UK: The great telephony shake-up and how it affects your business.

UK: The great telephony shake-up and how it affects your business. - We all know it's good to talk. It could also soon be cheaper than ever as telephony on the Internet slashes the cost of phone calls.

by Jane Bird.
Last Updated: 31 Aug 2010

We all know it's good to talk. It could also soon be cheaper than ever as telephony on the Internet slashes the cost of phone calls.

In the beginning was the plain old telephone service: then came cable, cellular, and satellite communications. Now the Internet is threatening to blow the global telecoms market apart by slashing the cost of international phone calls, video-conferencing and online document sharing. Already a throng of entrepreneurial companies has entered the market with innovative products and services. For customers, it means lower prices and greater choice. For telecoms giants, however, its effect is one of ferocious competition in highly lucrative sectors of their market.

The basis for this upheaval is the convergence of telephony and computing, now being intensified by privatisation and liberalisation. Already more than 50 telecoms licences have been awarded in the UK, and competition in the US and Sweden is well established. This month the rest of Europe joins the race with the implementation of the EU directive on telecommunications liberalisation.

But it is the maturing Internet that will really shake things up. Some 45 companies already offer products enabling voice or fax communications on the Net. 'The Internet will become the epicentre of innovation in communications,' says Forrester Research, a US-based research company. It expects some 34% of the world's $600 billion phone traffic to be running on the Internet by the turn of the century. By 2005 the figure could be 99%, says Bruce Bond, CEO of ANS, a subsidiary of WorldCom, the US-based telecoms company.

'This technology is beginning to suck everything else into it.'

The Internet is not the only technology that exploits the convergence of computers and telecoms. Large companies with private voice and data networks in place, for example, can start to combine the two. This gives them economies of scale, says Larry Fromm, vice president of new business development at US-based Dialogic, a network specialist. 'In addition to boosting their efficiency in handling data, it cuts the cost of deployment and maintenance.' But private networks are expensive: the Internet is much cheaper because it uses public networks to carry shared voice and data traffic.

Conventional voice telephony involves tying up an entire circuit from caller to recipient. Data communications, on the other hand, allows signals to be broken up into small sections or packets, which can then be interleaved to maximise the available bandwidth. They are then pieced back together at the other end. If data is lost en route, it can be regenerated.

Now communications engineers have developed techniques for data compression and high-speed transmission that allow voice signals to be broken up and reconstituted in a similar way. This allows them to share lines with other voice or data traffic, hugely increasing throughput and reducing cost. Although there is some degradation, the quality and speed of transmission is being constantly improved. These techniques work independently of the medium: it could be optical fibre, microwaves, satellite transmission or copper cable.

For companies, the race is on to spot the business opportunities provided by Internet-based telephony, including cost savings, access to new markets, and the ability to respond more rapidly to changing customer demands.

'Competitive advantage is increasingly down to the speed at which companies can absorb information,' says Alistair Henderson, head of technology at UK-based telecoms company Energis. 'That is why companies want to consolidate their voice, data and video.'

Companies that want to dip their toes in the market can do so very inexpensively.

Basic Internet telephony simply requires a multimedia PC with a modem and relevant software. If you want to use video links, you can either attach an existing video camera or buy a PC with one built in - now available for around £30 extra. Not only will this telephony enable you to make and receive calls at the same time - instead of incoming callers hearing the engaged tone, they can either speak to you while the other caller is put on hold, or leave a message - it will also dramatically reduce the cost of your overseas calls.

The biggest problem is quality. Internet telephony can be slow and unreliable, as with anything involving the web, or 'World Wide Wait' as it has all too often been dubbed. Companies have to ask themselves how much an international call is worth to them. If they are calling a potential customer in Japan or the Middle East, for example, an awful phone link presents a bad image, says John Moroney, principal consultant at Ovum, the London-based telecoms market research company. 'Would you consider making the same call on a cheap mobile?' Moroney asks. 'That's what a good Internet link would be like.'

Delays of almost a minute between speaking and hearing the reply are not uncommon on the web. Graham Marriner, strategy manager for future markets at the Post Office, says this is unacceptable for serious business use, and has ruled it out for in-house use for the present. 'It will be a long time before Internet telephony will match the quality and reliability of most existing voice networks,' reckons Marriner.

Another problem is the lack of service contracts. With standard Internet telephony, as with other web activities, there is no one to blame when things go wrong.

So convoluted may be the route from caller to recipient, that it is frequently impossible to locate the source of a problem. Few businesses will feel comfortable relying on such a complex technology for their communications in the absence of service guarantees.

Meanwhile, the cost advantages of the Internet may be short-lived. International telephone charges are already tumbling and are set to fall more steeply in response to an agreement by the World Trade Organisation. Prices are also being forced down by specialist operators such as the callback companies which exploit tariff anomalies between countries. Moreover, as Internet traffic levels rise, the telecoms companies that run the networks it uses are likely to increase their charges to Internet service providers (ISPs).

These costs will in turn be passed on to subscribers.

Using Internet technology simply to save money on international phone calls may not be worth the effort. On the other hand, there are many innovative business applications that exploit the ability to combine voice and data.

Corporate video broadcasting, for example, enables thousands of staff to be sent a clip of the chief executive's statement simultaneously. They can even give instant response by pressing specific buttons on their keyboards.

'This is an exploding market,' says Bond. And although ordinary Internet lines may be poor for voice, on an intranet they can be more closely controlled.

Bond also sees a big opportunity in bringing services such as virtual private networks, previously the province of large corporates, within reach of small and medium-sized companies. This would enable them to form virtual organisations to seem bigger than they are and to create dynamic teams with appropriate skills for individual contracts - small groups of freelance lawyers competing with large City firms, for example.

The business opportunities for Internet telephony will proliferate as more people acquire it on their home PCs. For example, insurance companies, tour operators or motor manufacturers, could set up web sites offering visitors the ability to press a button and speak to an expert. In addition to promoting teleshopping, this would help teleworkers. 'Usually a home worker needs three phone lines, one to make and receive business calls, one for personal use, and one for going online,' says Dialogic's Fromm.

'Internet telephony eliminates the need for the third line.'

But by far the biggest initial use of Internet telephony in business is likely to be fax, which currently accounts for up to half of international phone traffic. Fax is an ideal application for Internet telephony because a few seconds delay makes very little difference. WorldCom plans to roll out fax over the Internet this year via UUNet, its ISP subsidiary. 'The benefit will be for long haul traffic,' says Bond. 'We'll be able to deliver fax worldwide for the cost of an Internet subscription and a local call to your nearest Internet node.'

The importance of speed in telephony applications on the Internet suggests a big market for power line web access, announced by Nortel and Norweb Communications last October. This technology, expected to be available sometime this year, will allow access to the Internet at 30 times the speed of today's modems via standard electricity lines. Techniques such as this will pave the way to a host of new products and services from existing and new players. You might, for example, go to CompuServe or AOL for your telephony services.

Energis is looking at power line telephony to provide high speed circuits for groups of users such as high street retailers. 'We could have fibre to a local substation, then user power line telephony to deliver two Megabits per second to smaller premises,' says Henderson. 'This would give individual shops more interactivity so that, for example, they could access online catalogues to quote prices, availability, and send e-mail.' Such facilities currently require expensive dedicated high-speed networks.

The risk for the giant monolithic carriers is that they won't be able to move fast enough to exploit the Internet access market which is doubling in size each year. Forrester believes that the shift to Internet services will be a catalyst for a radical restructuring of the telecom industry.

'Telecom carriers will be forced to reorganise as specialists in customer retail, application innovation, or network operations,' it says. Ovum's Moroney agrees: 'They will have to become better telcos and offer really good services.'

Never mind the current fashion for mergers, it may be more sensible to break up. Despite WorldCom's victory in the battle for MCI, Bond agrees that big is no longer beautiful in telecoms. 'A few years ago, we had the idea that there would be three to five players in the global telecoms market, but I no longer think it's true,' he says. 'If it was a good idea, it is one whose time has come and gone. There are actually numerous potential products and services on the scale of cost and quality, and it's a mistake to think that one player could be world class in all of them.'

This means big opportunities for start-up telecom companies to cherry pick specialist niches and grow phenomenally fast. For business customers, the fragmentation is good news because it will broaden choice and cut prices. Just one word of caution: as with computers, the tendency in telecoms is to spend more and more just staying in the same place. So even with Internet telephony, don't expect your phone bills to go down.

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