Internet Telephony: Market Analysis
by Chris Cona
Internet telephony (IT) is the system of sending voice over a network by converting analog voice/data into digitized voice/data through the use of software or hardware. There currently three different ways to provide internet or intranet telephony. For two of the methods, the call goes through Internet Protocol (IP) lines rather than the Public Switched Telephone Network (PSTN). The third, newest, method uses Internet Phone Gateway (IPG). The connection, which links a PSTN and a company's Local Area Network (LAN), is made through a gateway device that is connected to a company's PBX (Public Branch Exchange). The IPG turns the local circuit-switched calls into internet calls. At the other end, the IPG turns the internet connection back into circuit-switched calls. All three methods of IT bypass long distance carriers and their high rates. This article will discuss internet and intranet applications of computer telephony and discuss the current marketability for these applications by analyzing the environment, strengths and weaknesses of IT.
Some people hear the words "internet phones" and automatically think "free long-distance calls." However, there are many more IT applications that can be used by businesses and consumers. Most of the applications discussed below are geared towards the corporate user rather than the home user because the applications can greatly enhance the way companies operate. Costs of the hardware and software are still too high for home users.
Internet telephone calls allow the user to make long-distance phone calls for free or at low cost by bypassing the traditional circuit-switched telephone network. This application has been used in the home user market, but companies have been increasingly interested in it. Companies that use long distance can greatly reduce costs if they utilize internet phones.
Another application for companies is voice-enabled web pages. Companies can link web pages to voice responses and fax-on-demand options to give customers the information they need quickly and efficiently. Customers could visit a company’s web page, need some assistance, click a button and have a live, real time sales/support representative help them. These IT sites may become a new way to advertise on the internet or may be an efficient way for a company to communicate internally.
Internet-based video conferencing is also being used by companies [Nassar article below]. The quality of the sound and pictures are not as good as hardware-based video conferencing but the low cost makes this a viable application for even small businesses. The use of video conferencing can cut down on travel time between offices. Since it would be used over the internet/intranet, the cost would be minimal.
Currently, IT is estimated to be a $3.5 billion industry with growth rates in some areas at 30%-100%. One source estimates that IT will reach 16 million users by 1999, compared with only 500,000 in 1995. Many opportunities are available for companies that want to market different applications of IT. But along with this new technology comes fierce competition from all sides of the telecommunications and computer industry; all of which are trying to position themselves for the next generation of telecommunications.
The three major players in providing IT are small "next generation" IT companies, internet service providers (ISP's), and traditional large telecom companies like AT&T, Sprint and MCI. The IT companies are leading the way for new ground breaking technology in both internet telephony and intranet telephony. ISP's are also in a good position to take advantage of the growing number of applications for IT because of the number of users, both home and corporate, currently using the internet. Large ISP's such as Netscape and Microsoft will soon attract home users with IT software bundled with internet software. The large telecom companies also have a large stake in IT. They have the ability to develop the technology and market it to home users and businesses. Most are moving slowly to see which way IT will go, and all are concerned with the cannibalization of their existing voice market. Still, most see IT as a new profit area.
Except for free long distance, IT will not become mainstream, home-user technology for some time. Businesses, however, are a prime market for IT technology. IT can integrate voice, data and video through the use of the company's intranet network system rather than through the traditional PSTN. One benefit of switching to the company network is that users can make phone calls and faxes without using the internet, where there can be delays or disconnections. Most of the IT applications will be used on company-owned existing intranets so cost to upgrade will remain low. Currently, medium to large companies that have established LAN's will be able to benefit from IT. The smaller businesses, however, may not be able to take the big jump into IT without substantial investment in LAN's that can support IT technology.
IT has several major market strengths. The first and most important strength is the backing of most of the telecommunications and computer industry. Telecom companies like AT&T, who wholesale capacity, are not trying to suppress IT because they do not view IT as competition but, rather, as a new profit area. Microsoft, Netscape, and other major software and internet providers are also leading the way for IT.
Second, advancements in standardization will help the development of IT. Recently, the International Telecommunications Union ratified H.323, which will allow interoperability between different software and hardware. However, since most of the existing products are proprietary it may take time for the products to be fully compatible.
Third, market demand will play a pivotal role in IT technology. Both the home and corporate market will demand technological advancements. Companies are continually looking for ways to increase efficiency and productivity. Consumers want to make their lives more efficient and want to be connected to the information superhighway.
Fourth, regulation, or the lack of it, will affect the progress of IT development. Recently, the FCC seemed to favor non-regulation of IT. It based its opinion on the fact that IT is just another form of data. Regulating it would be impossible to enforce and also counterproductive to the development of new telecommunications.
Several weaknesses that may hinder the development of IT as a new technology. First, the current sound quality of IT products is poor and transmission problems are frequent. These problems will be resolved as the technology progresses.
Second, bandwidth constraints pose a problem for IT. Because the internet and most intranets have limited bandwidths, adding voice and video can cause major information jams. Some of the larger ISP's and telecom companies are trying to solve this problem by developing both high capacity lines that utilize asynchronous transfer method (ATM) and a bandwidth compression standard that will increase the flow of information.
Third, regulation may hinder IT development. Regulation is not likely in the near future, but it must be considered as a potential weakness. America's Carrier Telecommunications Association (ATCA), a group of long distance resellers, is pushing to regulate IT. [Rundell article above] ATCA claims that IT should be regulated just like other telecom companies. For the present, however, it looks like IT will develop without government regulation.
A fourth possible weakness of IT would be ease of entry into the market. Any company that wants to provide IT service or develop IT software/hardware would need minimal start-up money and could maintain relatively low overhead. This ease might make heavy investment in the technology unprofitable.
Fifth, cultural aspects may slow the market acceptance of IT. It took many years for people to start using computers and the internet for everyday applications. Similarly, it may take some time before users give up on conventional methods of communicating and feel comfortable with this new technology.
IT is a current, viable technology and has many applications for businesses. The home-user market may take some time to develop fully. In either market it is clear that IT, through voice, data, and video, will play a large role in how people communicate in the future.