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Is this the year of voice over IP, or the year of hype over voice over IP? A slew of major carriers have entered the consumer retail VoIP arena this year, while challengers like Skype and Vonage continue to rack up numbers. VoIP is taking serious headlines and mindshare. And it's clearly a direct threat to incumbents.

"Almost every service provider I am speaking to is thinking about some sort of transformation," said David Caspari, vice-president of Cisco's Asia-Pacific service provider operations.

"If the incumbents don't develop a product--in this case, VoIP--to cannibalize their own base, then their rivals will come in and attack their base," said Darren Day, Asia-Pacific director of marketing for MCI.

"There's no doubt in the consumer market it's one of the most talked-about subjects," said senior Ovum analyst Mark Main. He estimates the number of worldwide consumer VoIP users represents a "very small penetration" of the total voice market--about 1% to 2%.

But development of consumer VoIP has been very market-specific, Main notes. VoIP has become a major service in Japan, which leads the world with more than 9 million customers, because of the high-cost of IDD calls. Both Yahoo! BB, and NTT Communications now each have more than 4 million VoIP customers, offering calls around the world for just a few cents a minute.

Free Telecom in France is bundling VoIP with multi-channel TV for 30 euros a month--a response to the poor level of choice in the TV market, says Main. By contrast, the UK has low IDD prices, a wide choice of TV channels and only 10,000 or so VoIP customers.

"There's not a lot of money to be made from any kind of telephone service these days," Main said. "It's not a huge money-spinner."

So we are still fairly early in the technology adoption cycle of VoIP, despite the great Leap of the past 12 months. But every carrier has marked the VoIP and NGN transformation onto its roadmap, says Caspari.

Challenging the rules.

For a service that is not even classified as belonging to the telecom sector, VoIP is causing plenty of headaches for industry regulators. In fact, it is that very nature of VoIP that is the heart of the problem; it supports voice, but in no other way resembles a telecoms service.

VoIP thus presents a paradigm-busting dilemma for progressive regulators. They don't want to stand in the way of fresh technology but know they will be first to blame for any kind of service disruption.

So, regulators from Singapore to Europe have embarked on industry consultations on VoIP, dealing with the same slate of issues.

"It's pretty unusual to see everyone working on the same issue at the same time," observes Paul White, executive manager of standards and compliance with the Australian Communications Authority (ACA). The ACA lists 21 questions in a consultation paper issued in October.

On one side are technical questions. Internet voice calling doesn't have its own power supply, meaning no service in a power cut. Emergency and security services are worried that it doesn't provide location information. There is no VoIP numbering plan, nor is it configured for number portability. Quality is uncertain.

Then there are the financial issues. In particular, incumbent carriers are quarrelling about the impact on the financing of universal service obligations (USOs) and on local access or interconnection fees.

That's become a thorny topic in the US, where $6.2 billion each year is paid out for various USO programs. One FCC commissioner, Kathleen Abernathy, has proposed a flat tax on every physical network connection, or every phone number.

These issues will take some working out, but it's worth noting that most regulators have gone out of their way to facilitate the development of Vole Most look likely to follow in the spirit of the FCC, which has declared VoIP to be an information and not a telecommunications service, and hence not subject to telecom regulations--at least not yet.

But Hong Kong incumbent PCCW has objected to the green-lighting of VoIP ahead of industry consultation. It's taken regulator OFTA to court, claiming that rival CTI has exceeded the scope of its local license with its VoIP offering.

"This is a very Hong Kong-specific, narrow legal issue," says Stuart Chiron, PCCW's director of regulatory affairs. "It's not an attack on VoIP generally, it's not an attack on technology.

"There's a proper way to get [VoIP] off and running here and that is through public consultation," Chiron told Telecom Asia. "All the issue are laid out ... and the government takes a decision. The way not to do it is to do it outside the scope of its license."

OFTA simply disagrees. "There is nothing we can do to pull back a service that is within the license conditions," says OFTA chief M.H. Au.

PCCW also has issues with the financing of the universal service charge, which comes out of international minutes. "Some of the revenue will go missing," says Chiron.

Despite those differences, Chiron says PCCW saw the same issues with VoIP as those laid down in OFTA's paper. Au said the key issues for OFTA were whether the existing license conditions were too stringent, whether or not non-network based operators should be allowed to enter the market, and the impact on the existing interconnection regime.

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"When you look at the business case, purely on cost regime, and reducing opex, operators struggle to justify the very significant investment they have to make to transform the network from circuit to packet-based. Their focus is also on how to address incremental revenue and services."

Asian markets certainly run the gamut of responses to VoIP. At the opposite end to Japan, Thai authorities have responded by arresting 30 people in early October for offering VoIP as an unauthorized service.

No consumer VoIP service is available in Singapore. SingTel's initial foray, via way of a partnership with US-based SIPphone, has moved slowly. SIPphone CEO Michael Robertson, who founded dotcom company MP3.com, enthused at the April launch that the service would have a similar impact on the voice market as his previous venture had on the music market.

However, although initially targeted at Asian service providers, its end-users today are all in North America. Richard Tan, vice president of SingTel's international carrier services, told Telecom Asia he saw limited prospects for consumer VoIP in Singapore.

"Given the maturity and cost competitiveness of the local telephony market, we do not expect VoIP services to offer any dramatic cost advantages in Singapore," he said in an email message.

Cannibalizing core revenue

What's brought VoIP to center stage right now? Hardcore hobbyists were making Internet voice calls a decade ago. Internet or packet-based voice has been running in trunk backbones for four or five years now. IP wholesaler iBasis estimates that a third of all international voice minutes are now carried by IP. Likewise IP voice over corporate VPNs or PBXs is not new either.

VoIP for the mass market, or consumer VoIP, or broadband telephony, is the first big broadband application after pure high-speed access; ironic perhaps, that the telcos' much sought after killer app for broadband is one that cannibalizes their core revenues.

The availability of broadband has given the impetus for viral PC-based applications such as Amsterdam-based Skype and Voglo from the US (see "Reaching for the Skype", p.20). Skype CEO Niklas Zennstrom was also the co-creator of the Kazaa file sharing software, which is the all-time most popular Internet download, with 380 million downloads.

Using Skype's proprietary P2P software, callers can connect to other Skype users for no more than the price of a headset. A commercial version of the service, SkypeOut, offers charges of typically 1.7 euro cents (2.2 cents) a minute to place PSTN calls to major destinations. A voice mail product is on the drawing board.

UK research firm Analysys calls Skype and Voglo "PVAs"--private VolP applications--and estimates they could take as much as 13% of the residential wireline voice market in Europe by 2007. By that time, in the worst-case scenario, incumbents could lose as much as 3.3 billion euros in subscription revenues a year, Analysys suggests.

From one perspective, services like Skype, Voglo and US VoIP pioneer Vonage make for tough competitors. Says Main: "The beauty of their approach is there is no risk for the user. But it's not clear yet how much impact it has had, and how much revenue it is going to gain."