IP telephony

1 Overview

Point Topic defines IP telephony as a service that emulates the voice service provided by the ordinary telephone network as fully as possible over internet protocol (IP) connections. This means that voice traffic is carried over IP networks (including the public internet on occasion) rather than the circuit switched public switched telephone network (PSTN). Thus there is no dedicated one-to-one connection between the two callers. Instead, each voice call is split into small packets of data that are transported using IP and reassembled at their destination.

The main selling point of IP telephony has traditionally been that it can be cheaper than conventional telephone services, especially for peak time or long distance calls, when provided as part of a bundle that also includes high-speed internet. Long distance or international calls from IP telephony customers to conventional phones can be charged at approximately local rates. Competition will reduce the cost advantage for calls in the longer term, but IP telephony services will still be able to offer other benefits, such as multiple telephone lines at little or no extra cost. Softclient VoIP provides quick, easy-to-use best-efforts video calling and conferencing..

IP telephony is one of a whole range of services that use VoIP technology in some form. Basic voice over internet technology has been available since the late 1990s. ‘Internet voice’ software supports voice calls between internet users, usually by pre-arrangement and with only the best-efforts quality of service (QoS) offered by the public internet. On the other hand, corporate VoIP offers a high-quality service for business customers, using IP to optimise the use of broadband connections and virtual private networks (VPNs).

From early 2003, there were small-scale deployments of IP telephony in North America, including initial deployments by cable companies. By the end of 2003, major telcos and cable operators had begun to deploy IP telephony products. IP telephony became more widely available during 2004 as cable companies began to enter the market. Japan was the early leader in IP telephony rollouts. BT was the first major European telco to announce an IP service. More and more incumbents and ISPs are entering the VoIP market for defensive reasons (my competitors are doing it) and/or to be able to offer a triple-play of video, broadband internet and voice. This increasing competition is pushing down margins and making the long-term future for VoIP-only players look uncertain unless they are able to target niche markets like small enterprise.

2006 was the year when VoIP really began to gain traction in many consumer markets, and since then it has continued to grow strongly. This growth is likely to accelerate on a worldwide basis now that the potentially huge Chinese and Indian markets are starting to embrace the technology. Worldwide growth was 85% between 2004 and 2005 and hit 114% between 2005 and 2006. Since then strong growth has continued. In 2008, the US edged ahead of Japan to become the world’s largest market, thanks mainly to multi-play services provided by the cable companies. By the end of Q3 2009, IP telephony subscribers had edged over the 100 million mark, with another 520 million registered users of Skype.

The growth is expected to continue to come from both cable companies and ISPs providing ADSL services, with the majority of VoIP subscriptions being part of bundled packages. Point Topic research in the second quarter of 2008 showed that bundled DSL services were being offered at lower prices than a simple broadband connection. The average price of a double play package with VoIP in Western Europe was $47.83, down almost 30% from $68.16 in the previous quarter. This compares to $56.45 for a standalone tariff. A similar pattern emerged in other parts of the world, with bundles in both South and East Asia being 43% cheaper than standalone. The most extreme examples of discount bundling are to be found in Eastern Europe, where the average triple play service (including Cable TV/IPTV) fell from $65.63 in Q1 08 to $57.03 in Q2. This makes it even cheaper than an average double-play package with fixed telephony.

Key issues

Different markets. The success of VoIP depends significantly on the state of the local telephony market. VoIP is strong in markets with high conventional telephony costs, such as Japan. In the US, the price differential is smaller and VoIP is sold in unlimited bundles, reflecting a trend in incumbent pricing.

Service reliability and quality. People expect their telephone service to be very reliable. VoIP companies need to work harder to assure customers of reliability. However, although end-to-end QoS over IP is not yet possible, the standard has improved to nearly that of PSTN.

Numbering and regulation. VoIP is one of the most disruptive technologies ever for the telecoms industry - perhaps even more than mobile. It changes the delivery of voice, which is a foundation telecoms service. The introduction of VoIP therefore has many implications for all aspects of telecoms. But regulators have only just started to deal with some issues, such as numbering. Regulators need to encourage the VoIP industry without endangering basic service provision. The example of France (with almost 40% of fixed lines delivered over VoIP by Q3 2009) shows that VoIP can become established rapidly where market and regulatory conditions allow.

Interoperability. Many VoIP operators have established themselves quickly but there is not much interconnection between them. So the cost benefits of all-IP calls are lost. Operators need to negotiate more VoIP peering and interconnection agreements.

Mobility. VoIP is beginning to impact mobile markets. Services such as H3G’s Skypephone, launched in the UK in November 2007, or BT’s Office Anywhere use VoIP in different ways to provide a mobile telephony service. In July 2008, Vonage launched its Vonage Pro service in the US, enabling subscribers to use their home phone numbers anywhere. However, mobile operators are dragging their heels on VoIP implementation.

New profile content

This profile has been updated. Section 2.4 has been extensively updated on leading markets and providers. Section 3.1 has market-sizing estimates taken from Point Topic’s consumer broadband services overview, plus a full operator-by-operator breakdown of VoIP subscribers as of Q3 2009. Section 3.2 has updated pricing information for 2009 Section 3.4 has current regulatory developments for VoIP. Section 5.2 has more on the challenges of VoIP over fibre. There are two new sections, 5.5 on Mobile VoIP and section 5.6 on Wholesale VoIP. The operator list in section 6 has been updated.