Voice-over-IP, or next-gen voice, has never suffered from lack of hype. It's a technology that has tantalized us from a distance: visible on the horizon, always a goal, but never a reality. It seemed to suffer from the perpetual one-year out effect, with carriers projecting significant steps toward VoIP 12 to 18 months in the future, but never fully acting on that plan. In fact, last year, the theme of our carrier research on next-gen voice was "The vision remains, service providers proceeding with caution."

As I said last year in our press release for the 2003 version of our carrier next-gen voice study, "Few service provider executives deny the future of packet-based voice. There are many strong drivers impelling service providers to deploy next-gen voice equipment, particularly the ability to offer new and previously unavailable services. Still, there are lingering doubts and barriers, like product maturity and interoperability, and the fact that business models for these new services are not yet formed." Service providers envisioned a future with VoIP everywhere, but it rarely materialized.

This year, it's a whole new story.

During the past six months, equipment vendors have announced many VoIP customer wins--and more importantly, these wins are tied to major service rollouts from top tier carriers including AT&T, Bell Canada, BT, France Telecom, MCI, Qwest, SBC, Telus and Verizon. In addition, early VoIP adopters such as Global Crossing, Level 3 and Net2Phone have recently introduced new services. Some of these moves are baby steps, but they show that VoIP is a serious strategic element in carriers' long-range plans and, overall, create market momentum. This will help make the second half of this year and 2005 solid investment periods as carriers ramp up subscribers and service revenue.

The drivers for adopting VoIP have always been there--typically cited in our research by service provider respondents as capex and opex reduction and the allure of new services and revenue--but why is now the time for acting on them? The top reasons I see are:

• Next-gen voice technology has matured and is ready for primetime deployment: most standards are in place; product interoperability, while still a chore, is achievable; and the reliability and necessary service elements are in place
• Broadband penetration has reached meaningful levels and service bundling is a hit with cable and DSL providers--public North American service providers had 11.4 million DSL subscribers and 16. 7 million cable Internet subscribers as of 4Q 03
• For the first time, competition among big players is intense as local providers, long-distance carriers and cable companies eye each others' businesses and customers; even start-up specialists are putting incumbents on notice
• Carriers desperately need new revenue and to lower their total cost of network ownership, especially as competition intensifies and margins slip
• Capital expenditure budgets are not being slashed further and are finally stabilizing
• If carriers don't act now, there is a very real and painful potential of being left out of the equation as businesses of all sizes move to VoIP: Cisco has been educating the corporate market for the past two plus years on the virtues, benefits, and paybacks of VoIP so they are ready to embrace what doesn't look like some new technology

The above list applies to North American providers, as many in Asia have been happily blazing the path of new IP multimedia services for the last two to three years. Europe is behind the North American pace, but is slowly awakening.

The change in the capex environment cannot be understated. In 2002, capital expenditures were tied to getting new customers and small network rollouts. In 2003, the capex focus was finding the leveling point and aligning capital intensity (capex-to-revenue ratio) with historical and sustainable norms. Going forward, capex is fairly flat with slight cuts or marginal increases. For instance, in our recent Quarterly Service Provider Capex Analysis report, we noted that North American capex totaled $48.2 billion in 2003, 22% less than in 2002, but 2004 is projected to decline only 2%. For further cost savings, service providers will focus on reducing operational expenditures, and while capex is fairly flat, investments are shifting from old gen to next-gen technologies.

Despite the recent rush to VoIP, questions remain and most cannot be answered properly until there is a broad base of carrier experience with next gen voice services. Issues that can seriously hamper rollouts and potentially give a black eye to VoIP include:

• How will carriers operationalize the new systems and services?
• Is there a killer app? Does the market need one?
• What are the successful VoIP business models?
• Will the regulatory environment support or hinder VoIP overall? Will regulators create an unfair playing field?
• Will VoIP's benefits exceed its threats for incumbent operators?
• Are IP networks reliable and resilient enough for the tidal wave of latency-sensitive IP communications?

Despite these important issues, the VoIP vision is becoming reality. Over the past few quarters, we've witnessed carriers taking the first steps toward circuit-to-packet migration, which will no doubt be a very long process--at least 10 to 15 years for countries with high teledensity and significant legacy voice investments. However, the technology maturation combined with intensified competition and the strong desire for new services adds up to significant momentum for VoIP. The next generation of voice is indeed becoming this generation.

Kevin Mitchell is the directing analyst with Infonetics Research and can be reached at kevin@infonetics.com.