Last week's general services contract between CopperCom and Iowa Telecom was an important development for CopperCom, but in a bigger market picture, it could be an ice-breaker for the pure-play, next-generation switch providers in their hunt to win business from independent telcos.

CopperCom announced a multi-year, multi-switch deployment at Iowa Telecom, the state's largest independent operating company (IOC). CopperCom says it was the first sale by a next-generation switch provider to a Tier 1 independent operator.

A Tier 1 operator in the IOC space is a carrier with more than 250,000 lines. There aren't many of them; however, the 10 that exist account for 12 million lines, compared with the 7 million served by Tier 2 and Tier 3 operators combined. The Tier 1 IOCs also have 2300 switches compared with the 2400 required by 643 Tier 3 IOCs (see chart).

Of the 9500 switches deployed in the IOC space, 75% of them are deployed in a host/remote configuration. Any new switch getting deployed in this market must have solid host/remote capabilities. Any new switch also must work with any old switch.

In a recent market report, Kevin Mitchell, directing analyst at Infonetics Research, said concerns about the latter are dissipating. “Lingering doubts and inhibitors — such as product maturity and interoperability, and unproven business models — are steadily diminishing, leading to increased investment,” he said.

There are still issues, he said, that could disrupt the market and negatively impact adoption. Regulatory uncertainty, capital requirements, back-office and billing integration and voice quality are still serious issues that need adequate solutions.

So far, these issues are not slowing deployment of next-generation voice equipment as the worldwide equipment market grew 37% in 2004 to $1.73 billion. “This is just the start to an extensive migration to next-gen voice, and we expect the market to reach $5.8 billion in 2008,” Mitchell said in his report.

Another next-gen switch provider, Tekelec, says, however, Tier 1 IOCs and RBOCs are not quite ready to pull the trigger.

Despite a solid second quarter that saw 19 new customers for its switching division and a $37.4 million rise in revenue, Tekelec CEO Fred Lax said, “Tier 1 [IOCs] and the RBOCs have simply not begun to adopt this technology and upgrade their networks. Nonetheless, ultimately we believe [that] is where a significant amount of opportunity for switch replacement will come from.”

Lax bases much of his optimism on its pipeline of potential customers in this space, and he backed up that optimism by purchasing the outstanding minority shares in Santera Systems for $75.6 million in cash.

Sonus Networks, although not necessarily focused on the IOC space, displayed its optimism in the next-generation switch market with the recent introduction of a scaled-down version of its flagship softswitch product, which could address this market.

The earnings reports and statements last week by Tekelec and Sonus, the projections by Infonetics, the continuing success of MetaSwitch and Lucent Technologies' Telica product and the step up in class by CopperCom, are positive signs for the second half of 2005 and beyond for next-generation switching.

“The kind of confidence that Iowa Telecom has placed in CopperCom as for the kind of network they are deploying is a huge thing for us,” said Bob Kersey, vice president of product management at CopperCom.

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