| Internet | Managed IP | Approach | Open = unrestricted access and use | Closed = restricted access and use | Functionality and service creation | | Within or at the edge of networks but only where enabled by the operator | Charging | Subscription or traffic volume only | Can support usage based charging | Connectivity at the IP level | Full interconnection | | Addressing | Public global system | Internal private addressing possible | Quality of service | Not managed | Managed to support defined levels |
Whilst there are distinct differences between Internet and Managed IP networks, there is a widespread misunderstanding that the Internet cannot be used to provide a delay intolerant service such as telephony because of its unpredictable quality of service. However service providers can and do add a layer of management1 to the Internet to improve quality of service, and a significant proportion of international traffic to some destinations is already carried on the Internet by wholesale services that are used by many large and well known operators.
IP is not the only new network technology. ATM (Asynchronous Transfer Mode) is a link layer “small packet” technology that can either be used underneath IP or be used to provide virtual circuits to carry media without involving IP. Many of the new systems designed for telcos who want a next generation PSTN are ATM based and so the report includes these ATM developments.
Services
We focus on two main service types:
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Public telephony, which uses only E.164 numbering.
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Internet named telephony2, which uses only Internet naming and so far has not yet developed into a full any-any service and whose quality is more unpredictable and may be significantly lower.
We use these service distinctions based on identification because they relate to users and are independent of terminal types which will change. The Internet trade-jargon, however, uses distinctions based on terminal types:
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Phone-Phone: a bypass service which uses ordinary telephones and the PSTN for access and termination and the Internet for the long distance or international part of a call. It includes calling card services.
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PC-Phone: where a call can be made to a traditional telephone from a PC and where the call will be carried most of the way on the Internet and handed to a circuit switched network operator at the terminating end.
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PC-PC: where a call will be made entirely on the Internet.
Although at present:
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Phone – Phone = Public telephony
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PC – Phone = Public telephony
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PC – PC = Internet named telephony
These relationships will change and become more complex since in the future:
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Phones may support Internet naming as well as E.164.
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public telephony will also be supported on PCs via IP based networks.
There are four main categories of company that are providing services:
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Traditional telcos with directly connected customers and a significant proportion of their own infrastructure
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Telcos who work mainly or wholly as indirectly connected operators (their customers use carrier selection, carrier pre-selection or 2-stage call set up) and use leased lines for transmission
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Internet Telephony Service Providers, who predominantly use the Public Internet and have little infrastructure under their own control
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Internet Service Providers who are adding voice related service features to their access services.
Figure 2 shows the relationship between the service categories and the development routes being followed by the different players. The terms “PC-PC” etc have been added but apply only with the current state of their relationship to services.
Figure 2: Development routes 
The current situation is that:
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The market for public telephony from a PC is growing and selling primarily on low prices for bypass traffic
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Internet named telephony from PC to PC is starting as a free function provided by ISPs and portals. Usage is driven by both cost savings and functionality (mainly the presence feature3).
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Both the Internet and managed IP networks are being used for public telephony bypass services
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Very few telcos have yet migrated onto managed IP networks
The market
Twenty years ago the market was characterised by:
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Most traffic being telephony
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Nearly all revenue being from telephony
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Calls being charged per minute
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Prices being strongly dependent on distance
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International calls subsidising national and local calls
The growth of the Internet has changed the market completely by providing hugely growing data traffic funded by subscription and partly by advertising. Within a few years the market will be characterised by:
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Most traffic being data
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Significantly reducing revenue from telephony
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Prices being distance independent and fixed network call charges being replaced by subscription (mobile calls will probably continue to be charged per minute because of the relatively high economic cost of radio capacity)
There are two drivers for users to change their service providers:
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Cost savings
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Functionality and ease of use
When prices were high, cost savings were the main issue for users and this created a strong bypass market for calls, but as prices drop, cost savings will be less of an issue leaving functionality and ease of use as the main drivers for users.
Users currently pay both access and call charges. Call related costs and charges are reducing and billing and administration are becoming an increasing proportion of costs. These changes are creating pressure for calls to be included in subscriptions.
We think that the combination of technology advances towards multi-service solutions and price reductions will drive a process of combination in service provision in the retail market. As prices reduce consumers will find it easier to buy everything from one service provider. Figure 3 shows our conclusions. The separate market segments of:
will be replaced by:
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Access line paid by subscription but including Internet access
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Basic services including email, fixed voice calls and data paid by subscription with some funding by advertising. These services will probably be combined with the access line
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Premium services paid separately, probably on a pay-as-you-go basis using electronic payment
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