Suddenly — well, not so suddenly given the delays in realizing the promise of the next-generation networks — the market finds itself trying to figure out what to do with voice, the service on which the industry was built.

We ask ourselves, is there any value in it? Is it a commodity soon to be offered free or close to it? What is the best delivery method for the new voice — the packetized kind? How should we position it? How much should we invest in retaining our five-nines reliability because if consumers don't care about quality, why should we? Or do they care?

You would have thought we would be tussling with deeper questions, but first things first. To answer these questions, Telephony talked with service providers almost as old as electronic voice itself: Verizon Business, a combination of Verizon's local services and MCI's global voice-over-IP (VoIP) and managed services businesses; and Sprint, the carrier that made the connection so clear you could hear … well, you know the rest.

We also talked to some high-profile vendors, such as Siemens and Cisco Systems, and a couple of start-ups that believe — and have been able to convince their investors to believe — that they have the right answers: Signate, a provider of open-source solutions for service providers (small ones at the moment) looking to offer hosted voice applications, and Stoke, a semi-stealth provider of infrastructure solutions (unnamed at the moment) for fixed/mobile convergence. Research firm Ovum also kicked in with some thoughts on the market opportunity for managed services, driven largely by voice.

It appears we can first dispel the rumor that voice is going to be free. Nobody believes that. It may get close, particularly in the consumer space. But in the business world, voice still has a very dominant role today and into the future, said Lorena McAllister, director of VoIP marketing for Verizon Business.

“There is a high demand and expectation that even within a converged environment, the quality of voice will remain intact,” McAllister said. “Enterprise customers expect the likes of Verizon and our peers in the marketplace to deliver an enterprise-grade, high-quality product, which I expect [they] expect won't be free.”

She said there is an understanding in the enterprise world that voice quality is expected and that it will come at a price. “Albeit a lower price probably from what is available today in the legacy environment, but there will be a price associated with the quality and security of that transaction,” McAllister said.

That price should be enough to keep voice service profitable for now. It helps, McAllister said, that the infrastructure currently used to deliver it has been more than depreciated, helping to cushion margins even in the face of low prices.

“However, that profit margin will continue to erode as that legacy voice service continues to compete on price against next-generation voice services and applications,” she said.

Keith Higgins, vice president of marketing for Stoke, agrees that voice won't be free. Free voice is a misnomer, he said. He also agreed, as most everyone does, that the revenue stream from standard voice will continue to shift downward.

“There is still a big pull through for bundling services and applications around voice,” Higgins said, using push-to-talk as an example of an application driving revenue for voice in the wireless space. He also pointed to presence-based applications and database applications such as ENUM as ways to add value to voice.

Another way to add value to voice is through managed services, which leads us to one answer to the question on how voice ultimately will be delivered in an IP network.

Legacy voice services have accounted for almost 70% of Verizon's revenue stream. McAllister said that mix will shift more toward data, managed services and application revenue going forward.

“The share of voice revenue will shrink but will be very much offset by applications, data services, outsourcing and managed services,” McAllister said.

Leaving data services aside for the moment, carriers appear to see a larger shift toward managed and hosted voice services than previously expected. Many of the early adopters of VoIP technology have found it to be more problematic than anticipated and are coming back to service providers looking for help.

“As companies start stepping through VoIP implementations, we see them running into brick walls,” said John Montross, vice president of managed network operations for Sprint. “So a lot of them are coming back to us as an outsourced partner to relieve the level of complexity.”

McAllister admits that service providers have not been very aggressive in promoting hosted or managed VoIP services. Most implementations have been by aggressive vendors of premises-based IP PBXs.

“Going forward, my full expectation on behalf of Verizon Business is that we will be much more vocal and aggressive in giving our customers an alternative solution,” she said.

McAllister agreed, the door to this opportunity was opened in part by the frustrations of VoIP early adopters. “We have seen a number of customers who trialed an IP PBX throw up their hands and come back to us for help,” she said. “It was much more complex than they anticipated, and the early versions of IP PBXs were not all they were cracked up to be.”

Signate has seen the same complexity. “VoIP is close to rocket science,” said William Boehlke, CEO of Signate. “My technical guys have called it the most challenging thing in their careers because it requires an understanding of such disparate technologies.”

That complexity is responsible in part for Ovum forecasting a $41.5 billion global market for managed services by 2009. Managed voice services alone will see a 65% compound annual growth rate over the next three years, according to Ovum's recent report, commissioned by Cisco.

Recently, Insight Research said the U.S. managed services market will grow at a compounded rate of 22% over the next five years due to growth in all segments of the managed services value chain. The firm put the market at $94 billion by 2011.

Boehlke said the market for enterprise VoIP will be split. Small and medium-sized enterprises will opt for hosted voice service, while larger enterprises, concerned about the integration of IP telephony with their own business applications, will go with a managed service.

Cisco smells the blood in the water in the managed services market and sees it as a way for service providers to overcome their revenue woes. Cisco recently launched a quality-of-service certification program to help carriers support Cisco VoIP products from a managed services perspective.

“Service providers need to find new revenue sources, and we see managed services as a way to help them in that area,” said Kirt Jorgenson, director of service provider marketing for Cisco.

Hosted and managed services answer the question about delivery methods, but it says nothing about what systems will deliver them. Signate is a new player with new ideas about which systems would best serve the market. In fact, Signate is so new that Boehlke calls it the world's smallest telephone equipment vendor.

Signate is proposing open-source systems based on high-end, off-the-shelf hardware, open-source software and applications and its own Signate Software Stack released just last month.

Signate came out of the blocks in July 2004 by publishing a comprehensive guide to Asterisk open-source PBX software called “VoIP Telephony with Asterisk,” written by Paul Mahler, the company's chief technology officer. Asterisk is an open-source software code that runs on the Linux operating systems and enables engineers to build open-source PBXs.

Signate launched its Telephony Server 5000 in April 2005. Six weeks ago, it launched SigPRO, a hosted telephony system for service providers with 5000 to 500,000 customer extensions. Both platforms were built with open-source software on top of industry-standard hardware.

Jon Hall, president of Linux International, said in a recent Financial Times article that “demand for IP telephony based on open-source software will generate more business over the next few years than the entire Linux marketplace.”

Service providers could take or leave open source per se, but they do care about cost, and that's why they might take a chance on a small company like Signate: “We are able to take about 75% of the cost out of the application,” Boehlke said.

Most of that cost is removed by avoiding the engineering and manufacturing costs of most vendors. Boehlke compares the competitive landscape for IP telephony solutions to that of the mini-computer. “When UNIX came along and started attacking the mini-computer manufacturers, none of them survived because of the cost of writing off building and engineering their own boxes,” he said.

It remains to be seen how much of this market will go to new open-source solutions providers. But relatively speaking, everyone is new in the IP telephony market, even longtime suppliers like Siemens. Harald Braun, president of Siemens' Networks division, thinks open-source players have great ideas and that they should get together with the larger players and “really make some business.”

However, Braun isn't sure the market is ready for pure-play open-source solutions. “We don't see a big push from them at the moment. After the Internet bubble burst, people are very cautious about these kinds of companies. But I like how they do things and how they go to market,” he said.

Braun does agree, however, that hosted VoIP services will be big. “We have a hosted voice product, and a couple of carriers tell us it is their flagship product for the future,” he said.

Like other network equipment manufacturers with a history, Siemens wasn't always focused on IP. But now, Braun said, “The game is changing like crazy.”

In 2002, Siemens generated 85% of its revenue from its TDM products and 15% from routing, but not necessarily IP-based products. Today, that 85% comes from IP-based next-generation solutions.

He credits the cable industry with driving the VoIP market and says because of it, the U.S. market is two years ahead of every other market in the world in terms of VoIP deployments. “But the carriers are still doing baby steps,” Braun said.

He also credits VoIP with driving investment in telecom and said it has people thinking once again about switch replacement. Carriers are starting to look at being all-IP by 2010 or 2012, Braun said, and have found themselves building and supporting separate networks, and they realize they can't go on that way.

“The cost to maintain both networks is tremendous. Nobody can afford it,” Braun said.

So while the question about voice itself being profitable remains, voice is still a driving force in the industry. New market entrants such as Vonage, Skype, Google, eBay and others are also driving the market but in different ways, which go to the questions of positioning and service quality.

Although Vonage and Skype rely for now on voice as a lead offering, it's just an enhancement to the rest for their search engine or commerce activities. “Their minds are totally somewhere other than voice,” Braun said. “But it's something they have to have, and it's a cool application to put on their Web portals.”

Internet players will position voice as an enhancement to their primary services while carriers will position new applications around their primary service, which is voice. As a stand-alone application, voice may very well be a commodity, said Verizon's McAllister, but when you add in applications such as Find Me-Follow Me, Call Blocking, Call Forwarding or presence-based applications, there is value to be had.

“Voice takes on a new shape and new meaning and is not commoditized in its new definition,” McAllister said.

Voice also can assume more value when it enables capabilities users are clamoring for: more mobility. Mountain View, Calif.-based start-up Stoke has trials under way with its new IP service gateway for converged fixed and mobile networks that accomplishes that — or will, if the trials go well. The gateway, also known as a session continuity platform (the company has yet to name the baby), will enable seamless, carrier-controlled service hand-over between fixed, cellular and Wi-Fi/WiMAX networks.

Unlike some systems coming to market, Stoke looks beyond voice to support the hand-over of all services and applications in a fixed/mobile environment by providing session management for multimedia services moving between networks.

“When you start thinking about mobile TV or other multimedia sessions doing seamless hand-overs between networks, doing that with scale requires a much different mousetrap than what is available today,” Higgins said.

It takes a secure tunnel that goes from the service edge to the subscriber. And in that tunnel, Stoke applies granular admission control, policies and bandwidth management that deals with traffic flows based on the class of user.

Although Stoke is looking beyond voice, voice service will likely be the proving ground for this seamless hand-over capability. And once proven, Stoke will find itself in the middle of the net neutrality argument, which could have a direct impact on the quality of voice applications as carriers and content providers wage war over such things as routing prioritization, tiered quality levels and equal access.

Stoke is trying to stay neutral on net neutrality. The company's position is that because there will be contention between a lot of different service providers and content providers, a system is needed that fairly allocates the limited resources over the last mile. The company's objective is to provide a solution that best manages those resources.

“That gives you the vehicle to enforce whatever gets worked out between the infrastructure providers and the content owners,” Higgins said.

Perhaps that will help the new market entrants consider the value of carrier-grade voice.