Convergence tops telecoms agenda

30 Nov 2005

The much-anticipated convergence of networks within the European business community is already well under way and the process will continue for the foreseeable future, a leading telecoms expert believes.

Tony Marson, a senior analyst with respected technology industry research house Yankee Group, was in Dublin recently to address a meeting of the Irish Internet Neutral Exchange (INEX), an internet protocol (IP) traffic exchange hub. He says convergence is happening mainly on two fronts: voice and data traffic migrating on to a single IP-based network and convergence of fixed and mobile networks.
In terms of what’s driving convergence on the voice and data side, Marson stresses that convergence is not a given but depends on whether a business is looking to IP enable existing facilities or a greenfield site. “A lot of the large initial convergence projects were on greenfield sites but the business case for those is different to existing facilities and smaller sites. For these you need a different approach and one of the things that seems to be taking hold is hosted IP telephony where a telecoms company provides you with a VoIP [voice over IP] service.”

Despite the hype surrounding it, VoIP is still at the early-adopter stage, says Marson, who believes it will need to progress through a number of stages before it can become commonplace within business. The first of these is that businesses will need to become comfortable with the idea of outsourcing applications to a third party.

Convergence of fixed and mobile networks is a different matter and is happening at a faster pace. “You’ll see more convergence in terms of fixed and mobile. The big cost for everyone is the roaming costs of mobile, which can be anything between 30pc and 70pc of the monthly cost for a business customer. Fixed and mobile convergence promises to substantially reduce that. However, although there’s a considerable amount of money to be saved the major savings are ‘soft’ savings — people working more efficiently and so on,” he says.

Telcos around Europe have responded to the growing demand for converged fixed and mobile services by putting together service bundles for their customers. Marson cites the example of BT launching its fixed and mobile product BT Fusion on the back of a mobile virtual network operator deal it signed with Vodafone. Here in the Irish market, it is likely that Eircom will offer a converged product
to its customers once its acquisition of Meteor has got final regulatory approval.

These bundles are intended to help businesses reduce their total telecoms spend across fixed and mobile platforms. But some businesses are already achieving similar savings by routing mobile traffic over corporate networks. Marson’s example here is Ryanair, which uses an IP virtual private network from Cable & Wireless to cut down on mobile roaming costs. “Ryanair employees travelling from one office to another can just plug their laptop into a network port and dial up a number. They have a soft phone and dial the extension they want. When travelling, they can leave a voicemail on their direct line to say they are on the other number. The alternative way of eliminating roaming costs is buying these people a SIM card for every country in which there is an office,” he points out.

The move towards convergence is causing significant upheaval in the telecoms industry and has intensified the battle between fixed-line operators and mobile networks. If fixed-line players are looking to generate additional revenue by positioning themselves as a one-stop shop for telecoms services, mobile operators want to persuade fixed-line users to use their mobile handset as their primary, if not their sole, communications tool.

Against the backdrop of this war over customers, tier-one carriers are having to cope with precipitous falls in the price of data traffic, which is threatening the very existence of some of them, according to Marson. These so-called ‘transit’ companies will have to adapt their business model if they are to survive, he argues.

“There is literally no margin in it. Prices have dropped in Europe between 60pc and 70pc over the past couple of years — and they are continuing to drop. You’re getting to the stage where people will be making no margin or making negative margin [ie losses].”

He estimates that the average price of transit traffic in Europe has fallen from €65 per megabyte two years ago to between €20 and €30 today. There are, in addition, some low-end competitors charging as little as €6 per megabyte.

The IP transit market consists of large tier-one telecoms carriers that move international data traffic on behalf of internet service providers (ISPs) and web-hosting firms. In Europe, they include Level 3, Interoute, Global Crossing, France Telecom, Cable & Wireless, Telia Sonera and T Systems, the business telecoms arm of Deutsche Telekom. Marson points out there are also a number of other operators in the market offering low price deals, but the quality is so poor that many customers end up switching back to their original service provider. However, as all these businesses scramble to compete in a market that is fast becoming commoditised, the quality of service experienced by customers is declining overall.

A complication for the tier-one carriers is that their ISP customers are increasingly looking at alternative means of moving data traffic, which threatens to cut them out of the loop or at least reduce their share of the pie. For example, some ISPs are buying their own bandwidth and establishing peering relationships with other ISPs in their own country or city via public-peering exchanges. INEX is an example of such a facility. This allows it to reduce its costs and improve its customer service by keeping traffic local.

Other internet service providers (ISP) are moving towards a virtual peering model, which involves connecting once into the private network of a global peering provider such as Packet Exchange, which allows them to connect to any other ISP also linked to that network.
A third model that’s evolving is direct peering whereby organisations seek to peer directly with one another rather than go through an exchange. According to Marson, it is big content generators such as Microsoft and large global ISPs — Yahoo! and AOL for example — that would see the benefit of sharing traffic in this way. Typically, these organisations will split their IP traffic; they will peer it directly where they can and funnel the rest through transit services.

In such a fast-changing market, Marson concludes that IP transit firms will have adapt to survive. “The old model can’t do what is being asked of it nowadays and therefore the firms involved will have to adapt their business model.”

But rather than leading to a downward spiral of ever lower prices and declining service levels, Marson argues the current crisis is merely the result of the growing pains being experienced by the internet. Over time, new transit models will emerge and the internet will be all the stronger for it. Businesses need not reach for the panic button just yet.

By Brian Skelly