Some time in the not-too-distant future, you are sitting at home playing your favorite game on your X-box when an intruder breaks in. It is a particularly inconvenient moment because you are really close to breaking your previous high score. So you dial 911 on your X-Box and continue with the game, while the police arrive and do the needful.

You might even find it amusing that there used to be a time when such an idea would have seemed fantastic.

But such a scenario will soon become quite real. And this is thanks to Voice over Internet Protocol—or VoIP—a technology that is already redefining the way people communicate.

Today a U.S. soldier stationed in Seoul can set up service with unlimited in-bound calls that are local to the caller from home. An Indian student at the University of South Carolina can also avail of the same facility. Or consider the traveling executive who can just carry his IP phone with him wherever he goes and plug it into the broadband connection that more and more hotels now provide. Not only can his family call him on the local number, he can also use the out-bound service to make calls from his hotel room.

Penetration of broadband connections in the U.S. residential market—now approaching 20 percent and likely to hit 30 percent in 2004—is undoubtedly on an upswing. This rapid increase is indicative of the opportunity in the VoIP space. New Millennium Research Council, a telecom think tank in Washington, D.C, predicts that VoIP could account for as much as 40 percent of the consumer telephone market by 2009.

The demand is not coming from consumers alone. When Chicago-based Nemertes Research recently surveyed 42 companies—70 percent of which had revenues of more than $1 billion—it found that nearly two-thirds are using IP telephony, and an additional 20 percent are running trials of the technology. Jon Arnold of Frost & Sullivan predicts that in the next five years 15 percent of the enterprises in the U.S will be on VoIP infrastructure.

Many Fortune 500 companies have already begun to deploy this promise-filled infrastructure. The $30 billion Dow Chemical Company got the VoIP initiative rolling as early as 2002. Today, the company’s 50,000 employees across 450 Dow sites in 35 countries are hooked on to Cisco’s integrated IP voice-and-data network. In fact, this is one of the largest installations so far in the industry today; serious evidence that VOIP might finally be ready for prime time.

In the main, there are two drivers behind the deployment of VoIP in enterprises. The first is reduced costs, which, needless to say aids growth. Dow’s transition from legacy circuit-switched PBX system to IP network has saved the company on its communication costs. Nasdaq estimates that it has cut $40 million off its $100 million annual network cost by using VoIP to consolidate its 15 networks into one.

The other is the ability to converge both voice and data onto a single network, which offers untold opportunity to boost productivity. A handful of enterprise users have started taking advantage of VoIP-enabled applications to streamline day-to-day functioning, enhance customer service, and otherwise improve their businesses. In fact, Dow Chemicals has now integrated video on to its VoIP infrastructure, thereby enabling videoconferencing—a facility that is seeing extensive use as a bridge to talk to employees in different offices.

“Videoconferencing has increased seven times since the same time last year when it was done over ISDN,” reveals Bill Copple, DowNET program director at Dow in Midland, MI. This additional feature has gone a long way to knock off all dollars off travel bills.

India embraces VoIP
While the U.S. market has seen growth in enterprise VoIP deployments, most of the growth is coming from the Asian market, particularly China and India.

“The real story behind the VoIP growth in India is the widespread adoption by IT services and IT enabled services companies for whom communicating across multiple locations is a key factor,” says Alok Shende of Frost & Sullivan.

Look at vCustomer for example. Today, the Delhi-based ‘contact center’ has almost 3000 VoIP enabled workstations. The company handles over 3 million calls a month on the end-to-end IP telephony network, where calls travel from the U.S and U.K over dedicated circuits to call center agents in India. “The lower capital and subsequent maintenance costs more than offsets the marginally higher costs of the private leased circuits,” says Sanjay Kumar, CEO of vCustomer.

For a communication-centric business like the one that Kumar is in, quality of voice is a critical factor. Kumar, for one, appears more than satisfied with the voice quality that his Cisco IP phones offer. And his visiting clients—who are requested to call home—can hardly disagree, because “they find that there is no difference in voice quality.”

Another instance of enterprises adopting VoIP is Hyderabad-based Dr Reddy’s Laboratories, an emerging global pharmaceutical company. Dr Reddy’s uses a hybrid system—a combination of traditional telephone and VoIP—for communication. “Some companies, including giants like Merrill Lynch, use multiple networks for voice and data from a security standpoint,” says the company’s CIO Sachdeva Ramakrishna. However, he has plans to converge everything on VoIP. “The savings get substantial as communication time goes up; our estimate of payback time is between 10-12 months for the whole project,” he explains.

And it’s not just the private companies who have taken to VoIP in a big way. There is a greater degree of adoption by public sector companies as well. State Bank of India and Life Insurance Corporation of India are saving on intra-office long distance communications by leveraging on VoIP.

The challenge for Ashok Kini, Deputy Managing Director- IT, SBI was to find scalable solutions that could meet the requirements of the 9000 branches spread across the country. Though Avaya stood out in the Indian market, Kini found that there was little difference between Avaya and Cisco’s IP products. He decided not to shell out extra money for an incremental gain and went with Cisco. Today around 6000 branches of SBI across the country are using IP phones to communicate and deliver MIS. Though Kini doesn’t like to mention figures, he believes that SBI is saving on significant telecommunication costs by implementing Cisco’s IP network.

But VoIP is yet to grab the fancy of the Indian consumer. As yet there is no widespread adoption of broadband among Indian consumers. Once that happens, demand for VoIP products and services will boom. Till then, it is the players who will have to wait.

The Vendors
For years, Cisco has been the driving force in the market VOIP phones that run over corporate data networks rather than the phone company’s lines. However, Cisco is not alone in this space. The long-established enterprise voice players—Nortel Networks, Avaya and Siemens—which have made it through their darkest days and are now responding to the VoIP threat with hybrid systems that incorporate both traditional phone and IP elements. That’s something Cisco also offers, but only reluctantly. Cisco’s reluctance has helped Nortel and Avaya gain big chunk of market share. According to Synergy Research Group, Nortel Networks ranks No.1 in the global markets for voice over IP.

“When it comes to large customers looking for IP telephony, my strongest competition doesn’t come from the new guys like Cisco,” says Malcolm Collins, president of Nortel's Enterprise Networks group, “We’re seeing major corporations coming back to the suppliers they believe really understand the voice market.”
Avaya has a different strategy to compete with Cisco. “We take a holistic view of the enterprise,” says Ravi Sethi, President of Avaya Labs [see panel]. “Enterprises are reluctant to throw away legacy systems. They are taking a hard look at cost structure and leveraging assets. Hence we have smoothened our customers’ migration from existing PBXs onto IP telephony. We have evolved our product line to interface with existing systems as well. For example, one can plug in both digital and IP phones into Avaya’s gateways. Any enterprise with multiple branches can decide to upgrade their existing network at different stages.”
Avaya’s strategy has worked. Today 90 percent of Fortune 500 companies use Avaya’s products.

Even small and medium businesses use Avaya’s products, which are built using the session initiation protocol technology, or SIP, thereby integrating voice, instant messaging and video.

While enterprises may be reluctant to throw away legacy systems, this is more true in the consumer space. Nick Burd, director of Broadband Access Products at Conexant, echoes Sethi’s evolutionary approach to VoIP. Conexant builds chips that go into devices bringing broadband into homes. “Initially consumers will continue to use their existing handsets. An adapter connected to their handsets can provide VoIP service. As the technology matures and new products are built, consumers will embrace VoIP products. Right now it is an evolutionary pace than a revolutionary phase.”

The Startups
As VoIP gains momentum, the big product players are wary of the small players in the market. It not just one big player boxing the other—they have to compete with a new breed of companies offering innovative solutions. Many startups see VOIP as a significant opportunity to cash in on.

Cisco—which all but created the fast-growing enterprise VoIP market single-handedly—is beginning to feel some heat as unhappy customers vote with their feet. Last year, Transcom, one of the largest wholesale VoIP carriers in the U.S, ripped out a large number of Cisco media gateways and replaced them with gear from Veraz Networks, claiming strength against the giant.

Sid Nag, CEO of Prominence Networks begs to differ, though. “It is quite silly to take on larger players like Cisco or Avaya, which is much better off building a router or PBX. That market will be harder to crack. A lot of companies that were around during 2000, and which went on to build ‘everything for everybody,’ are no longer around. You will be in a much better position if you build a technology that actually enhances the story of the larger players. This could be done by adding features to their products and helping them sell more.”

Today’s best-effort IP networks were not designed for real-time, delay-sensitive voice and video traffic. The result is often high latency, packet loss, jitter and network congestion that makes for garbled voice and freeze-frame video. Nag’s company has develope an innovative product offers quality of service for better movement of traffic over IP infrastructure.

Nag’s conviction that startups should work closer with the large players to make the overall story more compelling seems to be working quite well for him. He sells his solutions through partnerships. To instill confidence in enterprises users and eliminate costs incurred on having to maintain backup systems, Prominence offers an insurance policy. Such strategies, Nag believes, are helping him rope more customers.

Independent VoIP providers such as Vonage and packet8 are also beginning to steal consumers from traditional phone operators, with flat-rate VoIP plans that cost between $20 and $40 a month for local and long distance calls. Vonage has already attracted 85,000 customers. “They are an example of what the carrier of the future will look like,” says Arnold of Frost & Sullivan. “Innovators such as Vonage are making IP user-friendly, and we expect to see more examples of this going forward. We feel companies like these are vital for VoIP, as they understand that the real issues driving this market have more to do with identifying the right value proposition than perfecting the technology.”

Investments
Analysts predict that the big players will make life more difficult, but not impossible, for start-ups. Some could survive in their own right. And others may get acquired.

Startups in the VoIP space will need to differentiate themselves. “If a company’s strategy is totally price-based, whatever the technology, their days are numbered,” says Lisa Pierce, research fellow at Forrester Research. “It’s just not a good long-term strategy.”

The approach that the startup takes to build its technology is important. “One can build a technology on an expensive platform with custom chips and all kinds of fancy hardware. But that will push up costs. If costs are higher, the margins are low,” says Nag.

“If it’s a software-only VoIP company, it usually requires less front-end investment than more hardware centric company,” says Naser Partovi, managing director of La Jolla-based Enterprise Partners who is an active investor in VoIP startups. “Since the capital required in a software-based approach is much less it is reflected in pricing of the product. Through such approach one can sustain existence for longer time,” adds Nag.

As the number of startups in the VoIP space has increased, investors have become cautious. Earlier investors were looking at what kind of product you will be building. Now the pendulum has swung to the other extreme. Investors are putting companies through a rigorous due diligence. They do not want to burn their money.
However tough the going has got, the appetite for investments is still there. But is there really room for new startups? “Absolutely,” says Partovi, “There are still huge opportunities in this space. We are just beginning transition from circuit switched world to VoIP.”

Instant Winners
For telecoms and cable companies, VoIP opens up the possibility of introducing new services, which of course means additional revenues.
Cable operators, in particular, are well positioned to benefit from VoIP technologies, having recently spent billions of dollars to upgrade their networks to handle two-way digital traffic. However, it is the ‘Baby Bells’(Verizon , BellSouth, SBC and Qwest), which until now have enjoyed captive consumers, that are likely to be hit hardest.

Particularly in the case of the residential market, the initial edge goes to the cable companies, which have been eager to bundle telephone services with their digital cable and Internet packages. As of now, they’re leading the charge to provide VoIP to consumers, though very few have rolled out true VoIP services.
“In the cable space it is the question of having the right sort of culture. Cable companies providing non-interactive broadcast and data services are not used to receiving calls from customers trying to sort out their problems. Voice is a very services-oriented market and it basically means getting the culture right. Having said that, cable companies are eager to offer VoIP because they are being pushed into this by providers such as Vonage, who ‘eat into’ the bandwidth of cable operators without paying them any share of the voice revenue that [the providers] get. So cable companies are saying: if someone eats your lunch, it might as well be you!” remarks Jahangir Raina of iLocus, a leading research company that specializes in the IP telephony market.

Last December, Time Warner, the second-largest cable provider in the U.S. with 11 million subscribers in 27 markets, struck deals with long-distance stalwarts Sprint and MCI to provide Internet-based phone service to its subscribers.

Comcast and Cox Communications, the other two big pure play cable firms have been doing a very good job of beating the Bells at the high-speed Internet access game. “Companies like Comcast and Cox, by virtue of their lead in the broadband access race, are well positioned to benefit from VoIP,” says Greg Gorbatenko, an analyst with Marquis Investment Research, an independent firm focusing on telecom and cable.
Should other cable companies decide to follow this model, the battlefield could soon be realigned with big cable companies and long-distance outfits—including, perhaps, AT&T—fighting against Baby Bells. In fact, AT&T too has announced its intent to offer Internet-based phone services. The rationale was simple enough: Voice-over-Internet-protocol will free AT&T from paying the Baby Bells for switching and access. AT&T’s new push towards VoIP is good news to DSL service providers like Covad, MCI and Z-Tel.

Added to this, the February 12th ruling of the FCC over VoIP should make the Baby Bells slightly nervous. A voice call delivered digitally over the public Internet is the same as an e-mail, as far as the regulators are concerned.

All this means an even tougher road ahead for upstart telecoms offering broadband and Internet telephony services to small businesses and home users. It signals the death knell for the Baby Bells’ longstanding hammerlock on the local-phone business—the segment that provides the vast majority of revenues and profits today.

Bells are facing erosion in their core business of local phone service, while the cable giants are continuing to gleefully add customers. While it’s certain that the Bells should be able to offset some customer losses with their own VoIP services, the long-term growth prospects for the phone companies are still not that compelling.

So is VoIP threatening the Bells? “No,” says Jeff Kagan, an independent telecommunications analyst. “It’s challenging the old models, not threatening the companies.” Regional Bells and satellite operators are forging partnerships, which allow the telecoms to offer video service, cable operators are aggressively launching enhanced services such as video on demand (VOD), high-definition television (HDTV), and digital video recording.
Verizon has a deal with DirecTV to resell its satellite service. BellSouth has a similar agreement with DirecTV while SBC has a partnership with rival satellite TV service EchoStar. And Qwest has deals with both DirecTV and EchoStar. To add to all these partnerships, the Bells have cut prices on their digital subscriber line (DSL) offerings.

Will this win back market share for them? Analysts believe that these efforts have been largely unsuccessful. Of course, the Bells are hoping that video will be the final piece in the so-called “bundling” puzzle. If they can offer video in addition to DSL, local, long distance and wireless phone services, then customers might ditch cable in favor of the, well, one-stop shopping experience.

Service Providers/ Carriers
An exciting sector to watch out for within the VoIP space is the service provider space. Carriers are already beginning to wake up to this reality and have recently talked about deploying new IP telephony services. ITXC still leads closely followed by Global Crossing, iBasis, and Primus Telecommunications and that is in the long distance voice market.
Beyond straightforward IP voice services there is a growing interest through the industry in the eventual migration to carrier-hosted IP Centrex services, which are basically “PBX-less” business phone services in which all the functionality resides on a Class 5 switch on the carrier’s network. “Several players are offering IP Centrex and related enhanced services,” says Raina. By offering such services over IP, telcos can potentially reduce the cost to end users; because voice and data share the same circuit, dedicated voice circuits aren’t required as often.

Take for instance McLean, VA-based Primus, which has deployed next generation VoIP telecommunications technology in over 125 countries. According to the TeleGeography 2004 report, Primus now carries more than four percent of an estimated 24 billion total VoIP minutes worldwide. “VoIP is changing the playing field for service providers globally and Primus’s existing global presence uniquely positions us to capitalize on this dynamic change in the market,” says John Melick, co-president of Primus.

With four Baby Bells, three long-distance providers, and many independents, the battle for business customers alone is going to be interesting, to say the least, and because most of them will have similar offerings, price will become a crucial bait to hook customers.

Carriers look India-wards
As carriers in India rapidly increase service throughout the country, besides pioneering broadband access and multimedia services, carriers in the U.S have started to look that way. Most of the big carriers realize that India presents a real opportunity and they want to capitalize on this growing market.

“VoIP carriers like ITXC are actively exploring business in India. ITXC is well ahead and enjoys better brand awareness in India than any other VoIP carrier,” said Jahangir Raina. The Nasdaq-listed VocalTec Communications Ltd has been marketing its VoIP solutions in India since 1995.

According to industry resource Telegeography, international phone traffic to India from the U.S. grew by more than 19 percent in just one year, from 2001 to 2002. At the same time, VoIP traffic from the U.S. to India grew by a startling 190 per cent. Recent iLocus findings reveal that 220 million minutes of international long distance (ILD) traffic in 2002 were on VoIP. This is forecast to reach 7.1 billion VoIP minutes or 61 percent of the ILD traffic by the year 2007.

IT Service Companies Cash In
It is not U.S carriers alone looking to gain from India. Major vendor equipment players like Cisco, Avaya and Nortel are not only busy convincing Indian enterprises to deploy their solution, but they are also leveraging on IT Service companies to develop newer products; thereby reducing the risk, cost and time-to-profits.

There are quite a few Indian software services companies that are cashing in on this emerging opportunity. Companies like New Delhi-based Hughes Software Systems develop protocol stacks for equipment vendors and application developers. They also develop network infrastructure frameworks like H.323 Gatekeeper, SIP Server and Cable Softswitch. “In some cases wehave supplied infrastructure frameworks that have cut down the time-to-market by 9 months. Customers focus on building differentiating services on top and thus they get to the market quickly,” says Ajay Gupta, Assistant Vice President of Hughes Software Systems. He adds, “The number of VoIP contracts have increased and we have seen at least 40 percent growth in these numbers this year. We have many broadband VoIP based Voice delivery orders in Europe for delivering into this space through our equipment vendor partners.”

Time To Hang Up Yet?
The scenario looks interesting, and changing at a breathtaking rate. Earlier, actual VoIP deployments had been primarily focused on evaluating feasibility. 2004 seems to be the when VoIP deployments are happening in real earnest. Most analyst projections expect VoIP to set off on a steep climb this year. Despite all this excitement, the future of the industry is still uncertain. Trying to pick the winner of the VoIP wars is like betting on the SuperBowl of 2010. There is a good chance you might pick the winner, but one thing is certain: the players will have a long, hard fight ahead of them. There is also plenty of time for the evolution.

After all, we got along quite fine with the telephone for well over a 100 years.