IDATE Conference

1. IDATE Conference IP Services and Voice over IP • IP Services in Western Europe: The Case for a new IP Realism • Pros and Cons of IP Technology • Voice over IP • Conclusions and What’s Next Contact Details: Tolga Uzuner, Director, Technology Investments • Tolga.Uzuner@drkw.com

2. Our study framework to discuss the outlook for IP Services over the next 24 months IP Market Dynamics—Project Focus Areas Demand Side Supply Side Corporate Customer Needs IP Services Consolidation Corporate Applications/ Services Consumer Needs Consumer Content/ Services Emergence of New Players IP Migration Business Case Critical study areas Technology Developments Availability of Finance Secondary factors External Factors Other factors .

3. The IP services market is still in its infancy but is increasingly recognised as a legitimate hope for the industry growth • IP services are unlikely to provide a growth catalyst of the magnitude required to bring telecoms out of the current crisis • The “converged network of the future” will be a hybrid network where IP and legacy services complement each other • Shifts in the value chain and changing the dynamics of competition may cause vendors, service providers and systems integrators to focus on the same end-user attention • With some exceptions (e.g. IP Storage), the technologies underpinning IP are relatively mature, and the industry is in a later stage of its life cycle: • Expect to see vendor consolidation and a shift to process innovation • As in all other industries preceding it, the number of vendor/operators is likely to decrease over time, market leaders will consolidate their positions, and the nature of innovation will move from product to process innovation, the realm of the established vendor/operator. • IP-based technologies have failed to live up to their promise due to the uncalculated/hidden costs associated with complexity (e.g device proliferation, unpredictable nature of traffic): • Hence, tech vendors offering products that solve complexity management issues are sure-fire winners. • One of the few areas where we expect significant product innovation to occur and where we believe start-ups still have a reasonable chance of winning.

4. Looking at the traditional definition of communications did not allow for a clear segmentation of IP Services Traditional Services Definitional Framework Unanswered Questions • Local, national, long distance calls • Freephone, local anywhere • Directory assistance, contact centres Basic Services • How to deal with voice services carried over data infrastructure? • How to deal with with unifying sevices that combine voice and data services? • How to deal with new services that result from convergence? Voice • PBX and centrex services, voice mail, call forwarding, call waiting, call return, caller ID, conference calling, find me services Value Added Services Basic Connectivity • Leased Lines • Connectivity • Access Data • Network management, element ownership, security, hosting, storage provision, application provision, video conferencing Value Added Services • Videoconferencing Broadcast/ Media Broadcasting Services * Courtesy of Fred Destin

5. Our own definition reflects three dimensions: type of service, infrastructure and delivery approach IP Service Definition Outsourced Managed Customer Managed (DIY) IP Voice Services Unified Services IP Connectivity Services IP Media Services • VoIP in corporate networks: • Basic voice services • Value added voice services: • Voice mail • Call forwarding • “Follow me” services • Call Centre Automation • Internet access • IP-VPN • Site to site • Extranets / branch offices • Remote Access • Video conferencing • Web-casting • Streaming • Unified messaging QoS /CoS/Security/OSS/BSS features (not typically sold outright) Hosting Physical/Digital IP Storage Storage/Disaster recovery IP Advisory Services * Courtesy of Fred Destin

6. These strong benefits gave rise to a set of IP-based communications offerings referred to as “IP Services” IP Services are services that are sold by a service provider to customers and rely on and leverage IP networking technologies for the exchange of information (packetised data, voice and other media). * Courtesy of Fred Destin

7. Overall uptake of IP services will likely be only moderate over the next 24 months IP Services Growth/Margin Matrix Explaining the Results • The IP services market is expected to grow from its current size of $14.5 billion to $17.5 billion in 2004/5, with a CAGR of 10% • IP VPN is the foundation layer on which value-added services will be built • VoIP will grow slowly, as it is not the optimal technology for scaling a voice business • Video over IP and unified communications will experience high take up after 24 months • Penetration of the IP storage market is low with huge growth potential Converged Services VPN features: Security/QoS Advisory Managed + Hosting/ Storage Services Access & connectivity (incl. basic VPN) NB: All managed and outsourced elements of IP services have been included with hosting and storage revenues to reflect similarity in delivery capabilities. Players recognising IP-VPN (connectivity) as the foundation for upselling other services will likely be most successful.

8. Low infrastructure deployment costs • Parent financial support (utility cos.) • New, urban areas targeted • Proprietary network management software • Infrastructure light • Carrier non-competitive • Advanced networks built from ground up to support IP services • Deep network penetration • Liberated from debt worries by Ch. 11 • Network designed from ground up to handle IP/MPLS • Low cost • High-end service capability • Some carrier neutrality • Infrastructure light • Neutrality • Service expertise • International flexibility • Contract renewal on <1 year cycles • Hits at local loop data • Pricing pressure • Hits at int’l voice transport • Pricing pressure • Alt nets with network rings and local tails threaten leased line business • Hits at int’l & metro data • Carriers outsource IP services transport—lessen infrastructure burden • Price pressure • Hits at high-end services • Undermines relationship with end customer • Price pressure Although incumbent’s traditional franchises may look strong, new business models pose a serious competitive threat Incumbent Traditional Franchises Advisory Local Loop Access Data Transport Value-Added Services Voice Transport Access Network Specialists International Wholesale Voice over Public Internet Regional Alternative Network Providers International/Metro Wholesale Data Virtual Service Providers Competitive Advantages Impact on IIncumbent • Examples • ET&T • Vanco • Examples • 51 Degrees • Urband • Examples • iBasis • ITXC • Example • Interoute • Example • Level3

9. 2002 2005 Integration of instant messaging agents to the desktop Instant messaging Unified communications (including location-based services) Converged High cost and low quality of ISDN service IP videoconferencing to the desktop Emergence of better compression standards Media Softwsitch architecture enables services today IP-Enabled Voice Customer self-service for conferencing services Distance collaboration using data (e.g. slides) Hybrid voice data architectures Collaboration on voice & data improves productivity Legacy voice equipment is cheap and very efficient Voice VoIP QoS issues unresolved Critical business need for secure Intranet connectivity IP-VPNthe foundation layer Typically greenfield deployments before brownfield Connectivity Financial pressure to reduce bandwidth bill For service providers, the key to growth lies in offering the right bundled propositions from an IP-VPN platform Drivers/Inhibitors

10. IP buyer priorities currently do not reflect end-user needs for simplicity in the workplace Comparison of IT Buyer and End-User Needs High Cost Reliability Quality Current Service Provider Focus Migration Manageability IT Buyer Priority Needs Mobility Ease of Use “Pull” Opportunity for Service Providers Multi-accessa Speed Low Low End-User Priority Needs High a. Ability to access over multiple devices.

11. 2 Data Link 1 Physical The benefits of IP technology have emerged from both its network layer capabilities and higher layer protocols Benefits Associated with IP TCP/IP Protocol Suite OSI Reference Model Employs Open Standards Led to accelerated development of new applications Layer Accessible APPS 7 Application Connected all networks, regardless of operating system (also known as interoperability) 6 Presentation Point-and-click and click-through (hypertext mark-up language) for applications; browsers (Graphical User Interfaces or GUI) for surfing Ease of Use 5 Session Universal Uses comprehensive addressing system (Domain Naming System - DNS) 4 Transport TCP IP 3 Network Intuitive Use of Uniform Resource Locator (URL) or www.xxx.com allows access without number Efficient Connectionless: disperses and reassembles packets using only resources required Stateless: network remains dumb, unaware of rest of network; applications/devices are intelligent * Courtesy of Fred Destin

12. IP dominates the ‘store/forward’ data worldThe question remains: when it will conquer the ‘real time’ world of voice and video Mantra vs. Current Position Mantra “Traditional” IP Migration & QoS Issuesa • IP dominates the LAN • IP is the ultimate mediation layer between application and infrastructure • IP internetworking is the most cost effective and universal way to scale a multi-service network •  Therefore IP is the fundamental connectivity protocol of the future Voice ? Video ? Net access E-mail Transactional & Messaging Apps Is IP really going to live up to its billing as the “unstoppable internetworking protocol”? * Courtesy of Fred Destin

13. However, IP’s promise of better, cheaper and simpler services has not been fulfilled Not Better Not Cheaper Not Simpler • Of 50 companies interviewed, 30 cited quality and reliability as reasons for not using VoIP:a • The benefits of VoIP are hard to justify while Quality of Service issues are not yet resolved • 93% of IT Managers state security as a key barrier to deploying IP-VPNSb • Equipment costs still high, payback uncertain: • IP phones too expensive • No cost savings until $100 each • Traditional PBX cost is also lower when counting implementation costs for a new IP PBX • IP PBX estimated 5-year payback may be too long • Falling PSTN prices, have eroded VoIP’s price advantage • Sometimes referred to as Toll-bypass • Can be more complex: 60% of IT managers said ease of use/management issues were barrier to IP-VPN deploymentc • Migration to new IP services has often resulted in requirement to operate simultaneous systems. • Issues of inter-operability, billing and customer service have also emerged for service providers a. See IDC, “Attitudes towards IP Telephony in European Corporations”, October 2001. b. Internet Week Research, VPN usage survey based in US users (multiple responses accepted). c. Forrester, “Surviving A Metro Bandwidth Crunch”, December 2001. * Courtesy of Fred Destin

14. Circuit switching dominates at the core, with packet-based IP networks becoming prevalent at the edge . . . Transport Architecture Technical Implications Winning Vendors • Dynamic Circuit Switching: • IP playing a secondary, supporting role, for Internet access Core • QoS is free! • Vendors with dynamic circuit switching offerings: • Next-gen Sonet, not Mesh • Reconfigurable networks Edge • Mix of packet and circuit- switched, using multi-service edge equipment: • Driven by customer demand • Packet interface to access and circuit interface to core • QoS statically managed: • CoS on packet interface to access • Topologically optimised for Internet access • Ditto on circuit interface to core • Strong multi-service edge offerings based on packet-switching architectures: • Key features are switched routing, and edge optical nodes Access • Packet-switched networks will dominate intranets over the medium term: • IP, over time, will dominate corporate LANs and WANs • QoS actively managed: • Real-time monitoring, measuring and reconfiguring • Without breaking the basic stateless/connection-less paradigms of IP • Corporate IP vendors, and access/LAN IP QoS management vendors: • Dynamic, policy-based QoS based on business objectives

15. Recent Academic Research is coming to the same conclusions • From a paper presented at Hotnes, Princeton, October 2002: “Is IP going to take over the world (of communications)?” • Pablo MolineroFernandez, Nick McKeown, Stanford University; Hui Zhang, Turin Networks and Carnegie Mellon University • "It remains ill suited as a means to provide many other types of service; and is too crude to form the transport infrastructure in its own right." • "The growth and success of IP has given rise to some widely held assumptions amongst researchers, the networking industry and the public at large. One common assumption is that it is only a matter of time before IP becomes the sole global communication infrastructure, dwarfing and eventu ally displacing existing communication infrastructures such as telephone, cable and TV networks." • "But for all its strengths, we (the authors) do not believe that IP will displace existing networks; in fact, we believe that many of the assumptions discussed above are not supported by reality, and do not stand up to close scrutiny." • "It is the goal of this paper to question the assumption that IP will be the network of the future. We will conclude that if we started over - with a clean slate - it is not clear that we would argue for a universal, packet-switched IP network." • "We take the position that while IP will be the network layer of choice for best-effort, non-mission critical and non-real time data communications (such as information exchange and retrieval), it will live alongside other networks, such as circuit-switched networks, that are optimized for high revenue time-sensitive applications that demand timely delivery of data and guaranteed availability of service." • "At the core of the network, we expect the circuit switched transport network to remain as a means to interconnect the packet switched routers, and as a means to provide high reliability, and performance guarantees. Over time, more and more optical technology will be introduced into the transport network, leading to capacities that electronic routers cannot achieve."

16. . . . But IP will dominate the market for smaller enterprise networks • Small IP networks (such as Corporate LANs and WANs) are cheaper and simpler to operate than small circuit-switched networks: • Enterprise packet-switching is considerably simpler and cheaper to manage. • The number of components in an all IP corporate LAN can be significantly smaller than a circuit- switched infrastructure with N^2 characteristics, especially in highly interactive corporates like banks, the pharmaceutical sectors, large engineering firms, and the military. • The power/density/operational complexity characteristics of IP infrastructures in a core network. [NOT CLEAR] • QoS solutions for corporate LANs and WANs are becoming more manageable with the advent of policy-based management technologies: • Both from a hardware/software and operational perspective. • Service providers will also need to maintain packet-switched architectures to enable Internet access and other services: • E.g. managed services, such as storage and hosting, where most corporate interfaces will be IP. • E.g. multi-party services, such as audio, video, and web-enabled conferencing, due to the N-squared complexities associated with trying to provide these services efficiently off a circuit-switched infrastructure. From our conversations with buyers, systems integrators, and service providers, we are convinced the future of enterprise LANs and WANs will be all IP.

17. IP VPNVoice over IPVideo over IPUnified CommunicationsQuality of ServiceIP Storage Review of Key IP Services Technologies and Identification of Potential Winners • What are the drivers and inhibitors of VoIP uptake ? • What other value-added services might VoIP enable service providers to offer? • What does the voice migration architecture look like ? • Who are the potential winners in the Voice over IP arena? • What is the outlook for VoIP in the short term?

18. VoIP currently has some inherent challenges, particularly in the areas of QoS and cost Inhibitors to VoIP • Low cost and efficiency of legacy PSTN equipment weakens the business case for migration to VoIP • Tolerance for medium quality video is high but tolerance for even mildly reduced voice quality is very low • Replacing a TDM switching fabric with routers is not likely to deliver enhanced performance • PBX depreciation cycles are quite long and delay VoIP adoption • MGCP (in cable) vs SIP XML (Telcos and mobile operators) debate is making interoperability more difficult for all vendors Source: CGEY and DrKW Analysis

19. Why QoS matters The example of Voice, a delay sensitive application where users tolerate minimal drop in quality Anatomy of a Simple Voice Call Coder Delay Dejitter Buffer Site A Phone Site B Phone First Mile Last Mile Network Buffer 1 Delay Buffer 2 Delay Queuing Delay Queuing Delay Delay Coder Delay G.729 (5msec look ahead) 5 msec Voice can tolerate only 100 msec; margin for error is small Coder delay G.729 (10msec per frame) 20 msec ?? Queuing delay and Network Buffer delay 0 msec ? Propagation Delay (private lines) 50 msec Dejitter Buffer 75 msec + ?? Total * Courtesy of Fred Destin

20. However, there are significant advantages for service providers from hybrid trunk side architectures Advantages for Service Providers Internet offload Intercept dial-up calls handled by the IP infrastructure avoid clogging up Class-5 and Class-4 switches Improve mesh performance Adding switching capacity has decreasing advantages as more ports get allocated to interconnect with other elements of the mesh rather than to handle new calls By using, for example, an ATM cloud for the interconnect service providers can greatly reduce the number of trunks they need to manage Operational savings Deliver new hybrid applications Many of the applications that mix voice and data, which generally involve SIP manipulations, require IP anyway to interact with intelligent clients Source: CGEY and DrKW Analysis

21. The necessity to deliver new advanced voice services is driving developments in network architecture Customer Demand New Architecture • Economic advantages of packet voice are driving access voice networks from circuit to packet switching • Corporate demand for: • Unassisted,on-demand, reservation-less conferencing services • Unified messaging • Call centres • Obligation to deliver local number portability, emergency and directory services • Web-based invitation, notification, scheduling and device control • Unified network to allow unified and simplified management • Interoperable technology is finally becoming available to enable VoIP over LANs and increasingly WANs • PBX interoperability is improving in brownfields • In next-generation carrier networks: • Voice traffic between traditional voice networks and new packet-based networks will be directed by media gateways and media gateway controllers, which will be handled by soft-switches • There are two key concepts behind these new networks: • Media gateways, signalling gateways, media gateway controllers and application servers will be divided into separate logical network components • These components will communicate with one another through the use of intra-switch protocols such as Media Gateway Control (MEGACO), Media Gateway Control Protocol (MGCP), SCTP/M3UA and Session Initiation Protocol (SIP) VoIP today is more a question of delivering a suite of hybrid voice/data services than replacing TDM networks. Source: CGEY and DrKW Analysis

22. VoIP is not interesting in itself, but explosive growth in IP Services will come from services it enables Conferencing A market experiencing explosive growth at present and that tops the agenda of vendors and users alike Unified Messaging Call centers A medium term winner delivering clear user experience and connectivity improvements Huge addressable market further enabled by speech technologies for total customer contact and reduced operational costs. VoIP ToolBox

23. IP Centrex • Centrex (central office exchange service) is a service from local telephone companies in which up-to-date telephone facilities at the service provider’s central office are offered to business users who do not wish to purchase their own facilities. • The Centrex service consists of allocating centralized capabilities among different business customers. The customer is spared the expense of having to keep up with fast-moving technology changes (for example, having to continually update their private branchexchange infrastructure) and the phone company has a new set of services to bill for. • According to statistics compiled by RHK, the Centrex service is most popular with small to mid-sized companies with up to 400 lines. However, customers with over 1,000 lines represent over 20% of the existing Centrex base. • These larger customers have been increasingly investing in their own infrastructure, as suggested by the following data showing erosion of 8% per year from 1996 to 2001. The rate of decline is expected to increase to 12% per year from 2001 to 2005. • Meanwhile, smaller customers are expected to show only modest growth in the adoption of Centrex. Another source of risk with Centrex customers is that as they switch from outsourcing to owning their own facilities, service providers risk losing other precious sources of revenue such as Web hosting, VPN offerings and Unified Communications. According to Lucent, such losses could add up to $750,000 per customer per week, or approximately $39 m per year. Source: Ariane Mahler, CGEY and DrKW Analysis

24. We have identified the potential winners in the VoIP space... Issue Solution Winners Complexity Management Elegantly bridging voice and packet networks Integrated bearing/ signalling/control box Telica Device Proliferation Deliver QoS sensitive services with limited knowledge of endpoint Converged SIP based application delivery platform Dynamicsoft Interoperability, multi-vendor solutions No appetite for forklift upgrades Gradual migration in softwsitch architecture in multiprotocol world Veraz networks Integrating voice with other real-time apps Multi-channel interface for application delivery Iperia, Voyant, Aspect Product Innovation Scale packet based voice services Separate voice processing from application logic IP Unity (media server) Sylantro, Pactolus (apps server) Process Innovation End-to-end solutions absent Control the value chain from the user interface up Avaya Source: CGE&Y and DrKW Analysis.

25. … and created a market map of the next generation VoIP players IP Devices Application Servers Softswitches Gateways SonusSyndeoCommworksTaquaipVerseConvergent NetworksCisco (IP Cell)MockingbirdTekelecNueraUnisphereGallery IPT DynamicsoftTelephony@WorkSylantroPactolus CiscoAvayaAscomMitelPolycomCongruencye-TelEricssonTelstratTundoNortelToshibaAlcatelSamsung SonusSyndeoCommworksTaquaipVerseConvergent NetworksCisco (IP Cell)MockingbirdTekelecNueraUnisphereGallery IPT Media Servers IP UnityConvedia AlcatelNortelLucentTelcordia AlcatelNortelLucentTelcordia Source: CGEY and DrKW Analysis

26. 100% VoIP for core voice transport is many years into the future Conclusions on VoIP • IP is not the optimal technology for scaling a voice business: • QoS slippage is not an option • Legacy infrastructure is cheap and very efficient • The transition to VoIP will be slow as each new service introduced must be value accretive and protect the value of legacy networks • Work on VoIP has led to developments in technology that enable delivery of real time services e.g. call centre automation and conferencing • The market take-up of these services depends on the design, pricing and bundling of attractive end-user applications: • It is up to the carriers to design and deliver IP-enabled differentiated services that leverage existing TDM networks … without falling back into a minutes / bits price war The near-term significance of VoIP is in the real-time IP Services that it enables. Source: CGEY and DrKW Analysis

27. While IP technology promises a lot, success depends on improved QoS and IP-VPN users reaching critical mass What It Means Key Findings—Technology • Most IP services have crossed the “Operational Chasm”—they work! • Proliferating technologies, standards, and devices have not yet given way to more integrated solutions • IP-VPN and voice/video over IP may enhance the next wave of services • QoS to deliver real-time IP is emerging, but selectively and slowly • “IP everywhere” is neither always required nor always desirable • Costs of managing IP complexity may exceed many IP benefits: • Too many ROI case studies fail to consider “hidden costs" of complexities • Additional software/hardware/”wetware” (blood, sweat and tears) needed as device numbers increase. • Tasks such as “coupling" and "amplification" are proving difficult in large-scale networks. • QoS-driven IP services can evolve only where QoS issues resolved; not everywhere at once! • IP services with QoS work best in autonomous networks e.g. in the LAN or the service provider’s own core IP network • Corporate IP-VPN(not the internet) becomes the foundation and enabler for all other IP services • Massive technology disruptions are unlikely Key Technology Challenges • Extend QoS across the WAN to include all brownfield and greenfield sites; becomes the basis for other services • Enhance legacy voice services with IP interactivity: • For customer-activated conferencing, internal line provisioning, integrated communications interface, and other additional functionalities • Make corporate applications fully available to remote users and key external parties • Delivering IPv6 and end-to-end QoS across the internet cloud look to be many years away

28. The future of real-time IP Services depends on successfully developing and deploying emerging QoS tools QoS Solution/Method Description Tools Over-provisioning • Common over-provisioning is for typical bandwidth utilisation • QoS over-provisioning is for peak utilisation • May raise questions of affordability • Increased edge/access infrastructure (servers, switches, routers and gateways) Guaranteed bandwidth allocations or resource reservation • Make sure preferred “bursty” bandwidth is available to QoS-sensitive applications • Determine preferred paths in network • Implement circuit-switching with ATM • Implement connection-oriented IP with MPLS • Signalled resource reservation with RSVP Traffic management • Admission control • Data management: packet prioritisation, policing and shaping • Compression • Provision-class packet marking with DiffServ • Standardised shaping/queue reordering/etc. • IPv6 Application-driven QoS • Prioritise by application, not packet type or port • Measure and police network traffic in real time • Content management & caching • Implement centrally controlled traffic-management tools and drive policies down to network elements in the LAN • Multicast & content-aware networking Delivering quality is an inter-domain traffic engineering problem encountered at both the interface of the WAN and LAN and between service provider networks.

29. The IP services market is in its infancy, but it is increasingly recognised as the industry’s best hope for growth • No winners in next 24 months, only survivors. • IP services will grow steadily over the next two years (possibly 10%). • QoS has yet to be fully resolved: Be suspicious of any hype. • TDM voice networks will not disappear into some converged Nirvana; they work! • “Converged networks” more likely means hybrid networks with IP enhancements, not fully converged IP networks. • Service providers and vendors are still not speaking end-user benefits.