This year’s rage, VoIP, is the hottest thing to hit the cable industry since high-speed data. Now every MSO is looking into deploying digital telephony, with revenue projected by some to approach $4 billion by 2007. CableWORLD gets the answers to 15 important questions about VoIP.
1. What is VoIP? Voice over Internet protocol (pronounced voyp) comprises any system that uses the rules and formatting associated with Internet protocol to send and receive voice signals. That includes IP telephone service cable operators deliver over their broadband cable plant, as well as computer-to-computer telephony and Internet telephone service delivered by companies like Vonage. Bigger MSOs make the distinction that they are delivering carrier-grade IP telephony. That means it utilizes a cable system’s highly managed network and acts, sounds and feels like the telephone service that’s been delivered by local telephone companies for the past 100 years. For consumers, cable operators use carrier-grade VoIP to deliver all the regular features of traditional phone service: local, long distance, emergency 911, etc. For about $40 a month, most packages include unlimited calling in the United States and Canada, familiar calling features such as call waiting and low-cost international rates. In most situations, cable customers with high-speed Internet service connect their existing wireline telephone into a small device, called a multimedia terminal adapter (MTA), that connects to or is integrated with a cable modem, or they can plug into a wall jack that’s been enabled for VoIP. With Vonage-type VoIP, consumers connect their phones to their cable modem and essentially ride on cable’s broadband pipe, whether the VoIP provider is a partner of the cable operator or not. If not partnered, then the provider collects the revenue and the cable system simply benefits by retaining the high-speed Internet subscribers that are using the phone service. Vonage-type VoIP is known as Internet telephony or voice over Net (VON) and is for all practical purposes a "best effort" VoIP service. This type of VoIP sends a customer’s voice signals over the unmanaged, public Internet to various regional processing centers located across the country. The quality may not be as high as carrier-grade VoIP. 2. Cable’s been talking about providing telephone service for years. What’s so great about VoIP? VoIP is creating industry buzz because cable operators can leverage their existing high-speed Internet infrastructure and fulfill the broadband promise of delivering bundles of video, voice and data service—the so-called "triple play"— in one bill from one provider. Strategically, cable can use VoIP as a way to retain customers versus satellite services and go after the telephone companies’ turf. Depending on how the offers and bundles are structured, VoIP brings in a healthy $30-40 a month per subscriber. Kagan Research projects a sixfold increase in cable VoIP annual revenue, from $670 million in 2005 to $3.75 billion in 2007. VoIP gives operators a cheaper means of offering quality phone service than traditional circuit-switched telephone because it utilizes cable’s existing broadband infrastructure and routes calls through "softswitches" in a lower-cost manner. Most cable marketers are positioning VoIP as a primary line replacement. VoIP marketing is "not feature led," says Sam Howe, SVP, voice marketing, Time Warner Cable. Time Warner Digital Phone promotions highlight unlimited nationwide calling, bundled packages, familiar calling features and free installation offers. Over time, VoIP proponents foresee a new wave of services, including video telephony, video instant messaging, advanced call routing, games and Web-enabled ringtone features. Cable engineers also are seeking wireless phone tie-ins so cable can offer a "quadruple play." Potential coming attractions—such as using your phone to record shows on your DVR, getting caller ID and voicemail on television, using global positioning system satellites to locate callers, or using voice shaping to sound like your favorite movie star—are expected to further blur the lines between video, voice and data. 3. Do consumers want phone service from their cable company? How much demand is there? These questions have loomed over cable’s aspirations to get into the phone business for a long time. Cable’s VoIP managers say cable must deliver a reliable, quality phone service that gives consumers the value of unlimited calling at a reasonable price. So far, the big news is that consumers are signing up in droves, with some operators saying they’re racing to keep up with demand. Time Warner is adding more than 15,000 new VoIP customers per week, Howe says, and Cablevision says it’s adding more than 1,000 per day. Cox is achieving 40% VoIP penetration in some markets. Comcast, though, has been taking a more measured approach while it gets its operations and backbone network in gear. Still, it is targeting Comcast Digital Voice for 15 million homes passed by year’s end with 20% penetration within the next five years. The current subscriber universe is small, but it’s growing. Kagan forecasts 2.4 million cable VoIP customers by year’s end and 10.7 million by year-end 2007. The commercial services market also provides fertile ground for VoIP. MSOs increasingly are focusing on providing packages of telecom services to small- and medium-size businesses, which can result in healthy long-term contracts. 4. How does VoIP work? Imagine a highway carrying cars, with each car representing a telephone conversation. With traditional circuit-switched telephone service, each car requires its own dedicated lane for your voice to get from one end of the highway to the other, which is not especially efficient. With VoIP, voice communications get converted into data packets. Each car can be packed in with other cars in a lane and all of them can travel at top speed. It’s much more efficient and cheaper. Of course, there’s the possibility of traffic jams and crashes. But so far cable VoIP managers are pleased with the way that their broadband highways are performing. Cable systems route calls through softswitches. Compared to traditional telephone Class 5 circuit switches, softswitches handle more calls (about 100,000 per unit) and are smaller so a cable system has to spend less capital and needs less head-end space. As calls get routed locally, regionally or internationally, there are dozens of hand-offs or "demarcation points." At some point, calls get routed to the public switched telephone network (PSTN), requiring interconnection agreements and access fees to local telephone companies. Then there are additional hand-offs to long-distance carriers. Since cable systems are local by nature, call routing can require a lot of hand-offs. A cable company can sort through this maze by itself or partner with various telecommunications companies, support services or long-distance carriers, such as Sprint or MCI. Inside the home, most operators appear to be using multimedia terminal adapters (MTA) to provision customers. Assuming that all the telephone wires for a single number are connected, plugging an MTA into a telephone jack automatically enables VoIP on all extensions. The MTA changes the analog voice signal from each telephone set to a digital signal that is then passed along to the cable modem and transmitted upstream. 5. What are the technical requirements? One of the first things that cable operators need to decide is what type of telephone provider they want to be. Cable companies could provide a Vonage-like Internet telephony service without offering number portability (the ability to keep an existing phone number) or any frills. And they’d encounter fewer regulatory requirements, although the Federal Communications Commission now requires these services to add emergency 911. Operators can offer a VoIP "me too" phone service that mirrors traditional local and long-distance telephone. They also can offer "all you can eat" bundles of Internet, video and phone with myriad calling services, pricing plans and options. This decision is largely related to whether operators use PacketCable specifications built on top of DOCSIS 1.1 for VoIP, or use SIP (session initiation protocol) specifications for Vonage-type services. In addition to technical differences, the decision boils down to whether cable operators view their voice offering as a full-blown telephone service (PacketCable) or an extension of high-speed Web services (SIP). Most of the bigger MSOs—including Comcast, Time Warner, Cox, Charter and Cablevision—are taking the full-scale carrier-grade VoIP approach and most have become certified competitive local exchange carriers (CLEC)—essentially making them full-blown telephone companies. In addition to softswitches, gear associated with VoIP includes call management servers (CMS) to set up and maintain calls, media gateways and signaling gateways to interface with the PSTN, and record-keeping and provisioning servers to support back-office functions. 6. How good is VoIP quality? By various technical measurements, cable carrier-grade VoIP rivals traditional phone service for quality. MSOs use their managed networks and employ quality of service (QoS) specifications for prioritizing data traffic, which is regarded as being superior to "best effort" services that travel over the public Internet, like Vonage. Cox explained the effect of QoS data prioritization in a white paper last year: "On Cox’s managed VoIP network, voice packets are labeled and tagged to receive priority treatment and avoid bottlenecks that can cause delays, echoes, drop-outs or other negative impacts on voice quality. "In short, Cox’s managed VoIP technology delivers the same high-quality phone calls as traditional phone technology, while Internet telephony call quality may vary based on the amount of data traffic being carried at the time." Whether the difference in quality is perceptible enough to make consumers decide to take cable VoIP services over discount services like Vonage is a subject of debate. Cable VoIP managers also say their services must strive for "five 9’s" reliability, meaning 99.999% successful connections on first dialing attempts, as local phone companies seek to provide. One of the technology debates has centered on how much backup battery power and other steps are needed to maintain phone service during power outages. 7. How can cable enable consumers to keep their same telephone number? Keeping an existing phone number—number portability—is an important feature for many consumers. In its Maine service launch, Time Warner Cable found that about 80-85% of initial VoIP customers ported their numbers, according to Liliane Zreik, VP, engineering and technology, VoIP. Number portability can be an operational challenge, however, so some operators have launched VoIP without offering it. To transfer a customer’s number, a cable system must file a request with an incumbent provider (ironically, the phone company that may be getting replaced by cable VoIP) or body that manages phone numbers. The filing must conform exactly to existing customer and street address information or it will be rejected. It generally takes several days to get approval, or much longer if requests are rejected. Additionally, porting a number requires that phone installations are well timed. As one VoIP manager notes, if an installation isn’t properly coordinated, it’s possible for a customer to have their phone cut off by the incumbent provider before the new VoIP service is activated. 8. What are some other challenges in delivering VoIP? "The challenge for achieving VoIP at scale is execution," says an Accenture white paper titled "Will Technology Issues Spoil the VoIP Party?" A cable system’s plant must be flawless, engineers say. Flaws such as a defective connector on a splitter or a bad fiber splice can impair quality. Cable plant must be monitored constantly to ensure reliable, quality voice communications. "IP routers and switches can be unreliable and break down," undermining network resiliency, Accenture says. It urges MSOs to monitor their entire data chain to determine where there are any weak links. Since VoIP is a data service running on existing broadband infrastructure, the current effect on bandwidth is minimal. Yet as traffic increases and advanced services such as videophone are added, bandwidth management requirements likely will increase. As with any broadband service these days, security also is an issue. David Endler, chairman of the Voice Over IP Security Alliance, says: "We can expect to see over the next year or two VoIP specific attacks emerge that go beyond today’s more prevalent data network vulnerabilities (and) try to exploit the VoIP applications themselves." 9. What are the operational challenges for cable systems? A key reason why some operators have tiptoed into VoIP is that they want to make sure that their back-office functions, field support, sales and marketing, tech support, customer service and other personnel are properly prepared to deliver it. One of the perceived challenges of VoIP was that cable company cultures would have great difficulty taking on voice services. However, during a Kagan Cable VoIP Summit in April, MSO executives agreed that the cultural issues have been largely overblown. Yet telephony requires top-notch customer provisioning, billing systems, call center support, technical help desks, security and operational support systems. Currently, most MSOs appear to be using installers to set up customers’ VoIP service rather than offering self-provisioning, though more self-provisioning solutions are emerging. While field installation adds to the expense and logistics of truck rolls, manpower and training, VoIP managers say they must ensure that customers are set up satisfactorily. In some homes, there may be issues with internal wiring, integration with home security systems or other issues that could impair quality service. 10. Telephony is highly regulated. What are some of the biggest regulatory issues for VoIP? Is VoIP a telecommunications service or an information service? VoIP’s regulatory status is the big question. The answer will determine whether VoIP encounters stringent phone regulations or the more unregulated Internet information services environment. The issue currently is being hashed out in the FCC and the courts. Regulated telecommunications services must meet requirements for emergency 911, wiretap requests (under CALEA, the Communications Assistance for Law Enforcement Act), servicing the disabled, contributing to the Universal Service Fund for low-income households and potentially paying access fees. While the bigger MSOs already follow many of the practices of traditional phone companies, the industry is involved in various proceedings to ensure that onerous regulations aren’t implemented. 11. The telecommunications market seems crowded. Who are the major VoIP competitors? You’d have to be living under a rock not to notice the intense competition between all of the local, long-distance and mobile phone providers. Vonage is the perceived leader in the VoIP field with more than 650,000 lines and service offers of $24.95/month for unlimited, nationwide calling. Other small discount providers are entering the market. Virtually all of the LECs (local exchange carriers, including what were traditionally known as the regional Bell operating companies, or RBOCs) and long-distance players (AT&T, MCI, Sprint) are involved in VoIP or similar Internet telephony ventures. Moreover, major computer industry players such as AOL, Microsoft Corp., Apple, IBM and Cisco also are involved in various Internet voice or videophone services through the PC or telephone. VoIP also is coming along as some consumers are cutting their wireline services and relying upon wireless alone. 12. What can cable do to handle wireless customers? Coming up with a wireless component is a key area of focus in engineering circles. There are various methods being explored, including using Wi-Fi and dual-mode phones that would be enabled by both wireline and wireless technology. Cable’s broadband pipe could be used as a backbone to handle traffic. It’s currently unclear where cable’s broadband pipe, VoIP and wireless will eventually converge. MSOs also could decide to enter the wireless business by partnering with cellular resellers or establishing branded services on their own. 13. What’s cable’s niche? How can cable marketers differentiate their service? Marketers at Cox, the most phone-experienced MSO, would answer with one word: bundling. They’ve seen the subscriber acquisition and retention power of offering discounted packages of video, Internet and voice services. One thing that cable wants to avoid is a price war with the deep-pocketed phone companies or discount providers and end up chasing after phone switchers who are constantly seeking the next-best deal. 14. Is this a good business? What’s the ROI? The return on investment (ROI) is partly determined by how much an operator has recouped their investment in their digital infrastructure, which, of course, also brings in revenue from video and data. VoIP sources say their business models show a payback in 24-36 months, which is regarded as a reasonable timeframe for most new businesses. MSOs can make back their telephony investment within 32 months after they deploy their own network. The ROI pushes to 35 months if the MSOs outsource their telephony services, according to an MRG forecast. The breakeven point will get pushed up if subscribers take both telephony and video services, MRG says. That translates to a 19-month breakeven point after an MSO deploys its own network, or a 17-month one if it outsources. 15. It seems there’s a lot for cable to understand. Is this really everything I need to know about VoIP? Not even close. There is much more for cable to learn as it gets deeper into the technology, operations, regulations and business. Dozens of white papers and technical documents are available on the Internet. Don’t Cheapen a Necessity During a Kagan Cable VoIP Summit, Rian Wren, Comcast’s SVP/GM of telephony, disputed the notion that MSOs should provide deeply discounted or free VoIP in their bundles in order to retain subscribers, saying such moves "cheapen your product." While phone companies cannot leverage the added power of television (at least for now), cable could provide services such as video e-mail, caller ID and voicemail through TV. "As VoIP becomes more integrated with TV, it’s going to be harder for anyone to disconnect," Tom Cullen said recently when he was still SVP, advanced services and business development, Charter. (He has since left the MSO.) "As we transcend these three product lines, it’s collectively retentive for the industry."