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| EMagazine Volume 5 Issue 3 June / July 2000 |
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Because telephone service can be carried on packet-switching networks, it is being drawn into the whirlpool of converging communications services. Large service providers are working to develop advanced services for their customers, while educating them about the services they have created. It is to be expected that acceptance rates of these technologies and services will start slowly. However, evidenced by its strong growth over the past year, packet-switching telephony is gaining acceptance. |
Packet-switching technology, the foundation of the Internet and other data networks, is proving to be an amazingly versatile technology. Its ability to carry telephone communications is considered to be one of the most compelling new uses of data networks. Vendors and service providers from several different industries are working to capitalize on this emerging functionality.
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The Evolution of Telecommunications Technology
For over 100 years, the world has been making telephone calls over circuit-switching networks. This reliable technology has not gone through any dramatic changes for many years and is the foundation of our modern-day communications services. But with the rapid improvement and proliferation of computing technologies, about the only things that become outdated faster than technology are information and fresh produce. Fashion, a more fickle industry than most, has a relevant life cycle approximately twice that of modern computing technologies.
Although the idea probably never occurred to Charles Darwin, technology fits perfectly into his theories of evolution and natural selection. Circuit-switching technology may be approaching extinction, fated to become a showpiece in telecommunications museums, as the market finds more utility in a younger, more adaptable technology. It won't occur next year or even in five years, but in twenty years, circuit-switching technology may be a thing of the past, replaced by its packet-switching counterpart.
The History of Packet-Switching Technology
Packet-switching technology was developed to create communication links between computers and to allow for the growth of data networks. The technology was first employed in the ARPAnet, the precursor to the Internet. Since then, the Internet has exploded exponentially; its unexpected popularity has made it a source of communication, entertainment, commerce, research, and more. Popular idioms suggest that the Internet can be anything you want it to be.
When VocalTec introduced its Internet Phone software, it introduced the Internet into yet another facet of our lives. The seemingly innocuous act of carrying telephone calls on the Internet could markedly change the way we communicate and challenge the assumptions and business models of incumbent communications service providers. Some have suggested that AT&T, Sprint, MCI WorldCom, and other major telephone companies will quickly become extinct as more nimble companies leverage the resources of the Internet to offer low-cost or free telephone services. These predictions were wildly naive, but the power of the technology nevertheless has important implications to the telecommunications industry.
The Promise and Progress of Packet-Switching Telephony
Internet telephony promises low-cost, advanced communications services that can be customized according to the needs of each user. Ideally, users can access all the necessary communications services that they require through an Internet connection, but to date, this promise has remained largely unrealized. Unified messaging solutions have been inadequate, and service quality has been fairly poor. As the hype surrounding Internet telephony deflates, many people are asking, "When will Internet telephony really be useful?" Although the technology has not lived up to its potential, there is a light at the end of the tunnel, and packet-switching telephony is poised to take off.
The technology that supports voice signals on packet-switching networks is maturing and is getting closer to the 99.999% reliability that the PSTN demands. The quality of the sound is also improving with the adoption of standards and technologies to manage the signaling and routing procedures that affect the fidelity of the signal. Furthermore, thousands of miles of fiber-optic networks are being built in order to create an environment friendly to voice signals.
Companies offering packet-switched telephony, often called "next-gen telcos," include Net2Phone, deltathree.com, and dialpad.com. These companies, and dozens of others, are currently offering low-cost or free long-distance services to consumers. Use of these services has been limited to hobbyists and residential users who don't demand toll-quality service and are interested in saving on expensive international and domestic long-distance calls. These services have grown from carrying about 300 million minutes of calls in 1998 to about 2.5 billion minutes in 1999. This is a paltry sum compared to the 100 billion minutes of international voice traffic and 1.5 trillion minutes of national long-distance traffic, but it does represent substantial growth.
In fact, AT&T recently announced that it would lead a consortium to purchase a 39% voting stake in Internet telephony leader Net2Phone. Shortly thereafter, AT&T also announced that its long-distance business has been hurt by the increasing popularity of Internet telephony. Although Internet telephony currently carries a small percentage of worldwide call volumes, it has appeared on the radar screens of all telecommunications companies as a technology with enormous potential.
The Future of Packet-Switching Telephony
As packet-switching telephony gains increased acceptance, service providers are looking to introduce the technology in local service markets as well. Several major cable companies are working to develop IP telephony solutions in order to compete with the RBOCs in the residential service marketplace. By incorporating additional computing technologies in cable modems or set-top boxes, cable companies are transforming these devices into gateways for delivering voice, video, and data to the home. Meanwhile, CLECs and some of the RBOCs are working to develop VoDSL solutions to increase the value of their bundled DSL services. DSL providers deliver their services through Integrated Access Devices (IAD), or DSL modems.
On the cable front, companies such as Videotron Group, Comcast, and Charter Communications are conducting trials for IP telephony services. These services will be introduced within the next year, providing consumers with new choices in telephone service providers and, eventually, new service options. AT&T's $100 billion investment in cable networks marked its entry into this industry and elucidated its hopes of becoming a major player in local service. The Company is currently enrolling customers for local services based on circuit-switching technology but will switch to IP-based equipment in 2001. AT&T expects to offer a bundled communications service package that no other provider can match, including Internet, cable TV, wireless, and local and long-distance telephone services.
CLECs including NorthPoint Communications, Rhythms NetConnections, and Covad Communications are working to develop a VoDSL service. They will likely introduce this service before the end of 2000. SBC and U S West are trailing their competitors in service development and will likely have a VoDSL solution available in early 2001.
Migrating voice signals to a packet-switching platform is an attractive proposition because it is a less expensive technology and will likely attract customers as a cheaper alternative to current services. More importantly, packet-switching technologies, especially IP, provide greater control and flexibility in the services that are available. Services can be quickly and easily developed through software upgrades, but taking advantage of this high functionality will generally require the adoption of new communications devices in the home. This is one of the primary challenges that could inhibit the growth of advanced telecommunications services. Creating intuitive solutions that consumers can configure according to their needs is imperative.
Packet-Switching Telephony and the Home Network
New products that provide solutions for nearly every home networking need are appearing in the marketplace. Scientific-Atlanta recently announced that it is developing a set-top box in conjunction with Net2Phone that integrates telephony technology. 2Wire recently announced an IAD that supports VoDSL and home networking standards HomePNA and HomeRF. Cable companies and DSL providers are working to make their access devices the central component in the home network.
Another scenario places the PC at the center of the home communications network. By using a communications service management application, the user may define what telephony devices are connected and what services are available. The computer can function as a device for communication, the storage device for messaging services, or a number of other functions that are created according to users' needs and demands. The ability to create additional phone lines and program or activate different features is one of the compelling possibilities enabled by packet-switching telephony.
There are daunting challenges to changing the nature of communications services that should not be overlooked. Consumers have come to rely on easy-to-use, conspicuous telephone services. Encumbering telephone services together with technology that is difficult to use or understand will dissuade consumers from embracing new service options. Technology providers will need to develop solutions that clearly demonstrate to consumers the additional value in the products they offer.
One of the many problems in today's marketplace is that consumers have too many options with too little to distinguish between these options. Technological innovation is occurring much faster than the general dissemination of information and understanding in the consumer market. This paralyzes the consumer and results in stagnant sales of products that do not have a clear advantage over their peers and do not immediately provide consumers with superior services.
Because telephone service can be carried on packet-switching networks, it is being drawn into the whirlpool of converging communications services. Large service providers are working to develop advanced services for their customers, while educating them about the services they have created. It is to be expected that acceptance rates of these technologies and services will start slowly. However, evidenced by its strong growth over the past year, packet-switching telephony is gaining acceptance. Now that the hype has died down and the naysayers have been proven wrong, service providers are upgrading their networks to deliver the communications services of tomorrow. And the growth in network traffic indicates that consumers are starting to listen.
Ben Sauter is the most recent addition to the team of analysts at Parks Associates. He contributes to the research that is being conducted on the evolving landscape of the telecommunications industry. His specific focus is packet-switching telephony and industry convergence. Prior to working at Parks Associates, Ben worked in the natural resources exploration and hospitality services industries. Ben graduated from Brigham Young University with a BA in Economics. sauter@parksassociates.com
