As we move further into the 21st century, it is apparent that IP networks are the next-gen networks for all forms of communication. It’s difficult to find a fixed-line carrier not modernizing their network with VoIP or planning to do so, as there are many strong drivers impelling service providers to deploy next-gen voice equipment, particularly capex and opex savings, and, more importantly, the ability to offer new and previously unavailable services. Lingering doubts and inhibitors--such as product maturity and interoperability, and unproven business models--are steadily diminishing, leading to increased investment.

As I mentioned in an April 2004 article in Telephony, VoIP, for many years, was just over the horizon and never quite here, but 2004 looked to be a breakthrough year, especially for North America, and it certainly turned out that way. In a carrier study published last year, we noted that carriers were beginning to treat next gen voice as a serious strategic element in their long-range plans, and there was a big boost in market momentum. Indeed, carrier VoIP equipment sales grew more than 30% worldwide in 2004, and showing that it was not just hype last year, the North American market grew more than 50%.

Many of the drivers cited in that 2004 article still drive the market today. One of the notable drivers, beyond equipment and standards maturity, broadband penetration, and competition--and the subsequent challenges of growing revenue, customer loss, and profitability--is capital expenditures. The change in the capex environment from years past is quite dramatic. Last year saw a return to growth in service provider capital expenditures. For public carriers headquartered in North America, Europe and Asia, capital spending grew 9% in 2004 to $161.0 billion, and expectations are for 8% growth in 2005. This is a positive capital spending environment for the fast-growing next-gen voice equipment market, which will make up larger portions of overall capex over the next 5 years.

This is our fourth year producing the Service Provider Plans for Next Gen Voice study, and each year we see more extensive activity and increasing numbers of service providers willing and qualified to participate in the survey. It’s no longer just specialist providers or VoIP pioneers, but all types in all regions of the world adopting the technology and using it to build new service offerings. This year we interviewed technology executives from 44 carriers in North America, Europe, and Asia.

Some highlights from the 2005 study include:

• Top drivers cited by respondents: new applications and services, capital expenditures, and openness of VoIP and a majority of respondents are using next-gen voice equipment for new voice and IP multimedia services now
• IMS is getting attention, with 30% of respondents planning to use that reference architecture in 2006
• Complete migration from legacy to next-gen networks will take some time for access networks and local and tandem switching, as most respondents say it will take them at least five years or currently have no definite timeframe for that switchover
• VoIP is seeing further penetration at respondents, as an average of half of respondents’ COs will have next gen voice gear deployed in 2006

Carriers in North America and Asia continue down this modernization path, while Western Europe is awakening, and we expect that 2005 will be much like 2004 was for North America: a year when many major carriers start getting behind VoIP and begin the long investment cycle and service rollout. Eastern Europe has more greenfield opportunities than does Western Europe, and as those markets are liberalized and adhere to market principles, there are factors spurring them to deploy VoIP. Not only do carriers in the region have less legacy equipment investment to protect than their Western European counterparts, they are also benefiting from Western European incumbent investment, giving them the capital and expertise to leap-frog to an all-IP network.

An especially illuminating example of this transition is BT’s 21st Century Network (21CN) project. The plan calls for converting to all-IP infrastructure for voice and data services to yield opex savings, improve service offerings and increase network efficiency by reducing the number of networks. BT is targeting a fiver-year transition and 10 billion pounds in investment over that time, and their goal is to begin large-scale migration in 2006 and to move more than half of voice customers to the new VoIP network by 2008 (we see BT's timeframe as too ambitious, especially as equipment interop remains to be done and commercial deployments won't begin likely until late 2005 or early 2006; we expect 8+ years are needed for this migration). As many European operators are looking to learn from BT’s experience, this is a major deal that will affect router, optical, access, and VoIP markets in Europe for years to come.

The IP multimedia subsystem (IMS) architecture is the latest hype in next-gen networking--everyone is talking about it, but it lacks the substance that softswitch VoIP has at present. It uses existing standards such as SIP and IP, but the 3GPP (3rd Generation Partnership Project) has renamed or created new logical distinctions to the softswitch-centric architecture, such as breaking softswitch functions into multiple CSCFs (call session control functions) and a MGCF (media gateway control function) while incorporating elements found solely in the mobile world, such as HLRs (home location registers). IMS has different appeals depending on the type of carrier. Mobile operators are looking to IMS for the overall service and control layer and specifically today, for non-duplex voice-related services, such as multimedia and push-to-talk services. VoIP to the mobile handset, using the high bandwidth data channel in 3G RANs, is not likely to become prevalent until at least 2008. For fixed-line carriers, IMS is seen as part of their overall next-gen networking effort and seem interested in migrating to this new architecture, although many have invested in platforms that may not easily fit into it, meaning new investments will be necessary. Their interest is first on voice and not multimedia.

The carrier VoIP equipment market is becoming quite substantial, although it is still in an early part of the adoption curve, as not all carriers have begun deployments and many major ones are still involved in small-scale deployments or pilots. There are some barriers and challenges that remain, such as regulatory uncertainty, capital requirements, back-office and billing integration, and voice quality. These are issues that are still being addressed and without adequate solutions, they could disrupt the market and negatively impact adoption. However, at present, they are not slowing deployments. In our May 2005 Service Provider Next Gen Voice Equipment worldwide quarterly market share and forecast report, we found the worldwide equipment market grew 37% in 2004 to $1.73 billion. This is just a start to an extensive migration to next gen voice and we expect the market to reach $5.8 billion in 2008.

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