Internet telephony has witnessed tremendous technical advancement in the past several years, but its growth has been concurrently limited by several factors that are both unique and typical of a new technology strongly on the march and bound to displace older, incumbent technology. In a sense, the traditional telephone system is analogous to the Titanic: the height of technical sophistication and quality, thought to be bulletproof and indestructible. Meanwhile, a hidden iceberg - telephone service over Internet Protocol-based networks - is now lurking in the Titanic's path, threatening to sink the unsinkable network and change our view of telephone service. This paper examines the issues and actors in the voice telephony market with an emphasis on the inevitable displacement of current services with Internet Protocol-based applications.[1] It also provides predictions on the future state of technology, and, just as importantly, how it will fit within the policy and business climate in the coming years.
Our analysis begins with an overview of the current and future domestic marketplace for IP and traditional telephone services and equipment.
Telephone service in the U.S. is obviously a major part of daily life and the economy. Revenues for local and long distance service were $96.5 billion in 1997, $15 billion from international service.[2] Telephone companies currently provide 114 million residential – a 96 percent penetration rate – and 58 million business lines.[3] Customers generated 346 billion minutes of domestic long-distance telephone use, 22.6 billion for international calls.[4] Local telephone services are dominated by five (becoming four) Regional Bell Operating Companies – Bell Atlantic, SBC Communications, US West, BellSouth, and Ameritech – and GTE (merging with Bell Atlantic) on the local side, who serve nearly 90 percent of local subscribers.[5] Long distance service is controlled by the Big Three of AT&T, MCI WorldCom, and Sprint, who earn over 80 percent of long distance revenues.[6]
IP telephony is currently a small fraction of the market, by any measure. Forrester Research estimates 1998 IP telephony service revenues were about $30 million.[7] International Data Corp. estimates IP telephony generated about 50-60 million minutes of use in 1998;[8] Yankee Group estimates that IP telephony comprised 0.4 percent of residential long distance usage in 1998.[9] – 10 times as high by end of 1999.[10] Leading IP telephony service providers (ITSPs) number their subscribers in the tens of thousands, not millions: IDT now has about 50,000 customers, and Delta Three has about 25,000.[11] Only 31 percent of the top 5,000 telecom spenders in the U.S. use IP telephony services now, and these are all confined to limited trials, according to the Yankee Group.[12]
Analysts mainly predict a rosy future for the IP telephony service market. Their particular estimates are all over the map, however, especially for revenues. The most conservative – and widely cited – estimates come from Forrester Research, which predicts revenues of $350 million in 2000, $1 billion in 2002, and $2-$2.5 billion in 2004.[13] Other estimates are higher, with Analysis and Piper Jaffray Equity Research predicting in the $7 billion - $8 billion range for 2003, and IDC predicting $20.5 billion by that year.[14]
Overall, Piper Jaffray Equity Research estimates that IP telephony traffic volume is doubling every two or three months, and will comprise 6 percent of total long-distance traffic by 2003. IDC thinks 11 percent of all international and long distance voice traffic will move to IP by 2002.[15] On the residential side, Yankee Group believes that IP telephony will grow to 15 percent of long distance minutes of use by 2006;[16] Killen & Associates estimates that 18 percent of corporate voice traffic will move to IP networks by 2002.[17] Analysys predicts 25 percent of international traffic will migrate to IP by 2003.[18] The most aggressive prediction comes, surprisingly, from within AT&T: Jossein Eslambolchi, AT&T Global Network’s vice president of network operations, expects the majority of voice calls to become IP-based within seven years.[19]
Not all observers are so high on IP telephony’s future, however. For example, Gary Arlen, president of Arlen Communications, a Maryland consulting firm, thinks IP telephony will remain a niche product.[20] Deloitte & Touche Consulting Group predicts that, even in five years’ time, IP telephony is expected to make up only 5 percent of all Internet traffic.[21]
The U.S. telephone and data equipment market totaled $106 billion in sales for 1997, 11 percent higher than in 1996.[22] The major players in this market break out into two camps: telephone equipment vendors, led by Lucent, Nortel Networks, Ericsson, and Siemens, and data equipment vendors, dominated by Cisco Systems.
By contrast, the market for IP telephony equipment today hardly registers by these standards. However, analysts expect the market to explode in the next few years. Frost & Sullivan predicts a 150 percent cumulative growth rate over the next few years, with $1.9 billion in equipment sales by 2001.[23] Dozens of vendors currently offer IP telephony products, led by VocalTec, the industry pioneer, and traditional vendors Lucent, Nortel, and Cisco, who have made acquisitions and entered into partnerships with complementary vendors to accelerate their entry.
In this section, we give a brief description on the basic components of an IP telephony system, and their interactions with one another in the process of a phone call.
Traditional telephone service is circuit-switched – every call is transmitted over dedicated facilities reserved for that particular call.[24] Long distance calls are transmitted from the user’s phone over copper wires to a local telephone companies’ switch, which converts the call to digital format and hands it off to the long distance carrier. The long distance carrier then routes the call over its network to the local switch serving the call recipient, where it hands it back to appropriate local carrier. That carrier’s local switch re-converts the call to analog signals and connects the call to the line serving the recipient. As long as the call is ongoing, a circuit – a dedicated splice of bandwidth – remains open throughout the networks involved to transmit the voice signals.
An IP telephony system, by contrast, handles the call over most of the network as just another stream of data. Typically, an IP telephony user dials a toll-free number to connect the user to an IP telephony gateway. The gateway is the key element here, as it bridges the public telephone network and the public or private IP network providing the service. Once connected to the gateway, the user will dial his or her account number (for billing purposes) and the destination phone number of the call. The gateway receives telephone signals on one side, converts them to Internet Protocol packets, and outputs the packets to public or private IP networks for routing to the terminating user, and vice versa. A typical packet includes 10 to 30 milliseconds worth of conversation. Each packet is coded with the second party’s phone number, and compressed for rapid transmission.
The packets travels the IP network, passing through routers, computers that read the addresses on each packet and assign them transmission lines. Finally, the packets arrive at a gateway that decompresses them and converts the packet back to a voice transmission signal. The gateway then passes the call to the local phone network, which delivers it to the intended party.[25]
Other forms of IP telephony service include phone-to-PC, PC-to-phone, and PC-to-PC. For calls involving a PC already connected to the Internet, service providers such as VocalTec and IDT provide software that plugs into a user’s Web browser and handles the gateway function locally. Thus, phone-to-PC and PC-to-phone systems use only one gateway to connect with the PSTN, and PC-to-PC connections – the earliest form of IP telephony – do not interconnect with the PSTN in any way (other than the local dial-up connections to the user’s Internet service provider.)
The advantages of Internet telephony are being realized more and more everyday, and both customers and providers are eager to cash in on the benefits that the service provides. The interests of the customer and the service provider are in essence not so different, because both parties realize that the relationship between them is a symbiotic one: the customer in general prefers fast, reliable, and cheap service, and the provider is interested satisfying the customer’s needs as a way of acquiring profitable subscribers.
IP telephony's disadvantages remain numerous, however, as the underlying technology is still unproven. As the technology matures, IP telephony can expect to overcome its disadvantages and become a full competitor to traditional service.
Below we assess the advantages and disadvantages of IP telephony, from the perspective of consumers, corporate users, and service providers.
The primary driver of consumer adoption of IP telephony has historically been low prices. Initially, the price benefit was derived from avoidance of charges on long distance and international calls. This has resulted in long distance international rates that are quite low by traditional standards – under 5 cents per minute in some cases – on calls that originate and terminate in areas served by the user’s ITSP and only slightly higher rates – 7-8 cents per minute – on calls that terminate elsewhere.[26] Compared to even the most aggressive rates offered by the Big Three, in the 10-15 cent per minute range, IP telephony offers significant savings. Similar savings – on the order of 50-60 percent – can be achieved on international calls.[27]
As discussed below, these regulatory savings may prove to be short-lived, as regulators may soon impose these charges on ITSPs, lower them on traditional providers, or both. Nonetheless, consumers can expect long-term savings due to IP telephony’s ability to lower carriers’ underlying costs, and due to the entry of numerous new competitors. Consumers will also benefit from the ability of carriers to introduce new enhanced services over their IP networks, as discussed below.
Large corporate customers have perhaps the most to gain from IP telephony. These companies care less about the regulatory savings than consumers do, as they have typically negotiated very low rates – as low as 3 or 4 cents per minute – for their voice traffic running on large, private networks connecting multiple branches and locations around the globe. But these companies also maintain large, private data networks – networks that usually have significant idle bandwidth.[28] By installing VoIP gateways at their various offices, businesses can gain extraordinary benefits.
The development of IP telephony also creates significant benefits for telephone carriers. Even carriers not offering IP telephony to customers are beginning to realize these, as they can achieve tremendous efficiencies in their networks. For carriers with access to high-quality bandwidth and large volumes of telephony minutes, the migration of trunking and core network services to IP-based transport will result in lower costs, faster infrastructure development, and time-to-market advantage in offering unified IP-based services to customers.[34]
One key driver of this is the savings in bandwidth over circuit-switched service. As discussed above, traditional service dedicates facilities to a call for its duration. Since as much as 70 percent of telephone calls are silence, circuit-switched services are a tremendous waste of bandwidth.[35] By not transmitting these silences, and by compressing the packets that are sent, an IP network can carry 8 to 10 times as much traffic as a circuit-switched one.[36] This results in direct cost savings at every level of traffic carried across a network.
ITSPs are also realizing significant marketing advantages by having the ability to offer IP telephony. As discussed below, IP telephony is currently a lower quality service than traditional telephony; users really do get what they pay for. But this provides operators a way to version their service on quality: high quality/high price and low quality/low price, with variations in between being developed. By offering multiple versions of their product, ITSPs can better match their products against their customer’s needs and their willingness to pay. This will enable them to extract the full value of their services from their customers.
The ability to quickly design and deploy new services and features is also a compelling advantage for service providers. In the PSTN network architecture, feature intelligence is built directly into circuit switches in a proprietary and inflexible manner. Efforts by carriers to break from this proprietary model – mainly through the deployment of Advanced Intelligent Network (AIN) service creation capabilities on top of the PSTN – have largely failed, due to the complexity of making AIN bullet-proof, the expense of the undertaking, and, the carriers accuse, switch vendor efforts to sabotage AIN and preserve their lucrative upgrade business.[37] In the VoIP architecture, the intelligence is deployed on top of separate, standards-based servers on the edge of the network. Initially these services will likely mirror the services currently offered by the PSTN. However, the industry should rapidly move beyond this, as one of the attractions of Internet telephony is the ability to offer more new innovative services faster by bringing computer-based open systems up to the network application interface.[38]
The horizontal layered infrastructure is advantageous to the VoIP provider allowing service to be built on the existing IP spanning layer. Utilizing VoIP is appealing to the provider by the fact that customers may be contacted and interaction can occur through VoIP transmission, and data transmission. This allows providers to offer services such as software updates, billing, usage monitoring, remote network administration, and future services through the IP connections.[39]
A consumer switching from the PSTN to VoIP service will find trade-offs in adopting the new service. In general, VoIP currently is a poorer quality and less reliable service than PSTN – one observer compares it to cellular service.[40] This is due to inadequate bandwidth in public and private networks and immature routing and gateway technologies, which can result in poor transmission quality, jittery calls, and dropped connections.[41] Unlike the PSTN, which is held to the "five nines" quality standard, there is no regulatory or legal oversight of IP telephony quality.[42] Customers, accustomed to PSTN service reliability, may delay VoIP adoption due to questionable reliability in IP networks.
A VoIP system can also experience negative network effects, as service quality can decreases as more users sign up and traffic on the network increases. This could be seen where a subscriber finds poor call quality at midday, but fine call quality when calling early in the working day. These effects are also evident to a consumer if a provider does not increase network capacity as the volume of users increases. These challenges are really no different than those faced by traditional telephone vendors or Internet service providers, who must also worry about scaling their networks to meet customer demands. The difference, of course, is that traditional telephone service has been tested and engineered to the highest level of quality (the "five nines" standard) for over a century – and that is the level of service IP telephony will need to match before it gains widespread acceptance, especially among corporate users.[43]
Further, VoIP equipment is quite immature, with vendors offering solutions that at best comply loosely with a few still-developing standards, as discussed below. This leads to difficulty implementing features across systems. In its current state, VoIP services lack many standard features offered by traditional carriers. Further, inconsistent implementation of standards – or noncompliance with the standards – by vendors may create incompatibilities between equipment and software from different providers. To create workable systems, then, corporate users must buy exclusively from one vendor. However, they so far have been reluctant to adopt these proprietary vendor solutions and lock themselves into closed system.
Service providers will also find that switching to IP has its costs. First, the horizontal infrastructure may reduce a provider’s control on the service reliability that it can provide its customers, at least compared to the stovepipe solution found in the PSTN.[44] Inherent in the spanning IP layer is that the heterogeneity of the underlying software and equipment is hidden, leading to difficulty in resolving service problems and assigning accountability on the network.
As discussed in the standards section, the present state of the market is immature and lacks established standards in protocols and equipment specification. This increases the risk for providers investing in equipment and software to provide for the increasing voice traffic. Lack of standards makes it more likely that a provider will become locked in to infrastructure that may become incompatible with emerging standards – in effect repeating the mistakes of incumbent telephone companies. Carriers have thus wisely chosen to hold off wide purchasing of equipment prior to thorough implementation of standards.
The acceptance of any new service and technology brings with it new methods of fraud, be it mail fraud, credit card number theft over the Internet, or malicious computer hacking. The means of fraud that may develop with VoIP must be anticipated and addressed to further develop VoIP acceptance.[45]
The convergence of voice and data networks has crucial implications for both hardware and software vendors and for IP telephony service providers (ITSP). Both aspects of the marketplace are seeing large numbers of new entrants threatening incumbents, with the incumbents belatedly scrambling to react to new market opportunities.
Equipment vendors occupy a critical place in the IP telephony marketplace. Unlike the two markets – the Internet and voice telephone – that are converging in the IP telephony space, the IP telephony equipment market is quite immature, with new entrants joining the fray, incumbent carriers from both sides scrambling to find a place in the new market, and new technologies, standards, and products being released almost daily.
That said, however, most analysts do not feel that the raw technology will be a major stumbling block to IP telephony’s success, as long as vendors maintain their current development pace.[46] But the equipment marketplace itself is still in flux, seeing both new competition and consolidation of the larger players.
Industry structure. The emergence of IP telephony threatens to shake up the existing structure of both the Internet and telephone equipment markets, in two ways. First, the emergence of IP telephony has provided a window for dozens of new players hoping to carve out a place in the new market. Frost & Sullivan analyst Andrew Pierog counted 39 VoIP equipment providers in 1998, up from 23 in 1997.[47] IP telephony gateway functions are now supported on everything from Windows NT and Sun Solaris servers to PBXs routers and remote access servers.[48] First among the new competitors is VocalTec, one of the first to develop IP telephony solutions, including the groundbreaking Internet Phone plug-in for Web browsers, and now a leader in the efforts to define IP telephony hardware standards (discussed below).[49]
Second, the convergence of IP and telephony gives major players in one space an entrée into the other. Although at first left behind by nimbler start-ups, established Internet and telecom vendors are now racing to capture a piece of this market. For example, Lucent, Nortel, Siemens, and Ericsson, the dominant telephone equipment vendors, have stepped into data markets, touting their experience and skill in making reliable and scalable voice systems. Likewise, Cisco and Sun, among other major providers of Internet routers and servers, have both aggressively entered telephone markets in the past year, using their expertise in data markets as their selling point. As Frost & Sullivan’s Pierog explains, "Lucent comes from a telco background, so they’ll approach IP telephony from a telco-solutions perspective, whereas Cisco will approach it from a data background. That’s why they’re putting gateway technology into their routers."[50]
Not satisfied, the major players on both sides have rapidly acquired skills in the opposing market through acquisition and alliance. The telephone companies have swallowed the most, with Nortel acquiring data network Bay Networks for $9.1 billion in stock last June, and Lucent acquiring Bay competitor Ascend Communications for $20 billion in stock soon after. Data equipment vendors have been busy acquiring carriers with special expertise in PSTN signaling and programmable switches. And Siemens and 3Com have entered into a $100 million to create telephony products to send voice and data calls over local corporate networks.
Recent Telecom-Data Acquisitions and Ventures |
||||
|
Acquirer |
Industry |
Acquired |
Specialty |
Date |
|
Siemens |
Telecom |
Argon Networks |
Routers |
Mar. 1999 |
|
Lucent |
Telecom |
Ascend |
Data communications |
Jan. 1999 |
|
3Com |
Data |
Siemens (JV) |
Telecom |
Dec. 1998 |
|
Cisco |
Data |
Selsius Systems |
IP-based PBXs |
Oct. 1998 |
|
Lucent |
Telecom |
Quadritek Systems |
IP network administration |
Oct. 1998 |
|
Ascend |
Data |
Stratus |
SS7/AIN platforms |
Aug. 1998 |
|
Lucent |
Telecom |
LanNet |
Next-generation Ethernet |
July 1998 |
|
Cisco |
Data |
Summa Four |
Programmable switches |
July 1998 |
|
Lucent |
Telecom |
MassMedia |
ATM interconnection gear |
July 1998 |
|
Nortel |
Telecom |
Bay Networks |
Data communications |
June 1998 |
|
Lucent |
Telecom |
Prominet |
Gigabit Ethernet |
Dec. 1997 |
|
Lucent |
Telecom |
Livingston |
Remote access routers |
Oct. 1997 |
Large incumbents and the IP telephony upstarts have also established several partnerships to better tackle the market. Lucent, known for its hardware, has partnered with VocalTec, primarily a software developer, to create advanced IP telephony products. VocalTec has also partnered with Motorola and Excel Switching Corp., for similar purposes. Other partnerships include Motorola/Inter-Tel and eFusion/Ameritech/US West.
Strategies. IP telephony essentially tries to splice the applications and services of today’s telephone market on the hardware and software of the Internet market. As such, equipment vendors from both industries have advantages in the race to supply ITSPs and corporate customers with VoIP equipment.
On one level, data vendors have a major advantage, since the IP telephony is just a special application of existing data services. As such, they must simply add on to their existing routers, bridges, and other equipment the capability to receive voice signals, convert them to data, and send them back to voice networks. By contrast, the voice vendors must develop whole new hardware/software packages to handle IP-based routing, error-checking, and other functions that are already standard parts of data vendors’ arsenals.[51]
Telecom vendors like Lucent and Nortel face a second disadvantage in the pricing and marketing of their equipment. Traditional, most of their revenues have come from sales of high-end, multi-million dollar switches to sophisticated telephone operators. Corporate and ITSPs sales are mainly for higher-volume, lower-priced items, with prices rapidly falling in accord with Moore’s Law. Some analysts feel that the large telecom vendors may be swept aside by this decentralized architecture by smaller, nimbler providers better suited to compete in a wide-open market, much like minicomputer vendors were displaced by PC and LAN providers.[52]
The smaller scale of these new providers, however, could hinder them in sales to large telephone companies and corporations. The typical VoIP gateway sold today serves 120 ports; a large Nortel or Lucent PBX sold to big corporate customers could serve many thousand ports, and a typical local telephone switch serving a major market could serve 100,000 ports. Hillary Mine, an analyst with Probe Research, notes that, "Vendors can’t make the equipment scale fast enough for these providers. The VoIP products shipping are lower-scale solutions."[53]
The major telecom vendors are clearly much further down the learning curve on this scalability issue, having provided large-scale equipment for decades. The data providers, however, appear to be having difficulty with this. One recent review noted that Cisco’s VoIP gateway/router "reflected the company’s data heritage and its relative inexperience with voice," and "lacks the scalability necessary for telco-type converged deployments."[54] By contrast, Lucent’s IP Gatekeeper, announced in January, can handle 2.6 million IP calls a day – more than four times the average number of IP calls daily nationwide.[55] Similarly, incumbent voice providers have a significant advantage in designing the tricky interactions between VoIP equipment and the PSTN signaling network.[56]
The telecom provider’s experience dealing with major telephone carriers also provides them a point of leverage. For example, they have experience complying with the certification processes within the local carriers, experience the IP telephony vendors generally do not have. These vendors, writes IP telephony analyst Jeff Pulver, "don’t realize that each Bell company in the U.S. has its own certification process. Just because you say you’re making a gateway doesn’t mean SBC or BellSouth will allow you to connect it to their network."[57]
The most important advantage for the telecom vendors, however, may lie with their installed base of billions of dollars of equipment lying in telephone company offices. These vendors – primarily Lucent and Nortel – have the telephone companies locked in to a steady stream of proprietary upgrades to the software that controls the equipment.[58] IP telephony threatens to break this lock in, by providing carriers and subscribers far more flexibility in providing services than the current system, as discussed above. Lower long-run network and hardware costs for IP equipment compounds the threat in the long run, and could provide carriers with the incentive and opportunity to migrate to IP on a large scale.
According to some estimates, however, the biggest cost factor in converting from circuit-switched to IP telephony lies in the telcos’ "wetware" – the costs of retraining hundreds of thousands of engineers and managers in the new approach to service provision and the hardware and software that runs those services. If the telecom vendors can maintain a consistent "look and feel" to the new equipment and software with their existing equipment, they will have a tremendous advantage over new providers, who must convince the carriers to incur enormous expenses learning a new way of running their networks.[59] Incumbent vendors can also design IP telephony products as upgrades to their existing equipment, giving carriers and businesses an opportunity to switch to IP telephony without abandoning millions or hundreds of millions of dollars of existing equipment.[60]
The incumbent vendors have also been pursuing different strategies in terms of technological leadership. Lucent and Cisco, for example, have put a premium on being out on the bleeding edge; Lucent has even acquired a reputation for pre-announcing "vaporware" to demonstrate its technical lead. Nortel, by contrast, has chosen a "me-too" strategy.[61]
Likewise, the vendors have different strategies when it comes to standards compliance. While the major standards, described below, appear to have widespread support, there appears to be ample room for vendors to game the standards process for their own benefit. For example, VocalTec and Lucent have released a specification describing how they feel the ITU-backed H.323 standard should be implemented and how the gaps in the standard should be filled in. Major competitors, including Cisco and Siemens, have agreed to the specification. This move is reminiscent of Microsoft’s "embrace and extend" strategy, and helps them in two ways. By publishing the standard and gaining additional support, the carriers will reap the benefits of the greater network of compatible VoIP gear. But because it is the spec they designed, these providers will some advantage (whether actual or perceived) in their ability to comply with it, and will have opportunities to extend the standard in the future, again to their advantage.
As with the equipment markets, the IP telephony service market is bringing into competition two previously disparate markets, Internet service and telephony, and in the process is creating a whole new breed of pure Internet telephony service providers (ITSP). We first discuss the issues facing the incumbent (circuit-switched) voice carriers, and then explore the status of the various new entrants. Even under the most ambitious projections IP telephony will be only a growing but still small part of the telephone services market.
Incumbents. IP telephony places traditional telephone companies – long distance and local alike – in a serious dilemma. On the one hand, as discussed above, IP telephony appears to be the long-term future of telecommunications, and they would be well advised to position themselves to profit in this shift. On the other hand, this shift threatens their profitability in the short run and their very existence in the long run.
The Big Three long distance carriers – AT&T, MCI WorldCom, and Sprint – face this problem most directly. With their advanced and extensive circuit-switched and IP networks, all three clearly have the technical capabilities to offer Internet telephone service. What they lack is the economic incentive: their IP telephony offerings not only directly competes against ("cannibalizes") their bread-and-butter circuit-switched voice services, but could also legitimize in their customer’s minds IP telephony generally, and greatly increase the competitive threat.[62] As former AT&T executive David Isenberg explains, "no one is moving too fast to kill their own cash cow."[63]
The Big Three do appear to have one factor in their favor: their current low rates for large business long distance service. As discussed earlier, the low price point minimizes IP telephony’s potential cost advantage in this lucrative market and magnifies IP’s quality flaws. The Big Three are hoping this will keep IP telephony out of their biggest customers until they have developed suitable competitive alternatives.[64]
That said, however, all three players appear to have resigned themselves to losing their high-margin businesses in the near future and are steadily rolling out new IP telephony products, banking on the theory that, as The Economist puts it, "it is better to cannibalize your own revenues than to watch others do it for you."[65]
Local carriers face a slightly different dilemma. The largest local carriers – the Regional Bell Operating Companies – are banned by law from entering domestic or international long distance markets for the near future at least, and so do not face the same cannibalism issue as the long distance carriers. However, as we discuss below, local carriers do lose a great deal of revenue from network access charges when long distance traffic moves from the PSTN to the Internet. At the same time, however, IP telephony should prove to be a faster, easier, and cheaper way for them to offer long distance voice services when they are freed from their legal shackles, so they do have some desire to see the market grow.
These conflicting desires have manifested themselves differently among the RBOCs. All of them have been embroiled in bitter legal disputes with ITSPs and competitive local carriers over lost revenues and higher costs due to Internet traffic. Bell Atlantic, however, has also announced it will install a gateway in New York to provide local connections for IP-based international calls terminating in the city, signaling a desire to move more quickly to embrace IP telephony.[75] Bell Atlantic and US West are also developing IP-based local services
New entrants. Numerous pure IP telephony carriers, including IDT, Qwest, I-Link, Level 3, Delta Three, and ITXC, have entered the market in the past few years, hoping to capitalize on the service’s promise. These have been joined recently by established Internet service providers such as PSINet and ICG NetCom. Both the pure ITSPs and the ISPs face some common issues.
First, they must overcome poor individual brand recognition and the widespread belief that IP telephony is a low-quality service in order to lure customers away from traditional carriers. To do this, many are exploiting their regulatory cost advantage (described in detail in the next section) to the utmost, offering low rates for most calls. Other carriers are signing aggressive partnership agreements with well-known brands to gain exposure and subscribers. For example, IDT’s Net2Phone PC-to-phone service has been available from Yahoo’s White Pages for almost a year, and it recently signed a deal with Netscape to out a Net2Phone button on the Navigator browser’s toolbar.[76]
Second, they must somehow directly address the service quality issue. Most of the major IP telephony players either have their own private IP networks or are affiliated with someone who does. These carriers include Qwest, Level 3, and IDT, which are constructing mammoth national and international fiber networks to support their telephony offerings; PSINet, which has reserved part of its large Internet backbone to use exclusively by its telephony service; and Delta Three, which uses the global backbone of its parent, RSL Communications.[77] These carriers feel their networks provide them an advantage, as they can better manage against packet loss and latency than can carriers trying to route through the public Internet. For example, Level 3 feels it has been able to engineer its private network "to truly match PSTN quality,"[78] and PSINet feels that with its network its "avoiding the congestion on the Internet, [so] you avoid all the latency and dropped packet issues."[79]
Third, emerging VoIP providers are disadvantaged compared with established PSTN in their business operations. The traditional carriers have account control, marketing, billing and other back-office systems already in place; ITSPs have to build such contacts and systems from scratch.[80] One solution may be for ITSPs to become wholesale providers of IP telephone service; that is, they could construct IP networks optimized for voice, provide gateways around the U.S. and the world, and sell space on their networks to incumbent carriers, who would in turn deal with all the customer-facing issues.
Fourth, they must prepare for the day when either their regulatory price advantage is removed and they must compete on a level playing field with the incumbents, or for when the major incumbent carriers aggressively enter the IP telephony market. Indeed, Karl Duffy, director of telecom services for Killen & Associates, feels that AT&T’s recent aggressive stance is "[o]ne of the most challenging aspects" of being an ITSP today.[81]
To respond to these challenges, ITSPs must develop and tout the benefits of IP telephony beyond the price advantage. As discussed above, these benefits – particularly rapid service introduction – are real, if a bit down the road still. One particular stumbling block to service development is the lack of standards for VoIP hardware and for VoIP interconnection with public telephone network. The new generation of telephone providers therefore have a real incentive to push through working standards on these issues as quickly as possible, so that they may begin to sell differentiated product offerings before the Big Three and the RBOCs can adequately respond. As we discuss below, some ITSPs, especially Level 3 and ITXC, are doing exactly this.
IP telephony is as much a product of regulation as of technology. As discussed above, the first driver for IP telephony adoption was tariff arbitrage: early ITSPs like IDT and VocalTec exploited loopholes in U.S. and international tariff structures to provide long-distance calls at local telephone rates. This arbitrage opportunity will likely not last forever as regulations adapt to these news services, but the timing and sequence of regulator’s reforms will continue to impact IP telephony’s development in the near future.
The U.S. telecommunications market is divided by law into interstate and intrastate jurisdictions. Intrastate costs and prices are regulated by state public utility commissions; interstate matters are handled by the FCC. Oversimplifying somewhat, the FCC allows the local telephone companies to charge long distance carriers for originating and terminating calls on their local networks. These "access charges" are designed to compensate the local carriers for the portion of their costs incurred for providing the long distance carriers access to their local networks.
Access charges are serious business, totaling $21 billion in 1998. Some is charged to the long distance carriers on a per-minute basis, averaging about 4 cents per minute.[82] The long distance operators typically pass these along to consumers in the form of higher per-minute charges. On a typical long-distance calling plan of 10 cents per minute, then, 40 percent goes to the local telephone company in the form of access charges.
Access charges apply in theory to all interstate telecommunications providers. Since 1983, however, the FCC has exempted "enhanced service providers" – carriers that exclusively provide services above and beyond pure voice telephone service, such as Internet service providers – from paying access charges. ESPs pay only flat-rate local service charges, the same as any other business.[83] ESPs are further exempted from payments into the FCC’s various universal service funds, which subsidize local telephone service to low-income subscribers, schools, libraries, and rural health care providers.[84]
This "ESP exemption" is the genesis for IP telephony’s cost advantage. ITSPs can thus charge subscribers based solely on the underlying cost of providing the service – estimated by Nortel’s Al Bender at less than a cent per minute[85] – and still easily undercut traditional long distance companies who must pass through access charges and universal service costs.
As IP telephony grows into a major factor in U.S. telecom markets, however, this arbitrage opportunity will quickly slip away. The calls for regulatory parity – that is, the imposition of access charges on ITSPs – have grown more strident over the years, as the ability of the advantaged ESPs to compete against incumbent carriers has grown. Indeed, the ESP exemption is a truly unique bit of regulation, in that it manages to injure both local carriers (who do not receive access charge payments from ITSPs) and long distance companies (who lose revenues due to their unfavorable regulatory cost structure). In March 1996, for example, a group of smaller long distance carriers, represented by the trade group America’s Carriers Telecommunication Association, petitioned the FCC to impose access charges on ITSPs. The Commission itself tentatively concluded in 1998 that phone-to-phone – but not computer-to-computer – IP telephony service was not an enhanced service and thus might not be covered by the ESP exemption to either access charges or universal service payments.[86]
The FCC does appear to recognize the inherently market-distorting effects of the ESP access-charge exemption, and has taken steps to reduce its impacts. First, the FCC has gradually reduced per-minute access charges since 1983 from over 17 cents per minute to under 4 today, and is expected to continue to reduce them, a result of the declining costs of providing this access (due to new and more efficient access technologies) and the rapid increase in long distance volume (spreading these lower costs over a larger base). Further, in 1997 the FCC shifted a large amount of these charges from per-minute fees to fixed monthly fees assessed per line on the long distance carriers. These charges, about $0.49 per month per residential line, are passed on by long distance carriers as monthly fees on their subscribers. This shift alone reduced per-minute charges by over 20 percent, from 5 cents per minute to 4 cents.[87] These reductions have already enabled long distance companies to cut their prices for high-volume corporate customers to the five-cent per-minute range, leaving IP telephony providers with little wiggle-room. As access charges continue to fall, this trend will extend to lower-volume customers as well.
Second, the FCC has indicated a preference for establishing parity by looking for ways to rationalize, if not outright limit, regulation on traditional long distance service – such as through access charge reform and reductions – rather than by imposing the old regime on new entrants.[88] These preferences, however, leave open the possibility of removing the access charge exemptions from ITSPs once the rate structures have been rationalized.
That said, however, the FCC, spurred by Congress, appears willing to resist calls for a level playing field. It has affirmed the ESP exemption three times (most recently in February 1999) since it was established.[89] To soothe industry fears, FCC Chairman William Kennard recently stated that "as long as I am chairman of the FCC, we will not regulate the Internet."[90] Not convinced, several members of Congress are reportedly working on a bill to bar the FCC from imposing per-minute charges on Internet service in perpetuity.[91]
The rate structure for international telecommunications is largely analogous to the U.S. access charge regime. For calls originating in the U.S., U.S. telecommunications carriers pay foreign telephone companies a negotiated "settlement rate" for terminating the call, and passes this settlement rate along to its customers. Because most foreign telecom markets were monopolies and because most countries are net terminators of traffic from the U.S. (that is, people in the U.S. call individual countries more than the other countries call the U.S.) terminating settlements were a major source of revenue and were thus exorbitantly high. In 1997, for example, the average rate charged to U.S. carriers was $0.35 per minute, down from $0.70 in 1990.[92]
Thus, international calling has long been the sweet spot for IP telephony. By using an ITSP, callers avoid not only originating U.S. access charges but also the much larger international termination charge. Bruce Kasrel, a telecommunications analyst with Forrester Research, says that U.S. Internet telephony users can save about 60 percent on international calls, versus a few pennies on domestic long distance.[93] FCC data corroborates these claims: the average rate for U.S. originated telephone traffic was $0.67 per minute, with settlements comprising $0.35 per minute, so eliminating the settlements charges alone saves over 50 percent.[94]
The FCC, which has long viewed foreign carriers’ termination fees as extortionary, sees IP telephony as a way to drive down these rates and help U.S. carriers. It thus appears especially unwilling to expose IP telephony to the international settlements system.[95] Naturally, foreign carriers are taking steps to protect their lucrative revenue streams; one observer fears a telecom "trade war" developing as different countries enact different barriers to trade and fees for terminating Internet and voice traffic.[96] Most analysts, however, see IP telephony losing its tariff advantage in the next few years, again through some combination of higher fees for IP telephony and lower fees for traditional international traffic.[97]
In any case, the impending extinction of ITSPs’ cost advantage on both domestic and international routes – whether by having their costs raised, their competitors costs lowered, or some combination – is a known event to the industry, and incumbents, new entrants, and customers alike are moving towards competition along other dimensions, as discussed earlier.
The biggest technical question hanging over IP telephony is the lack of standard communication protocol sets that will 1) allow carriers and businesses to mix and match equipment from multiple vendors, 2) enable IP telephony providers to fully leverage the PSTN, and 3) resolve service quality issues.
Without standardization and interoperability among IP telephony solutions, customers ITSPs and corporate customers may become locked-in to a particular vendor’s proprietary solution, and be unable to mix in equipment from other vendors without a significant loss in functionality. Standardization can eliminate customer lock-in, enable the innovation of new technologies, and maintain the competitiveness of the Internet telephony equipment market.[98]
The H.323 standard from the International Telecommunications Union (ITU), the primary global telephone standards body, is emerging as the de facto solution to this problem. H.323 was not designed specifically for IP or telephony; rather, it is a technology for multipoint-multimedia communications over packet-based networks, which include IP-based networks, such as the Internet, and can be the basis for services of any combination of audio, video, and data. VoIP, however, is the most mature service offering applicable to H.323, and is clearly the driver for its current popularity among equipment vendors and service providers alike.[99]
Version 2 of H.323, ratified by the ITU in February 1998, essentially defines the protocols by which IP telephony terminals (end-user phones and PCs), gateways (devices that interconnect IP networks and the PSTN), and gatekeepers (network management devices that control bandwidth, routing, call detail recording, and security). If fully implemented across vendors, an H.323-compliant terminal should be able to communicate with any H.323 compliant gateway, and vice versa; likewise, gateways and gatekeepers from different vendors will be able to interoperate and, importantly, access consistent feature sets.
H.323’s modularity makes it extremely flexible, particularly for joining an existing voice network to VoIP equipment. Businesses can replace only select components on their network. For example, they might provide users in a new facility with VoIP equipment at the desktop, yet retain the existing PBX network at corporate headquarters. Conversely, they could replace an outdated PBX cluster with IP-centric systems, while maintaining existing user-side equipment at the desktop.[100]
H.323 has been widely accepted by the industry, and vendors are working to produce H.323 compliant products. Currently, most products support only parts of the standard, often missing critical components. [101] The International Multimedia Teleconferencing Consortium, a group of 150 vendors, service providers, and user groups that was central to the development of the H.323 specification, is leading the interoperability testing effort (to ensure that products from different vendors actually work with each other), but "No one can say exactly" when products will be able to work together, says Ilan Cohen, VocalTec’s chief technology officer.[102]
Many vendors and service providers also feel that the H.323 is not complete and is not explicit enough in some areas. VocalTec, Lucent, and ITXC formed the iNOW (for Interoperability Now) consortium in 1998 to fill in the gaps of H.323 and produce practical specifications that other vendors can follow to ensure compatibility between VoIP gateways manufactured by different vendors. The iNOW specification has been endorsed by industry heavyweights Ascend, Cisco, and Siemens, and by a handful of other players."[103]
Other standards designed to improve vendor interoperability include Session Initiation Protocol (SIP), an H.323-like standard developed specifically for IP networks, under development by the Internet Engineering Task Force’s multimedia working group,[104] and the Simple Gateway Control Protocol, also designed specifically for IP telephony, and developed by Bellcore and now at the IETF. These standards are still in draft form, and, given the considerable momentum behind H.323, may soon be nearly irrelevant.[105]
One of the biggest questions surrounding IP telephony has been interworking and interoperability with the PSTN. While VoIP gateways can provide for the raw transmission of voice signals between the two networks, much of the value-added in the PSTN comes from the signaling network – the SS7 network – that rides on top of the PSTN. The SS7 network ultimately enables carriers to offer both standard features like Caller ID and exotic new AIN-based features. Some analysts feel that proper interworking between IP networks and SS7 is the key to allowing ITSPs to fully leverage the existing capabilities of the PSTN and speed the rapid adoption of their service.[106] For example, without SS7 interconnection ITSPs are forced to continue their cumbersome multi-state dialing practices (that is, customers have to first dial the gateway, then their account ID, then the number they want to reach).[107]
Pending before both the ITU and the IETF is the Internet Protocol Device Control (IPDC), designed to enable seamless interconnection between SS7 and IP networks. IPDC was developed by a consortium of 11 vendors, led by Level 3, a leading ITSP, known as the Technical Advisory Council, whose membership includes several key members of both standards bodies. Observers expect IPDC to be work its way through the ITU and IEFT in about 18 months.[108]
Then the hard work – building and deploying interoperable products – begins. If implementation of H.323 is any guide, viable IPDC-compliant products can be expected about six to 12 months after release of the standard.[109]
As discussed above, IP telephony service quality is highly sensitive to network congestion; the less bandwidth available, the lower the quality of the service. While simply adding bandwidth can temporarily resolve these issues, appropriate network-based mechanisms to guarantee necessary bandwidth to services like voice will help carriers minimize their bandwidth needs and keep their costs down.
To meet these needs, two new sets of protocols are working their way through the IETF. The first, called Differentiated Services or DiffServ, enables service providers to classify packets with various priorities (stylized as "platinum," "gold," "silver," and so on). Routers throughout a network would recognize the priority labels and give packets certain throughput privileges according to priority. Thus, IP telephony calls could be given a priority high enough to ensure their quality is not degraded. The other, multiprotocol label switching or MPLS, essentially imposes some circuit-switching sensibility into an IP network. MPLS, derived from Cisco’s Tag Switching protocol, allows carriers to group packets and "tag" them for expedited passage through the network.
Of the two, DiffServ seems to have a brighter future, since it is consistent with strategies being implemented by ISPs and ITSPs to version services based on quality and speed. As such, it has been placed on a faster ratification track at IETF than MPLS, which the service providers – worried about the performance hit by departing from standard IP routing practices – have serious concerns about. Prestandard versions of both protocols have been shipped by most major data vendors, who guarantee free software upgrades to the final standard, and are currently being tested by various ITSPs.[110] Nonetheless, it appears it will be some time before a truly standard and effective approach to guaranteeing IP telephony service quality will be deployed.
It is undeniable that IP telephony is the future of the telecommunication industry. One can argue that the critical time for those invested in traditional telephone service, the Titanics of their time, is upon them: those that are nimble and foresighted enough may be able to avoid and perhaps even benefit from the iceberg in their path. Those that are not are doomed to a slow, cold drift to the bottom of the Atlantic.Currently, however, the state of technology is not sufficiently mature to support mainstream adoption of IP telephony by consumers, businesses, or carriers. Low costs of IP telephony, however, bode well for widespread adoption of its architecture. We expect as the technology stabilizes and becomes more widespread, research and development investment will increase to subsequently improve quality of service as well as the telephony service infrastructures. This is currently the topic of substantial research. (the Iceberg.cs.berkeley.edu research project from Berkeley funded by industry, e.g., Ericsson, looking into this).
Development and implementation of standards will further improve service quality and feature availability and will reduce the risk of lock-in. The upshot of this will be increased equipment purchases by carriers and businesses.
At the same time, the interplay between government and industry cannot be ignored. IP telephony’s exemption from regulation has so far been a key driver of its growth. As regulatory bodies in the U.S. and abroad come to realize the effects on the industry as a whole, however, it seems likely that IP telephony’s regulatory advantage will be removed in the future.
The development of IP telephony will also have substantial impacts on the way that equipment vendors and service providers do business. Nearly all vendors are racing to embrace IP telephony, some by adopting standards, some by extending them, some by writing their own. Telecom and data equipment providers will need to carefully assess their strengths and weakness in the new marketplace in order to better leverage their capabilities.
Service providers face a similar disruption of their marketplace. New ITSPs are wholeheartedly pushing IP telephony service as a way to lower costs and improve services. Incumbent carriers are faced with an unenviable choice: to push IP telephony on their own and cannibalize their existing, very profitable businesses, or watch the upstarts do the cannibalizing in the future.
[1] In our analysis below, we use the terms "Internet telephony," "IP telephony," "voice over Internet Protocol," and "VoIP" interchangeably.
[2] FCC, Trends in Telephone Service, at Tables 11.2 (domestic), 7.1 (international) (Feb. 1999).
[4] Id. Tables 11.1 (domestic), 7.1 (international).
[7] P. Taylor, Big Shake-Up for Telecoms Suppliers, Financial Times, May 6, 1998, at 1.
[8] J. Luh, IP Telephony Gets Big Push From Lucent, Internet World, Jan. 18, 1999, http://ww.internetworld.com/ print/1999/01/18/ispworld/19990118-ip.html.
[9] Internet Telephony: Growing Up, The Economist, May 2, 1998, at 56.
[10] J. Luh, IP Telephony Gets Big Push From Lucent, Internet World, Jan. 18, 1999, http://ww.internetworld.com/ print/1999/01/18/ispworld/19990118-ip.html.
[11] L. Kokmen, ‘Net Long Distance a Bargain, Denver Post, July 13, 1998, at E1.
[12] G. Blackwell, Niche Applications Are First Footholds for IP Telephony, Internet World, Feb. 15, 1999, http://www.internetworld.com/print/1999/02/15/infrastructure/19990125-niche.html.
[13] L. Kokmen, ‘Net Long Distance a Bargain, Denver Post, July 13, 1998, at E1.
[14] P. Lewis, Internet Calling: These Savings Aren’t Phony, Seattle Times, Mar. 14, 1999, at C1 (Analysis); Internet Telephony: Growing Up, The Economist, May 2, 1998, at 56 (Piper Jaffray); D. Solomon, Internet Calls May Become Threat to Long-Distance Phone Companies, Buffalo News, Apr. 8, 1998, at 14A (IDC).
[15] D. Solomon, Internet Calls May Become Threat to Long-Distance Phone Companies, Buffalo News, Apr. 8, 1998, at 14A.
[16] Internet Telephony: Growing Up, The Economist, May 2, 1998, at 56.
[17] G. Donnelly, Phoning the Future, CFO, Feb. 1999, at 21.
[18] Internet Telephony: Growing Up, The Economist, May 2, 1998, at 56.
[19] P. Lewis, Internet Calling: These Savings Aren’t Phony, Seattle Times, Mar. 14, 1999, at C1.
[20] D. Solomon, Internet Calls May Become Threat to Long-Distance Phone Companies, Buffalo News, Apr. 8, 1998, at 14A.
[21] P. Blake, Impact: Carriers, Pay Attention!, Global Telephony, Nov. 1998.
[22] MultiMedia Telecommunications Association, 1998 MultiMedia Telecommunications Market Review and Forecast 3 (1998). This estimate includes network switches and carrier equipment, PBXs and related equipment, consumer telephone equipment (handsets, fax machines, etc.), and data communications and internetworking equipment.
[23] P. Taylor, Big Shake-Up for Telecoms Suppliers, Financial Times, May 6, 1998, at 1.
[24] At the local level, these dedicated facilities are physical: using the phone ties up the physical line connecting user’s phone and the network. At higher levels of the network, the dedication is virtual, with physical capabilities shared among multiple calls but each call still receiving a dedicated slice of bandwidth.
[25] R. Busby, How an Internet Phone System Works, Seattle Times, Mar. 14, 1999, at C1.
[26] A. Marlatt, IP Telephony Sees Price Wars, Internet World, Apr. 6, 1998, http://www.interworld.com/ print/19998/04/06/ispworld/19980406-wars.html (describing I-Link, IDT, and Qwest pricing structures).
[27] W. Wong, Telcos to Push IP Telephony in 1999, CNET News.com, Jan. 5, 1999, http://www.news.com/News/Item/0,4,30542,00.html.
[28] S. Borthick, VoIP Gateways: Assessing Options for the Enterprise, Business Communications Review, Oct. 1998, at S10.
[29] T. Friedrichs, Talk is Cheaper with Voice Over IP, Data Communications, Nov. 21, 1998.
[30] J. Hubaux, et al, The Impact of the Internet on Telecommunications Architectures, International Journal of Computer and Telecommunications Networking 257, 269 (1999).
[31] Selsius Systems, A Fundamental Shift in Telephony Networks, Mar. 1, 1998, http://www.selsius.com/literature/sales_literature/ip_pbx.pdf.
[32] Selsius Systems, A Fundamental Shift in Telephony Networks, Mar. 1, 1998, http://www.selsius.com/literature/sales_literature/ip_pbx.pdf.
[33] R. Fritzinger and C. Dupler, An Applications Approach to Network Convergence, Business Communications Review, Jan. 1999, at S7; Selsius Systems, A Fundamental Shift in Telephony Networks, Mar. 1, 1998, http://www.selsius.com/literature/sales_literature/ip_pbx.pdf.
[34] T. Kershaw, IP Telephony Market for Wholesale Carriers, Telecommunications, Feb. 1999, at 39.
[35] ACT Networks, IP Telephony White Paper, http://www.acticom/solutions/whitep_iptelep.htm.
[36] P. Taylor, Big Shake-Up for Telecom Suppliers, Financial Times, May 6, 1998, at 1; P. Blake, Impact: Carriers, Pay Attention!, Global Telephony, Nov. 1998 (quoting Robert Gourley, senior scientist at MCI WorldCom Inc.’s Enterprise Networking Laboratory).
[37] J. Hubeaux et al., The Impact of the Internet on Telecommunications Architectures, International Journal of Computer and Telecommunications Networking 257, 261-62 (1999). Indeed, in 1995 Bell Atlantic sued Lucent, its primary switch vendor, for attempting to delay and thwart the development of AIN. The parties settled their suit prior to trial.
[38] Elemedia, H.323 Network Evolution, http://www.elemedia.com.
[39] G. Donnelly, Phoning the Future, CFO, Feb. 1999, at 21.
[40] Internet Telephony: Growing Up, The Economist, May 2, 1998, at 56.
[41] E. Krapf, Global Networks and the U.S.-centric Internet, Business Communications Review, May 1998, at 16 (citing Jonathan Ogilvie, vice president at Lynx Technologies).
[42] "Five nines" refers to the telephone industry’s vaunted 99.999 percent reliability; this translate to only a few minutes of system downtime a year.
[43] B. Caulfield, Business Slow to Adopt IP Telephony as Quality Lags, Internet World, Nov. 2, 1998, http://www.internetworld.com/print.1999/11/02/infrastructure/19981102-business.html (citing Doug Hanson, president and CEO of Rocky Mountain Internet).
[44] T. Friedrichs, Talk is Cheaper with Voice Over IP, Data Communications, Nov. 21, 1998.
[45] E. Finegold, Telecom Needs a Bridge, But It Ain’t Brooklyn, Billing World, Nov. 18, 1998.
[46] J. Luh, IP Telephony Gets Big Push From Lucent, Internet World, Jan. 18, 1999, http://ww.internetworld.com/ print/1999/01/18/ispworld/19990118-ip.html. (citing Mark Winther, International Data Corp.).
[47] S. Schmelling and V. Vittore, Evolution or Revolution?, Telephony, Nov. 16, 1998 (citing Pierog).
[48] S. Borthick, VoIP Gateways: Assessing Options for the Enterprise, Business Communications Review, Oct. 1998, at S10.
[49] G. Noam, Equipment for IP Telephony, Financial Times, Mar. 18, 1999, at 6.
[50] S. Schmelling and V. Vittore, Evolution or Revolution?, Telephony, Nov. 16, 1998 (quoting Pierog).
[51] P. Chowdhry, A Gradual Convergence, PC Week, May 25, 1998, at 20, http://www.zdnet.com/ zdnn/content/pcwk/1521/318667.html.
[52] Don’t Talk About the Internet - Talk on It, Electronics Times, Oct. 26, 1998, at 42.
[53] K. Higgins, Voice Over IP: The Battle Heats Up, Network Computing, Mar. 8, 1999 (quoting Mine).
[54] P. Coffee, Convergence Won’t Come Easy for Cisco, PC Week, Feb. 22, 1999, at 18, http://www.zdnet.com/pcweek/stories/news/0,4153,391154,00.html.
[55] J. Luh, IP Telephony Gets Big Push From Lucent, Internet World, Jan. 18, 1999, http://ww.internetworld.com/ print/1999/01/18/ispworld/19990118-ip.html.
[56] V. Vittore, Nortel Unrolls IP Road Map, Telephony, July 6, 1998.
[57] P. Cassidy, Talk is Cheap Over IP, Information Week, Nov. 16, 1998, http://www.informationweek.com/ 0709/09iutlk.htm.
[58] C. Shapiro and H. Varian, Information Rules 105-06 (1998).
[59] Don’t Talk About the Internet - Talk on It, Electronics Times, Oct. 26, 1998, at 42.
[60] Nortel for example, has designed its IP telephony gateway cards to fit into its existing Nortel PBXs, specifically to give telecommuters the same features, such as voice mail and conferencing, that they use at the office. P. Cassidy, Talk Is Cheap Over IP, Information Week, Nov. 16, 1998, http://www.informationweek.com/ 0709/09iutlk.htm.
[61] V. Vittore, Nortel Unrolls IP Road Map, Telephony, July 6, 1998 (citing Probe Research’s Hillary Mine).
[62] K. Higgins, Voice Over IP: The Battle Heats Up, Network Computing, Mar. 8, 1999.
[63] P. Lewis, Internet Calling: These Savings Aren’t Phony, Seattle Times, Mar. 14, 1999, at C1 (quoting Isenberg).
[64] K. Higgins, Voice Over IP: The Battle Heats Up, Network Computing, Mar. 8, 1999.
[65] Internet Telephony: Growing Up, The Economist, May 2, 1998, at 56.
[66] M. Drummond, Internet Telephony: The Future, or an Experiment, San Diego Union-Tribune, Mar. 2, 1999, at 4.
[67] J. Rendleman, Long-Distance Trio Testing Voice Over IP, PC Week, Sept. 7, 1998, at 106, http://www.zdnet.com/pcweek/stories/news/0,4153,349105,00.html.
[68] S. Schmelling and V. Vittore, Evolution or Revolution?, Telephony, Nov. 16, 1998.
[69] J. Rendleman, Long-Distance Trio Testing Voice Over IP, PC Week, Sept. 7, 1998, at 106, http://www.zdnet.com/pcweek/stories/news/0,4153,349105,00.html.
[70] P. Huber, Local Exchange Competition Under the 1996 Telecom Act: Redlining the Residential Customer 61 (Nov. 4, 1997).
[71] P. Lewis, Internet Calling: These Savings Aren’t Phony, Seattle Times, Mar. 14, 1999, at C1; M. Drummond, Internet Telephony: The Future, or an Experiment, San Diego Union-Tribune, Mar. 2, 1999, at 4.
[72] K. Higgins, Voice Over IP: The Battle Heats Up, Network Computing, Mar. 8, 1999.
[73] P. Lewis, Internet Calling: These Savings Aren’t Phony, Seattle Times, Mar. 14, 1999, at C1.
[74] S. Schmelling and V. Vittore, Evolution or Revolution?, Telephony, Nov. 16, 1998.
[75] S. Schmelling and V. Vittore, Evolution or Revolution?, Telephony, Nov. 16, 1998. This is most probably a result of the fact that Bell Atlantic will likely receive authority to offer long distance services originating in New York sometime this year, and is positioning itself to take advantage of its regulatory freedom.
[76] A. Marlatt, IP Telephony Sees Price Wars, Internet World, Apr. 6, 1998, http://www.interworld.com/ print/19998/04/06/ispworld/19980406-wars.html; P. Lewis, Internet Calling: These Savings Aren’t Phony, Seattle Times, Mar. 14, 1999, at C1.
[77] S. Schmelling and V. Vittore, Evolution or Revolution?, Telephony, Nov. 16, 1998.
[78] K. Higgins, Voice Over IP: The Battle Heats Up, Network Computing, Mar. 8, 1999 (quoting Ike Elliott, Level 3 senior director of voice access and engineering).
[79] S. Schmelling and V. Vittore, Evolution or Revolution?, Telephony, Nov. 16, 1998 (quoting Tim Suh, PSINet engineering consultant).
[80] E. Krapf, VoIP That Even a Telco Can Love?, Business Communications Review, June 1998, at 16, http://www.bcr.com/bcrmag/06/98p16.htm.
[81] S. Schmelling and V. Vittore, Evolution or Revolution?, Telephony, Nov. 16, 1998 (quoting Duffy).
[82] FCC, Trends in Telephone Service, at Table 1.2 (Feb. 1999).
[83] Memorandum Opinion and Order, MTS and WATS Market Structure, 97 FCC2d 682, 711-22 (1983). For a discussion of the effects of these policies, see H. Brands and E. Leo, The Law and Regulation of Telecommunications Carriers 233-46 (1998).
[84] H. Brands and E. Leo, The Law and Regulation of Telecommunications Carriers 211 (1998).
[85] D. Kopf, VoIP: What, Me Worry?, America’s Network, July 15, 1998, at 20 (citing Bender), http://www.americasnetwork.com/issues/98issues/980715/980715_voip.html.
[86] Report to Congress at ¶¶ 14, 91, Federal-State Joint Board on Universal Service, CC Dkt. No. 96-45 (F.C.C. Apr. 10, 1998).
[87] FCC, Trends in Telephone Service, at Tables 1.1, 1.2 (Feb. 1999).
[88] First Report and Order, Access Charge Reform, 12 FCC Rcd 15982 (1997).
[89] Declaratory Ruling at ¶ 20, Implementation of the Local Competition Provisions in the Telecommunications Act of 1996, CC Dkt. 96-98 (F.C.C. Feb. 25, 1999).
[90] Remarks By William E. Kennard, Chairman, FCC, A Stable Market, A Dynamic Internet, before Legg Mason, Mar. 11, 1999.
[91] Congress Leaders Ask Kennard’s Help in Protecting Internet, Comm. Daily, Mar. 19, 1999.
[92] H. Brands and E. Leo, The Law and Regulation of Telecommunications Carriers 587 (1998).
[93] W. Wong, Telcos to Push IP Telephony in 1999, CNET News.com, Jan. 5, 1999, http://www.news.com/News/Item/0,4,30542,00.html.
[94] FCC, Trends in Telephone Service, at Tables 7.1, 7.2 (Feb. 1999).
[95] Report to Congress at ¶ 93, Federal-State Joint Board on Universal Service, CC Dkt. No. 96-45 (F.C.C. Apr. 10, 1998).
[96] S. Bahr, Settling Scores, America’s Network, Sept. 1, 1998, at 8, http://www.americasnetwork.com/ issues/98isues/980901/980901_wash.html. Much of this is not unique to IP telephony, but rather to the continued U.S.-centric nature of Internet, which tends to favor American Internet carriers at the expense of foreign ones. But IP telephony is an exacerbating factor here.
[97] P. Blake, Impact: Carriers, Pay Attention!, Global Telephony, Nov. 1998 (quoting Richard Sewell, senior manager of Arthur Andersen’s Global Communications & Entertainment Group: "There is still a window of opportunity for arbitrage with international IP telephony, but it is dwindling at a rapid rate.").
[98] D. McCormack, IP Telephony Standard is a Gateway to the Mainstream, Network News, Jan. 6, 1999, at 3.
[99] R. Gupta, Voice-Over-IP Banking on H.323, Electronic Engineering Times, Oct. 19, 1998.
[100] E. Hall, H.323 and Alternatives, Network Computing, Oct. 1, 1998.
[101] D. Willis, Voice Over IP, The Way It Should Be, Network Computing, Jan. 11, 1999, at 96.
[102] A. Cray, Voice Over IP: Here’s How, Data Communications, Apr. 1998, at 44.
[103] J. Bort, Vendors Draft VoIP Guidelines, VARBusiness, Jan. 4, 1999.
[104] The IETF is a large open international community of network designers, operators, vendors, and researchers concerned with the evolution of the Internet architecture and the smooth operation of the Internet. The actual technical work of the IETF is done in its working groups, which are organized by topic into several areas (e.g., routing, transport, security, etc.).
[105] E. Hall, H.323 and Alternatives, Network Computing, Oct. 1, 1998.
[106] D. Kopf, VoIP: What, Me Worry?, America’s Network, July 15, 1998, at 20, http://www.americasnetwork.com/issues/98issues/980715/980715_voip.html.
[107] E. Finegold, Telecom Needs a Bridge, but It Ain’t in Brooklyn, Billing World, Nov. 1998.
[108] E. Finegold, Telecom Needs a Bridge, but It Ain’t in Brooklyn, Billing World, Nov. 1998.
[109] H.323 was ratified in February 1998. While products claiming compliance began to hit the market in October 1998, those early products were not adequate to meet most carrier or business needs. E. Hall, VoIP in the Enterprise, Network Computing, Oct. 1, 1998.
[110] P. Lambert and D. Bushaus, Upgrading to First Class, Tele.com, July 1, 1998, http://www.teledotcom.com/0798/features/tdc0798cover1.html.
