The business case for Voice-over-Internet protocol services is out there...somewhere. Just where, and how compelling it's likely to be, are two burning questions being answered in a few select trials and in a smattering of labs around the country under varying degrees of secrecy.
It's no secret, however, that VoIP's future as a viable business is at stake. For years, the IP-based technology at the core of VoIP has been tinkered with, tweaked and refined. Now, it's time for the ultimate litmus test–is there a VoIP business, and how profitable can it be?
Though few hard revenue and ROI (return on investment) numbers are known to exist, most experts agree the business case for VoIP is at least appealing. With worldwide voice revenues expected to top $171 billion by 2007, according to a recent Frost & Sullivan study; and the cost of activating a VoIP subscriber down to about $600 and falling, with an 18- to 24-month payback on capital investments and installation costs, the business case for VoIP looks promising.
In fact, the VoIP business will be chasing some strong revenue numbers. For instance, cable telephony is expected to generate $534 million in revenue this year. But in 2007, revenues are projected to grow to $1.9 billion, according to Insight Research.
"It's inconceivable that for competitive reasons alone, cable wouldn't go to VoIP," says Bob Rosenberg, president of Insight Research. "Maybe not as a top revenue stream, but it could be the silver bullet aimed right at the heart of the baby Bells. It could eventually make copper loops valueless. Believe it."
The flock of believers is growing, yet getting a piece of the impressive revenue predicted for the VoIP business will require some creative business modeling and savvy decision-making before a true belief system can be developed.
"Cost-savings and revenues have to be in the business case for VoIP, and it's not a killer application when bundled with other services," says Elka Popova, program leader for next-generation packet service at Frost & Sullivan. "The value proposition of VoIP today is more on the cost savings side, and the most compelling business cases will be built by the largest providers of voice and data services, and cable will be in that space."
The VoIP arena is being filled with an assortment of cable MSOs, softswitch and circuit switch equipment manufacturers, software developers and network management companies. Each is adding a piece to the ultimate VoIP business case, which is still a work in progress.
"There are a variety of business cases out there, and VoIP wholesalers are growing a business too. Carriers like AT&T and others say they want a piece of the VoIP pie, while the smaller players can't attain the economies of scale to compete with the big guys," Popova says.
AT&T Broadband recently announced revenue-per-unit of $55 and a capital expenditure of $650 per subscriber for its broadband services, including VoIP service in select markets, a clear indication that voice service is proving to be an asset.
Comcast, Cox Communications and Time Warner Cable are three of the bigger names in the VoIP hunt, and all are currently developing their business models.
Comcast is trialing its VoIP service in Detroit, and considers the business case to be attractive. "We're evaluating the cost benefit and revenue potential of VoIP," says Steve Craddock, Comcast's senior vice president of new media development. "The cost of softswitches are in their early stages...very negotiable, and are on the back side of the cost curve. All the economics of circuit switched (approaches) have been exploited, but VoIP and softswitches haven't, and are still in the R&D stage, so the costs will get even better. And, where else will cable find another $40-a-month revenue stream than from VoIP? It's showing real promise."
Yet keeping the promise of palatable capital expenditures, and reduced operational and installation costs, along with an eye-popping new monthly revenue stream, is no slam dunk.
"Moving into a multiple service company, we must have a PacketCable reliability mentality of carrier-class gear. That can really make the VoIP business case work," Craddock adds.
Making the case for a VoIP business will require some gutsy decisions, too.
"There's lots of activity and hype, but rollouts and business cases are only in the test phase. There's a big opportunity but lots of challenges, and more than just providing ROI," insists Mindy Hiebert, senior analyst for the Yankee Group.
She points to operational challenges such as operational support system and billing system integration, lingering regulatory issues and technical concerns such as providing emergency 9-1-1 and lifeline services. "Services aren't integrating yet, and cable must compete against traditional carriers, so there are lots of obstacles," she says.
Obstacles or not, some service providers are pushing ahead with their VoIP strategies, albeit cautiously, and cobbling together a workable business plan for the nascent service.
"Our emphasis now is to look at different technical solutions and validate VoIP from an economic standpoint to find out if customers really want it," says Diana Mogelgaard, director of messaging products development for Cox Communications.
Cox is building its VoIP business model based on the experience gained from its circuit-switched telephony service, currently offered in nine markets. "We've built an economic model, but haven't run the numbers. We're using our circuit-switched business case as a comparison, and this is the year we're testing our models," she adds.
Cox is looking at 17 systems for VoIP service in 2002, she notes, and will compare system-by-system data to help determine economies of scale and to analyze various financial options for it.
"We know our circuit-switched business is successful. Now, we're analyzing the benefits of IP services, including VoIP. The technology is there and the equipment is in the labs," she concludes.
VoIP is now moving to MSO boardrooms, where crucial decisions will be made about cable's appetite for the service. "Now, VoIP is getting to the business level. Internet and IP have proven to work for telephony, and there are some compelling business cases out there for cable operators," says Glenn Russell, director of PacketCable for CableLabs.
Indeed, revenue from cable Internet access in the U.S. is expected to reach $9 billion by 2007, predicts an Insight Research study. With that startling number, it's little wonder why most larger cable operators are diligently assembling their VoIP and IP-based services business models.
Still, DOCSIS 1.0 and 1.1 have blazed the technological path and the operational reasoning for VoIP. Says Russell: "[DOCSIS specifications] have been crucial to the VoIP business case and have paved the way for the business models. Now, there's a strong movement to VoIP within the cable industry. It's doable (packet telephony), but people don't migrate to it, they try it. But can they manage and deliver them and get paid for them? We say yes."
Just saying yes to a VoIP business model yet-to-be-determined can be dicey, however. Once past the projected revenue potential and the reduced capital and installation costs, the reality of VoIP's operational structure is also tied to a multiple service network architecture.
"The cost of interoperability is definitely an added cost; then there are real estate costs and added powering costs to cool a network," notes David Spear, executive vice president of strategy and market development for Cedar Point Communications, a Windham, N.H.-based start-up that's developing a "cable media switch" platform for primary- and second-line IP cable voice services. "In some cases, they're only first costs, but they can be significant over four to five years. If you add another software load to a line, that's an additional $5 to $10 per line. Then there's the cost of setting up the operation with services, billing and network management, and most cable operators haven't done that. People forget about these costs and issues."
A typical VoIP business case, Spear suggests, will budget an additional 10 percent for telephony equipment backups and spares in inventory. Yet that's half the cost in a typical circuit-switch budget.
Spear is estimating an 18- to 24-month payback in the early VoIP business cases, and $35 to $50 in added revenue-per-line for new voice services. Yet there are other valuable components being built into the models. Says Spear: "Cable operators want to move to VoIP for the revenue and the cost reductions. But when it's part of the triple play, why wouldn't they want to do it? It is reducing churn from five percent to one percent, and [it represents] a huge operational cost saver. It can literally be a windfall of profitability."
When coupled with video and data services, experts agree that VoIP, at its best, is a revenue generator, cost-saver and churn reducer. "We've looked at the models outside the U.S. and the healthiest returns are when VoIP is [coupled] with video and data. The triple play is top of mind," says James Murphy, director of packet telephony product management for VoIP equipment provider ADC Telecommunications.
Lower costs are right up there, as well. Adds Murphy: "The reason most (operators) are doing VoIP and IP-based services is for operational cost reductions, mainly in software. At about $600 per customer of capital expenditure for all-IP telephony services, that's where VoIP is starting. It took circuit-switch costs seven years to get to that point. So, that's why most operators are looking at the ROI, and why this year there will be a boom in VoIP testing."
Lucent Technologies, another player in the VoIP arena, sees the business cases beginning to trickle in, albeit in pieces.
"Many customers are segregating their voice and data businesses in IP and incrementally adding voice," says Linda Manchester, vice president and general manager of Lucent's universal gateway business. "With capital expenditure budgets being squeezed, some customers are asking: why switch from circuit switch? Others see VoIP as a way of reducing their entry costs into telephony, adding new revenue streams and upgrading to a multiple service provider. We see the business growing in 12 to 24 months, and absolutely believe it is poised to be a significant revenue generator."
Once the business cases for VoIP are solidified, experts maintain, cable should be positioned to add a valuable weapon in the intensifying competition for video, voice and data customers. "Revenue motivation and competitive threats from third-party providers like Microsoft and AOL will motivate cable to crank up their VoIP business. But timing is the issue. When will VoIP take off?," asks Dr. John Pickens, vice president of technology and CTO for Com21, a supplier of cable modems, multimedia terminal adapters and cable modem termination systems.
Good question–few answers. Concludes Hiebert of the Yankee Group: "Cable has been slow in moving ahead with VoIP because of a lack of standards, (as well as) operational challenges, OSS, billing and regulatory issues. But there is a huge opportunity for the VoIP business. Now, it will take more than just field tests to prove that it's a business."