IP Telephony Profits Under Fire

April 15, 2020

Forecasts:
IDC (International Data Corp), based in Framingham, MA, says that broadband demand is increasing at 1000% per year (broadband carries video, voice, data, fax).
Yankee Group, based in Boston, believes that “the (fiber-optic backbone for the) carrier business is an extremely viable, lucrative business. The scarcity of fiber in the backbone is making this business very attractive,” according to Sanjay Mewada, a telecommunications analyst.

Although fiber-optic cables currently carry less than 1% of total voice traffic, in four years market researchers believe that fiber could carry 13% of total voice traffic.
Fiber-optic growth “really challenges the fundamental foundation of the industry. By the beginning of the year 2000, value-added services on top of voice-over-IP will be the new battleground, with multimedia and universal messaging functions coming into play as priorities to customers,” said Mark Winther, International Data Corp.’s group vice-president for worldwide telecom.

“Today {data} is about a twelfth of the size of the voice market, in five years it will be half the size of the voice market,” said Matthew Kovar, senior analyst at the Yankee Group.

Estimated to be worth almost $30 billion in revenues by 2000, broadband data transmission, including video, voice, text, and Internet, is the fastest growing portion of the telecommunications market.

But is Level 3 worth 1/3 the value of Sprint, or 1/10 the value at AT&T? Around Thanksgiving Level 3 was selling at $20, cash value. Four months later it’s around $75 (4/1/98).

Yes, younger companies have high sales multiples because they are blazing new ground. Bigger companies, however, are very much aware of the looming opportunities.

Competition

Level 3(LVLT)
Plans to lease, construct and own both long distance fiber-optic backbones and metropolitan fiber systems, to provide end-to-end fiber-optic, converged IP packet services to businesses.

Recently leased an 8500 mile network from Frontier to resell capacity while building its own fiber-optic network.

Also provides web/Internet-related consulting to businesses and generates about $100 million per year from consulting.
$3 billion in cash. Management team considered very strong.

Metromedia Fiber (MFNX)

Development stage company. Constructs and owns fiber networks in metropolitan areas. 26 employees when it filed for IPO in August 1997. IPOed October 29, 1997.
Qwest/Lci (QWST & LCI – companies are merging)

After the merger, the fourth largest long distance company in the U.S., after AT&T, Worldcom/MCI and Sprint. Also building a nationwide fiber-optic system for IP packet switching.

Ahead of Level 3 in long distance fiber-optic construction and implementation. Increases business and retail revenue through acquisitions. Qwest IPOed June 24, 1997.

Sprint (FON)

“We’ve been migrating toward packet technology and asynchronous transfer mode [ATM] switching for some time now.

“We’ve been building a long-distance backbone network that is both more survivable and more robust than the others. For instance, our entire network as of early next year will all be Sonets: synchronous optical network,” the company says.

Worldcom/MCI (WCOM & MCIC – merging)

“WorldCom’s recent series of acquisitions combined with its expanding network of fiber across the U.S. and Europe make it one of the largest providers of network infrastructure in the world,”said John Sidgmore, WorldCom’s chief operating officer.

“They (Qwest, Level 3) haven’t created the formula for cold fusion. They can’t buy equipment we can’t buy,” says Brian A. Brewer, senior vice-president at MCI Communications Corp.

AT&T (T)

AT&T plans to offer a version of IP voice through its WorldNet Internet-access business this spring. By year end, the company expects to complete a new network of 55 fiber-optic rings throughout the country. While the rings carry mostly traditional voice traffic now, they will be able to carry data packets with the installation of new electronics and photonics. Advances in technology will exponential and the capacity of those rings should grow fivefold by next year, the company says.

Baby Bells

The Baby Bells think the technology could jump-start their push into the long-distance business and several, including U S West Communications Group and SBC Communications Inc., are asking the Federal Communications Commission for the right to build converged networks.

News: April 1, 1998: Bell Atlantic Plans $1.5 Billion Upgrade.

In one of its largest phone system upgrades ever, Bell Atlantic plans to pay $1.5 billion for high-capacity fiber-optic switching equipment and software to sell business users more data and Internet services.

GTE (GTE)

GTE thinks it’s inevitable that all the traffic eventually will flow over a converged network. ”We’re not upgrading–we’re putting in brand-new technology from the get-go,” says George H. Conrades, executive vice-president at GTE.
GTE is reportedly the largest customer for “dark fiber” provided by Qwest (see definitions below).

Background/Glossary

PHYSICAL LAYER
Copper Wire: old, slow (unless enhanced with xDSL), provides the famous “last mile” from the local telco Central Office to your computer/telephone.
Fiber-Optic Cable: newer, much faster, supports voice, data, fax, video (converged broadband) applications. Used for long distance backbones, “rings” around metropolitan areas and cable TV/Internet to the home.

“Dark” versus “Lit” Fiber
Dark Fiber: is installed but not equipped with transceivers at either end and can’t carry traffic. It’s often deployed for future use or expansion.
Lit Fiber: has transceivers at either end, carries traffic and often refers to a building that has a fiber optic connection for tenant use.
Because fiber optics utilize light as the transmission vehicle, the terms “dark” and “lit” are appropriate.

CIRCUIT SWITCHING versus PACKET SWITCHING

Circuit Switching: old, supports voice. Like reserving for the entire trip… a freeway lane from San Francisco to Los Angeles. High quality voice and doesn’t require compression.

Packet Switching: Each packet is a like a car on the freeway. Each car zips along with a piece of data or voice or fax or video. Pieces are reassembled at the destination. It’s a more efficient, less costly system than old-fashioned circuit switching.

INTERNET PROTOCOL (IP) SWITCHING
Packet switching (Internet Protocol, IP) over fiber-optic cable: can provide broadband end-to-end service at perhaps 3% the cost of old fashioned circuit switching.
IP Telephony: voice over the public Internet and over private broadband networks that use Internet Protocols.

CONVERGED NETWORK
A “converged” IP packet switched network can carry voice, video, data, fax traffic, is considered a data network and is not subject to the 4 cents per minute local access fee.
In other words, voice over converged (data) networks enjoys an automatic 4 cents per minute cost advantage over circuit-switched long distance calls.

Tiered Pricing:
Because of the access fee differential, there is “rate arbitrage” in the current market between circuit-switched voice and IP telephony (voice over the Internet).
Old-fashioned circuit switching:
10-15 cents plus per minute
Voice over IP (Internet Protocol packet switched data networks):
5-8 cents per minute
Voice over the Internet:
5 cents and less