Russ Fordyce Issue: Europe I 2002
Article no.: 12
Topic: Reducing Costs and Capital Expenditures with VoIP
Author: Russ Fordyce
Title: Product Marketing Manager
Organisation: ITXC Corp
PDF size: 24KB

About author

Not available

 

Article abstract

Eastern European carriers have difficulty generating profits and increasing their market share. The cost of leasing or building networks has challenged carriers facing new technology and new competition. The difficulty of obtaining, and paying for, capital, to expand makes Voice over Internet Protocol (VOIP), an increasingly attractive option for carriers in Eastern Europe. Originating and terminating calls via VoIP reduces costs for international call completion, provides interconnect with no capital expenditures and accelerates time to market for high-quality service.

 

Full Article

The capital markets are dry. Retail prices are falling. Margins are shrinking. Market share is eroding as competition finds its way into virtually every region. However, Minutes continue to grow and find their way to surviving carriers. According to TeleGeography 2002, 3.5 billion minutes originated in Eastern Europe and the former CIS in 2000. As markets around the globe change and evolve, telecommunication carriers are re-examining their business models to face these new challenges. Eastern European carriers are working to maintain margins, market share and stock prices. They are looking for ways to reduce costs and capital expenditures while increasing revenues. The costs associated with leased circuits, unfavourable long-term bi-lateral agreements, and revocable Rights of Use agreements (IRUs), have all contributed to the current financial challenges faced by carriers. High fixed costs have financially burdened carriers as retail rates have fallen, and new technology enables more competitors to enter the marketplace. With Voice over Internet Protocol (VoIP), carriers maintain Tier 1 quality while benefiting from lower per minute costs, increased flexibility and better network efficiency. VoIP wholesalers are the carrier’s carrier, providing Tier 1 quality, low cost, wholesale international voice and fax long distance services to carriers worldwide. VoIP frees carriers to focus on maintaining or increasing market share. Carriers also add revenue by terminating calls for VoIP wholesalers within their own country and region. A Simple Solution to Complex Challenges Originating and terminating calls via VoIP is the fastest and most financially compelling strategy for managing expenses and increasing revenue with existing infrastructure and equipment. Over the past decade, the telecommunications industry has seen bankruptcy, consolidation and debt force carriers into positions they never thought possible. Preventative actions can give Tier 1 carriers a strong footing to withstand the challenging market conditions. “Carriers around the globe connect to VoIP Networks to get the most competitive rates for calls to international destinations. They connect to VoIP wholesalers in central hubs or via customer premise equipment or their own IP telephony equipment located on their premises” For example, by working with VoIP wholesalers, Eastern European carriers can: o Reduce costs for international call completion o Interconnect with no capital expenditures o Recapture key termination market share o Equalize existing bilateral agreements o Increase network efficiency o Accelerate time to market o Maintain Tier 1 quality o Reduce Costs for International Call Completion Carriers around the globe connect to VoIP networks to get the most competitive rates for calls to international destinations. They connect to VoIP wholesalers in central hubs or via customer premise equipment or their own IP telephony equipment located on their premises. Carrier operations personnel work with VoIP wholesalers like they do with any other wholesale provider. With a single connection to an Internet-based network, Eastern European carriers immediately improve international call margins by using more competitive wholesale rates and delivering new route choices to their consumers. Carriers find that VoIP wholesale rates are lower than other wholesalers and can even be lower than the best-negotiated bilateral agreement. High retail rates often keep consumers from spending more on international calls. With lower costs from VoIP, Eastern European carriers have the option to keep the savings or lower retail rates to increase volumes and overall margin. Interconnect with No Capital Expenditure Recent turmoil on world financial markets has dramatically reduced the capital available to fund carrier networks. Qualified carriers looking to connect to VoIP networks can do so with little or no capital investment by utilizing customer premise equipment. VoIP wholesalers, such as ITXC Corp, provide Internet-based voice network throughout the world. They offer qualified carriers customer premise equipment that gives incumbent carriers the power to fight back. These companies own and operate equipment co-located directly on the carrier’s premise and supply all the necessary components to connect carriers to their Internet backbone. As such, this affords a simple solution with minimal carrier requirements and no capital expense. The few requirements that do exist are all widely available to most licensed carriers and include PSTN capacity, IP bandwidth, a reliable power supply and rack space. Eastern European carriers can utilize this sort of service to quickly regain market share. Regaining Key Termination Market Share In most countries across the globe, competitors are entering the telecommunications marketplace. Some of theses operators have licences to operate others do not. Either type can take precious revenue and volumes away from incumbent carriers as they are faced with shrinking margins. As shown in the chart “Global Growth of International Carriers”, the number of new carriers has been doubling nearly every two years. These carriers are nibbling away at incumbent carriers market share. By working with VoIP wholesalers, carriers connect directly to the top carriers of the world. VoIP wholesalers act as aggregators of worldwide traffic and can funnel traffic directly to a country. The carrier in that country then terminates the call, taking traffic away from competitors networks and back to its own. Equalize Existing Bilateral Agreements Carriers can equalize existing bilateral agreements and meet volume commitments by terminating calls for VoIP wholesalers. If volumes are low, VoIP wholesalers can provide additional traffic to make up deficiencies. Carriers can route new traffic to those countries where time and effort has already been spent negotiating bilateral agreements. VoIP wholesalers can also terminate excess traffic if the agreed upon rate is not competitive for overages. An Evolving Industry In March of 2001, a report from the ITU (International Telecommunications Union) Secretary-General reported, “A fundamental paradigm shift has been underway in the telecommunications industry – a shift that has arguably brought about as dramatic a change in personal communications as the telephone did compared to the telegram. That change is a shift from traditional PSTN circuit-switched voice networks to packet-switched data networks, using Internet Protocol (IP) technology.” The shift from PSTN to packet-switched IP networks will evolve quickly as the technology continues to develop. Opportunities exist today that can position carriers to lead the industry in terms of knowledge, financial strength and reach. Increasing Network Efficiency Leased circuits and IRUs often make up a significant portion of a carrier’s operating budget and depreciation. Point-to-point connections between two destinations with a defined busy hour often stand empty during many hours of the day. With a single connection to an Internet-based voice network, carriers access all destinations, not just one destination with a single busy hour. That connection reaches all countries in all time zones, making more efficient use of capacity. Carriers who operate point-to-point leased circuits do so at a mostly fixed cost that often makes up a large portion of their total costs. So, if prices for phone calls drop, these fixed costs will reduce gross margin or worse, result in losses. Accelerating Time to Market Provisioning leased circuits to interconnect carriers often requires long lead-times, especially in areas outside Western Europe and North America. Establishing a bilateral network with PSTN circuits can be a slow, arduous process. As an alternative, carriers who have high-quality Internet access readily available can begin benefiting from VoIP wholesalers’ services. Once the initial connection to an Internet-based voice network is established, carriers can scale their operation and add new destinations very quickly. Unutilised capacity does not need to sit idle waiting for volumes to meet expectations. VoIP wholesalers route calls around Internet congestion in order to achieve Tier 1 quality. In addition, they can provide SS7 or C7 connectivity directly to the Internet-based voice network at local switches anywhere in the world for both call origination and termination. Calls are routed directly over the networks from originator to terminator with no intervening switches, unlike international traffic flow in a legacy phone network, which must be routed through a hierarchy of switches. Each intermediate switch adds delay to call set up and increases the chance that congestion, routing errors, or other problems will cause calls to be dropped. The result is better quality. In fact, the call completion rate on global Internet-based voice networks with this sort of routing is higher than most wholesale carriers can normally provide and there is less delay between when the last digit is dialled and a phone rings at the far end. VoIP has also proven itself to some of the most quality sensitive carriers in the world, mobile carriers. The mobile market is an increasingly important means for originating and terminating phone calls in the telecommunications industry. The International Tele-communications Union (ITU) states, “At current growth rates, the number of mobile subscribers will surpass that of fixed telephones in the middle of this decade (2000-2010). There are 35 markets – both developed and developing – where this transition has already taken place.” Mobile carriers face unique challenges in the wireless environment that degrade call quality, such as gaps in network coverage, geographical limitations, in-building signal degradation, and other technological issues. Therefore, mobile carriers demand the highest quality from their interexchange carriers. In the past, mobile carriers have been forced to pay high costs to international destinations to meet high-quality standards. Now, mobile carriers like Mobikom in Bulgaria and China Mobile are connecting to networks such as ours, ITXC’s, to gain lower costs with Tier 1 quality. Mobile carriers can use the savings and revenue resulting from connecting to Internet-based voice networks to increase its ARPU (Average Revenue Per User) and to increase their subscriber base. Fixed-line carriers serving retail subscribers have also come to rely on VoIP to deliver not only price but also quality. The retail consumer is the most fickle in the industry, able to switch providers with the press of a button. In many countries users dial access codes before dialling the actual phone number, meaning for each and every call, the consumer chooses a service provider. If the quality suffers just once, it may be some time before that user is likely to try that specific service again, regardless of price. VoIP traffic will account for approximately75% of world voice services by the year 2007. (Frost & Sullivan, World VoIP Services Market – 2001). Conclusion: Will Telcos Thrive Again? Revenues from voice services and products still account for 90% of the revenue generated by wire line providers. Market share is the key to success and needs to be monitored so that precious revenues are not lost. Carriers need to be flexible and react quickly to counteract competitive market forces. Outsourcing VoIP operations with VoIP wholesalers is the fastest and most financially compelling strategy to regain control. The winners in the telecommunications industry will be those that can manage expenses, find new revenue sources and meet customers and stockholder demands. VoIP wholesalers can help evolve any Eastern European carrier’s business by lowering costs, lowering capital expenditures increasing revenue bases, all while maintaining a high level of quality for end users. Working with VoIP wholesalers frees carriers to focus on core competencies and allows for the exploration of new opportunities that can lead to a better position in the future.