only apply to internal or private users of wireless VoIP; if individuals or organisations could use external public networks as well, the impact could be as great as the introduction of the Internet or the mobile phone all over again.

No one knows this better than both the fixed line and mobile phone operators, where executives and strategists forsee all call charges based on distance or duration replaced by one-off upfront payments - potentially decimating revenues.

US VoIP vendor Vonage, which launches in the UK in 2005, has seen great consumer success in the US by charging a monthly fee for unlimited national calls over broadband. By allowing customers to use a regular phone handset and a regular number - albeit one that could make them appear to be anywhere in the world - Vonage makes itself look just like a regular service provider.

To compete with emerging business models like that, established telcos will need to add new functions and services, better management and, perhaps most importantly for business communications, improved reliability.

The shift is already underway. VoIP is predicted to take some 10% of the enterprise end-to-end fixed voice market by 2006 - fast enough to hurt the operators, but slow enough to give them some time to pull together a defensive strategy.

"The service providers - the groups offering cost-per-minute calls - have had to change fundamentally and get into managed services. And they are," says Earle of Cisco.

In the UK, BT has made more progress on the IP front than its peers abroad. "We will have to sacrifice some higher-volume services and there will be some cannibalisation, but we're about ready," says John Blake, head of hosted IP services at BT Global Services. To support this, Blake cites BT's recent £125 million deal to host IP services for 10,000 users at UK banking group Abbey.

But it won't be easy, because even in services such as hosted IP telephony, the telcos face competition - not only from broadband and cable companies but from IT services firms such as IBM and Accenture.

Mobile operators face similar uncertainty. Up to now, most have cautiously embraced wireless networking technology, even to the point of launching their own WiFi hotspots and introducing data cards which can switch between WiFi, GPRS and 3G networks.

But with larger wireless networks and reliable VoIP technology, their market is open to a "pack of hyenas", says Nick Razey, managing director of VoIP services start-up, Saiph Broadband. "If I was one of the big five mobile networks, I'd be very worried."

Mobile operators might price tactically, by giving away free calls to certain companies or in certain locales. But this will be restricted by the billions of pounds they spent on 3G licences in 2000. "There are some questions we face on recovery of our costs," concedes O2's vice president of R&D, Mike Short. But he insists that O2 will make the transition with minimal loss in call revenues.

All the analysts foresee an intensification of the already aggressive battle for customers. Even if both mobile and fixed telcos incorporate the new technology and fend off the common threat of newcomers, they will end up back where they started: fighting each other.

For customers, this may prove an uncertain but golden period, in which suppliers compete intensively on price, on new services and with ever-improving technology. Once customers have made the switch to IP-based services, they should expect to get a lot more from suppliers.

Mobile and WiFi chasm closes

The technologies to build mobile Internet phone networks are emerging fast -- but not fast enough for some people. For them, the story, like the coverage, is still patchy at best.

But major improvements are underway. Although older networking equipment struggles with IP telephony's requirement to prioritise voice traffic over data, developments in wireless systems since 2003 have made it much easier to deploy a suitable office network.

The latest wireless LANs work on a "thin client" model: a central switch coordinates lightweight access points (APs), which are simple and cheap to deploy. The automated self-adjusting capabilities of these light APs are well suited to voice applications. Around 30 voice calls can be made simultaneously through each AP.

Beyond this, the technology is less mature. But wireless networks are certainly getting bigger - much bigger. Public wireless IP networks will soon spread beyond 300-foot wide coffee-shop hotspots to cover much wider areas.

The key to this may be WiMax, an Intel-backed "missing link" between WiFi and 3G. Bandwidth varies depending on how many users are accessing the same point. The latest generation of WiFi operates around 25 Megabits per second (Mbps), but one access point would typically have fewer users in its 150-300 foot range than WiMax, which provides a maximum data rate of 70 Mbps over an area of 10-15 miles. 3G, meanwhile, offers the widest coverage but gives speeds of only 200kbps to 400kbps.

In spite of the prominent WiMax antenna placed atop the Empire State Building in New York, the technology remains relatively obscure. Many unresolved issues surround the technology: interoperability standards, frequency spectrum usage and the accompanying regulatory (and possibly cost) requirements, power levels and, inevitably, health concerns, all top the list. In addition, the bandwidth-sharing technology means that, like cable, there could be availability problems in heavily populated areas. WiMax will also operate only over line of sight, meaning repeaters and WiMax-WiFi conversion will be necessary.

Wider WiFi deployment is a nearer possibility. City authorities in San Francisco and Philadelphia are proposing municipal WiFi networks. In the UK, start-up Last Mile Communications is proposing to put a low-powered WiFi connection in every lamppost, providing free access in exchange for highly targeted advertising.

But given the mix of technologies, roaming techniques will need improvement. Although phones are already available which support both cellular and WiFi networks, none can yet move between the two without interrupting calls.

The advent of new standards already in development should solve these and quality-of-service issues. These include 802.11e, an evolution of existing WiFi standards, and IPv6, an upgrade to the IPv4 protocol currently used on the Internet. While 802.11e is expected to be ratified in 2005, IPv6 networks are unlikely to be in place before 2008.

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