International Long Distance: Merger Wave Coming

Look for a wave of mergers and outsourcing in the international long distance business in 2008. The issue is that voice traffic growth is slowing sharply after decades of rapid growth. That means more volume is needed to keep a business cash flow positive or profitable. Not every global carrier will be able to attain that level of scale, so executives are going to have to consider buying wholesale capacity and abandoning operation of their own networks.

That, of course, is a business opportunity for wholesalers with the ability to handle a large amount of additional traffic.

International voice traffic grew approximately 15 percent annually, from less than 18 billion minutes in 1986 to just under 300 billion in 2006. But international calls grew only 10 percent in 2006, and signs point to continued sluggish growth in 2007.

Skype and other computer-based voice services are a key reason for the slowdown. "Skype only accounts for a small share of international calls, but the volume was enough to cut global growth in half," says TeleGeography analyst Stephan Beckert.

European VoIP Market Soars

Though VoIP might largely be driven by cable companies in the U.S. market, the 22 million-plus VoIP subs in the European market bear witness to dramatically different market dynamics. In part because of robust local loop unbundling rules, independent broadband competitors have had quite a field day, both as providers of broadband access and VoIP services.

In the French market, for example, France Telecom (Orange) is "the number two provider of VoIP in the world," says Carlos DeSilva, France Telecom director. "In France, 30 percent of all calls are VoIP and it is used by about eight million customers."

Massive Mobile VoIP Use by 2012

Who will massively introduce mobile VoIP? Mobile carriers themselves, says Dean Bubley, Disruptive Analysis president. In fact, some 250 million VoIP over mobile accounts will be in service by 2012, he argues. Analysts at Analysys seem to agree, arguing that wireless VoIP end users will outnumber wired VoIP users in the near future, as shown in the graphic.

Conversely, dual-mode mobile devices that work both on wireless networks and Wi-Fi will have been eclipsed, he argues. As for independent providers of VoIP over third generation mobile networks, get ready for something of the same thing that has happened to Vonage, he essentially argues.

In other words, as the mobile carriers increasingly move to provider VoIP as an alternative to legacy Time Division Multiplex services, it will increasingly be tough for independents to make a go of it, much as competition from cable has squeezed Vonage and other independents in the U.S. market.

Independents do have a window of opportunity, though, since the majors haven't yet moved.

Though some will find the analysis disturbing, Bubley's predictions fit well with the past history of technology innovations in the global telecom industry. That is to say, innovations at first are brought to market by upstarts. At some point, it becomes crucial for the majors to adopt, and they do.

Bubley's analysis rests on a couple of simple assumptions. Since mobile carriers are migrating to all-IP networks, voice necessarily will be in the form of VoIP. Either that, or keep running a parallel TDM voice network. The coming IP networks also will operate in more bandwidth-efficient mode than a circuit-switched network, possibly in the range of 100 percent to 200 percent, he argues. Given demands for more data bandwidth, that will be compelling.

Then there's the attraction of IP-enabled features not possible with TDM. Also, mobile providers will want to collapse multiple networks and switching fabrics. Just as wireline networks are moving to IP Multimedia Subsystems, so wireless operators, who initially were the impetus for the creation of IMS, will do so. And that means IP-based voice.

Google Buying Skype?

So the latest rumor is that Google is trying to buy Skype. While the move makes a certain sense, this might be a trial balloon of the sort often floated by investment bankers eager to get some deal fees.

Vonage at&t Patent Settlement for $39 Million?

Vonage and at&t are discussing settling the patent infringement suit at&t has filed against Vonage for $39 million, to be paid over five years. In October, it settled with Sprint Nextel Corp. for $80 million. Vonage will settle with Verizon Communications Inc. for between $80 million and $120 million, depending on the outcome of a final court hearing.

As a result of all the patent settlements, Vonage's available cash has been reduced from $356 million to $194 million, a dip of $162 million, of 46 percent.

It isn't clear whether other VoIP providers might be liable as well. And if they are, it isn't clear Sprint, at&t and Verizon will really want to make an issue of the infringements. It wouldn't look good, for one thing. Sprint won't want to sue its own customers, the cable companies. And though th giants might be able to cripple just about all the remaining VoIP independents, the regulatory harm would outway any potential short term financial gains.

NetZero Shuts Down VoIP Service

NetZero Voice, the VoIP-over dial-up service sold by NetZero, is being shut down by Dec. 15. Customers who want to migrate to the Packet8 service can do so for $19.95 a month.

Since 2005, NetZero had gotten only had about 12,000 subscribers, it appears. Former NetZero customers might be a mixed blessing for 8x8, though, which now focuses on VoIP services for small businesses. One has to believe most of the NetZero customers are consumers with a high value orientation, possibly similar in profile to the high-churning value customers EarthLink has to contend with.

So not only are the potential new customers outside the desired customer segment 8x8 is chasing, they probably are high churn customers as well. Time will tell.

Vonage Settles Verizon Lawsuit

Vonage has settled a patent lawsuit brought by Verizon Communications Inc. for an amount yet to be determined but not in excess of $120 million. Vonage already has put $88 million in escrow and the settlement caps any payouts Vonage will make on top of that amount at $32 million. Having settled a suit filed by Sprint, and nearing closure on the Verizon patent infringement lawsuit, Vonage still faces a patent lawsuit filed by at&t. The Verizon settlement is the third Vonage has had to make so far.

Paetec Buys Allworx

Paetec is acquiring Allworx Corp., a provider of IP-based PBX and key systems aimed at the small and medium business user. The transaction makes more sense in light of Paetec's recent merger with McLeod, whose customer base is largely anchored on smaller businesses use a single T1 connection at most sites. Paetec's historic customer base is a mid-market firm. So Allworx will make sense as a favored solution for McLeod customers more than for Paetec's historic base.

Based in East Rochester, N.Y., Allworx primarily uses Value Added Resellers as its sales channel. Paetec says it will continue to use VARs, as well as its extensive agent network, to introduce both Allworx services to Paetec customers while cross-selling Paetec connectivity services into the Allworx base.

The acquisition, set at $25 million, is interesting as it is not common to see communications "footprint" providers buying "application" providers. But more providers seem to be putting their money where their views are, as "moving up the stack" now is seen as necessary.

Level 3 has been buying content delivery assets, not simply termination assets or access assets, for example. That isn't to say all providers think this is the right strategy. Some continue to launch or extend Layer 2 connectivity businesses that deiberately remain focused on access to end user sites and transport within a metro area or region.

at&t to Launch VoIP Bundled with fiber

By the end of the year, at&t U-verse customers will be able to buy voice services running over the fiber-to-neighborhood service, instead of running a separate circuit-switched voice network to customer locations. The move signals that at&t is completely comfortable with the ruggedness and dependability of its VoIP offering, and is moving towards IP-based voice that can be interwoven with other services at&t plans to offer.

The move also is an early harbinger of a time when VoIP widely will be used as a standard replacement for landline voice, much as cable companies now use VoIP to deliver "digital voice" services that are feature equivalent with plain old telephone service but use IP technology.

The new VoIP offerng also will not be based on the CallVantage platform, because CallVantage "doesn't scale," at&t executives say.

The new VoIP product will be available in markets where at&t delivers U-verse TV.
at&t says its upgraded network will reach about eight million homes by the end of this year. The company intends to pass 18 million homes by the end of 2008.

Apparently at&t plans to move slowly offering VoIP services that run over Digital Subscriber Line, though.

From at&t's standpoint, that makes sense. Having watched IP, flat rate plans, competition, mobility, family plans and other forces wipe out much of the profit in long distance, VoIP stands poised to attack voice-based local access revenues as well. at&t will move, when it has to. But it is hard to fault them for not wanting to hasten the revenue decline from that product line.

Vonage Doesn't Have to Pay $58 Million, 5.5% of Revenue to Verizon: Appeals Court

At least, not yet. The U.S. Court of Appeals says the U.S. District Court has to take another look at one of the three Verizon patents Vonage is said to have violated, though it upheld two of the three decisions as originally made.

Further, the Court of Appeals vacated the entire award of $58 million in damages and the 5.5 percent royalty. The Court of Appeals sent the case to the U.S. District Court and directed that the court retry those aspects of the original case.

Vonage has work-arounds in place, and argues none of the patents should have been granted in the first place, though it seems unlikely to an untrained observer that Vonage can get the courts to agree.

Still, it is a partial victory. Perhaps the damage award and royalty payments will be lowered, ultimately. And, at this point, a partial victory is about the best news Vonage has had on the patent front this year.

Disruption? Maybe Not.

Lots of companies and lots of people have been at the "telecom disruption" game for quite some time, beginning way back with the Carterfone decision and MCI's assault on the long distance calling market. We have had Internet service providers, competitive local exchange carriers, hosted service providers, application providers, instant messaging providers, portals, VoIP providers, cable companies, satellite providers and others attacking one part or another of the global telecom value chain.

Through it all, global communications service revenue has kept climbing. In fact, you'd be hard pressed to find any year when that didn't happen. Perhaps the issue is not disruption at all, but rather transformation. There will be new spaces created, and a rearrangement of older spaces. But nothing has stopped global revenue from climbing, year after year.

Of course, all the analysts could be wrong. Some cataclysm could yet await. But it sure doesn't appear to be something you would build your company on.

Defanged Skype

For all the fear Skype and other IM-based and peer to peer voice applications and services have created in the broader service provider industry, Skype seems to have crested. Skype still has lots of registered users, but they don't seem to be calling and using Skype chat as much as they used to.

Remember the concern municipal Wi-Fi networks raised just two years ago? Telcos and cable companies were worried muni Wi-Fi would cannibalize cable modem and Digital Subscriber Line services. And dare we even mention Vonage and other independent VoIP providers.

In fact, the only threat that really has materialized is cable companies. At least in North America, cable companies have emerged as the most serious threat to wireline voice and broadband Internet access revenue streams. Everything else essentially has remained a flea bite.

On the video and audio content side, remember the hackles BitTorrent and Kazaa raised? Now we have iTunes, Joost and a legal BitTorrent working with content owners.

So what conclusions should one draw from all of this? Probably that "disrupting" powerful incumbents is going to be much harder than attackers once had believed. Bandwidth exchanges thought they'd reshape interconnection. Competitive local exchange carriers thought they'd capture a goodly portion of the wireline voice market. Independent DSL providers thought they'd catch the telcos sleeping. Internet Service Providers thought the same about dial-up.

Turns out incumbents have more resiliency than anybody might have thought.

GrandCentral Number Porting Affects 434

GrandCentral has had a few number porting issues of its own. CEO Craig Walker says GrandCentral had issues with 434 customers whose numbers could not be seamlessly transitioned from one underlying supplier to another.

What happened is that a supplier of numbers and connections "sent us a notice that they’d be exiting certain markets and disconnecting some phone numbers in 30 days," says Walker. GrandCentral immediately began porting the numbers to a larger carrier partner. But 434 couldn't transparently be moved.

Those users had to be assigned new telephone numbers in the same area codes they already were using. Going forward, GrandCentral is emphasizing working with large, reliable providers committed to providing these services long term.

"Although this affected only 15 of the local areas where we offer services, out of nearly 8,000, we take this matter seriously and have done everything to make the disruptions as limited as possible," says Walker.

That is the way to handle an unplanned outage.

U.K. VoIP Provider Also Has Outage

U.K. VoIP provider VoIP.co.uk had an outage of its own last Monday. Users could call other VoIP.co.uk users, but were unable to place or receive calls from users on the public telephone network. Service was out for the better part of a day.

Fred Pitts Back in Service with TeleBlend

It took 10 days, but TeleBlend customer Fred Pitts FINALLY is back in service.
"My first try to call home this morning continued with the "fast busy" signal; by midmorning, however, it was working," Pitts says. "So, while disappointed to have been without incoming service for such a length of time, I am thankful today that I am back up. I hope everyone else will be back in service soon as well."

A gracious comment, I'd say. At least some disgruntled SunRocket customers who picked TeleBlend as a replacement say they have churned to other providers such as Packet8 and Vonage.

A harrowing experience, to be sure. Perhaps it is only fair to note, though, that of the 60,000 transitioned customers, nearly all made the flash cut without much apparent disruption. Call it 99 percent. But one percent of 60,000 is still 600 customers, and it will be scant comfort to know that (hypothetically) 54,000 customers had no real issues.

That's the devil with mass market services, though, isn't it? Getting 99 percent of things right still generates thousands of trouble tickets (I'm not suggesting TeleBlend had issues with as many as one percent of its accounts, by the way. Just making the point that a very small failure rate in a mass market application or service can result in huge trouble ticket queues.)

Skype apparently still is having a major outage itself today, and as older posts today note, at&t and Cisco have had issues this month as well. S*** happens even to companies as large and sophisticated as Cisco and at&t.

Voice Quality is Getting Worse: What Would You Expect?

Those of use who grew up with one phone company got spoiled by the reliability and quality of its communications network (despite "customer service" so bad it became an oxymoron)," says technology journalist Mark Stephens, whose pen name is Robert X. Cringely. "Those of us trying to save a few bucks by piggy-backing voice services on the Internet are starting to get what we've paid for."

Skype itself now is experiencing an outage that might take 12 to 24 hours to fix (Aug. 16).

There's a larger trend at work here, and it happens in virtually all formerly highly-regulated businesses when deregulation and new technology hit. Remember when airlines were highly regulated, and could not compete on the basis of price? How did they compete? Amenities and other non-price differentiators. Of course, prices were high and not that many people flew.

Deregulation hits and all of a sudden price becomes a key competitive weapon. Of course, when people start paying lots less, something has to give. Like amenities. But more people fly now.

So here's the problem communications service provider executives face: they can't afford to run "gold plated networks" for the same reason airlines cannot. Obsessive concern about voice quality and service availability are one thing in a highly regulated environment. Such concern is quite something else in a highly competitive marketplace where customers in fact choose to pay money for service that is quite a bit less intensive than it once was.

In a nutshell, the business problem is that operators cannot afford to maintain the same obsessive levels of quality when customers demonstrably don't care. Mobile communications is the best example. Everybody uses mobile service. And everybody knows it simply is not as reliable as wired phone service. Nor is the audio quality as good. But it's a wild success, anyway.

If people will not pay you to maintain a higher quality of service, can you afford to do it? That's the problem the global communications business faces. People are voting with their pocketbooks: buying services with lesser quality on some metrics because the overal utility of mobility is so high.

In other cases, such as over the top VoIP, they are voting with their wallets to buy cheaper services with less reliable service.

Get used to it. In virtually every deregulated, formerly monopolistic industry, overall quality will drop. Of course, there's another trend as well. New, higher cost alternatives will develop. Because some people need high quality enough to pay for it.

IP communications are very valuable. They are very useful. But they are not as robust as the old public switched network, if only because of things like latency. The services can be made more rugged, of course. It just costs money.

Service Not Entirely Restored

"Make it 10 (days without service), says TeleBlend customer Fred Potts. "Last Friday, Bill Fogg of Teleblend posted a reply after a comment I made on your blog. He sent an email follow up asking for a number where he could reach me. I sent my cell number and have sent follow up emails to him each day. The silence is deafening."

Resistance is Futile: IP PBX Has Killed TDM

Forrester Research recently interviewed 516 landline voice decision-makers in North America and Europe and found that enterprises plan to increase budgets for IP telephony or IP PBX systems and services during 2007.

This is not surprising, nor shocking. It is getting hard to buy systems based on older platforms, just as it now is very hard to buy a new PC that doesn't have Vista loaded as the operating system.

New shipments of IPT outpaced those of traditional PBX systems three years ago, and the installed base of IPT lines is expected to outnumber traditional PBX lines within the next few years.

North American and European enterprises indicated that in five years most will have completed their migration to IPT. All of which continues to create a window of opportunity within which non-telco providers can sell hosted VoIP services into the consumer and smaller business markets without fear the telcos will massively convert to VoIP.

Someday, when they have lost enough share, telcos indeed will stop offering POTS and themselves become VoIP providers. But only after VoIP has completely reshaped customer expectations about what a voice service is, and how it should be packaged.

The SME customer segments remain the most promising opportunities for most competitive providers, though the cable companies have real advantages in the consumer markets.

TeleBlend Restores Service

Finally! TeleBlend has got service back up for customer Marc Kruskol, who I would say was one of the maddest TeleBlend or SunRocket customers I have heard from. Kruskil says his outage lasted from last Monday, August 6 until approximately 2:30pm PDT Aug. 14. The problem, I am pretty sure, has to do with termination partners in the Van Nuys area who either took some time to come to identify and strike business deals with TeleBlend, and then to get all the portability and software issues ironed out. Nice to hear that Kruskol now can use his VoIP service.

Yesterday, customer Fred O. Pitts reported that he still didn't have service. "I am now eight days and counting without incoming service." Pitts now says (Aug. 14) that his service still hasn't been restored. That's disappointing. Make it nine days.

Free Phone For Reseller Partners

All resellers who sign up for the Flat Planet Phone Company yearly $199 Reseller program will receive a free Cisco Linksys SPA942 phone and a $200 rebate on purchases of IP telephony equipment from VoIP Supply, says Moshe Maeir, Flat Planet Phone Company CEO.

FPPC offers resellers a brandable, SIP-based platform supporting hosted PBX service, voice mail and fax-to-email features, call recording, calling cards, disposable numbers, Iotum integration, local international phone numbers, reduced roaming expenses, virtual IVRs and click to call.

FPPC resellers are supported by an integrated rating and billing engine, customer self care portal capabilities and full customization of offered features.