So any service provider climbing on a horse has to have made some fundamental decisions about where to sit in the value chain and in the competitive matrix. “Are you trying to grow or protect your existing business? It makes a difference,” says Jon Arnold, Frost & Sullivan VoIP program leader.

To confuse matters further, one can deliver voice traffic using TDM, on voice-grade lines, but then enhance call control using IP-based servers and switching. “VoIP is just an access method to us,” says Thor Bendickson, GoSolutions CEO. “We deliver an integrated voice and email box, find me-follow me, automated attendant, on-hold music, dial-by-speaking-a-name and other features over TDM lines today.”

So any service provider has to match the technological platforms with the type of customer base one already has or wants to acquire. Then one has to grapple with the typical “build versus buy” platform issues.

And where a simple consumer second line or trunk replacement product doesn’t require site survey, planning and integration support, a hosted PBX product certainly will. Not to mention that development of integrated applications that embed IP telephony within existing vertical market business processes will require application development capabilities not many service providers possess – or even wish to possess.

“What’s my role in delivering VoIP? That’s the question everybody’s asking themselves right now,” asks Harry Lalor, Focal Communications vice president. “What’s your existing business model, and what value can you add?”

Then there are all the prosaic issues, such as firewall, the compatibility of devices and protocols with each other and the scalability of all your business processes. “By definition, almost everything has to be dealt with as though it’s off-net,” says Z-Tel Technologies CEO Gregg Smith.

“Highly automated support, integrated billing, order management and customer care, CPE management and fulfillment, provisioning and after-sale support as well as network monitoring all are important,” says Grange.

Finally, though it is not a major strategic concern at this point – and may not ever become a serious threat – the rise of session initiation protocol (SIP) represents a clear challenge to the entire service provider value proposition. To be clear, the issue is that SIP phones don’t actually need a network to communicate with each other. So what’s the value proposition for a service provider when devices at the edge can communicate with each other through the Internet, without the mediation of a network services provider in the middle?

The upshot is that it pays to be thoughtful about everything connected with VoIP. And also “why wholesale looks attractive,” says Mark Whittier, VocalData vice president. Put simply, there’s just less risk of mounting the wrong horse, or getting caught backward in the saddle.

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Decisions, Decisions

Dangerous though it may be, nearly all service providers are in some phase of testing, evaluation or adoption of VoIP as a local exchange product. “We know it’s something we have to have,” says Brenda MacDonald, TNCI vice president. “It’s the way we’ll all go.”

And lots of companies are looking at a wholesale solution. “I don’t want to build it, no way,” says Mocas of Eastern. “Really, it’s about time to market,” says Arnold (Frost & Sullivan). For the large tier one carriers, there also are training and culture issues.

Wholesale VoIP providers are getting laser focused on their choice of partners as well. “We don’t do residential and are focusing on partners that have commercial accounts, typically billing $500 a month or so,” says Neil Rosenblit, DCI Voice Solutions vice president. “We’re really looking for interconnect partners and larger sales organizations or master agencies who want to deliver a call IP and terminate it TDM anywhere in the United States,” Rosenblit says.

“Whether the business customer is IP-enabled or not doesn’t matter,” he notes. DCI Voice Solutions can put an integrated access device or terminal adapter on the premises where service is to a legacy key system or PBX.

“Whether it’s a calling card of business product, it has to be scalable and manageable,” says Steve Ray, Lightyear Communications director. “But we don’t have a choice not to offer it.” For its business customers, the main advantage the company sees is the ability to serve multi-location companies with dynamically allocated bandwidth.

“We’ll aim our VoIP offerings at the business customer with monthly spending in the $500 to $5,000 a month range,” says Ray. “IP Centrex will be big, as will the dynamic integrated T-1 features.”

A frequent bit of advice is that managed services make sense for switchless resellers and any companies for which the capital investment and technological capabilities to support the platform don’t make sense. “Competitive players have an extreme need to bundle VoIP but are capex constrained,” says Ron Harden, Volo Communications executive vice president. “They often don’t have the expertise to get in overnight.”

VoIP services also differ in complexity, a fact that may make an outsourced solution more attractive. “An ISP with a couple hundred customers might be able to install and support Cisco IP phones,” says Mark Richards, Volo COO. “But when you have to support thousands of customers, that’s a different level of complexity, equipment and knowledge.” Not to mention taxation, regulatory support, back office and billing issues.

For that reason, wholesale options may make most sense for service providers at two ends of the spectrum. “Small, independent LECs, ISPs, CLECs and other smaller operators may, for one reason or another, simply want to buy VoIP by the T-1 and sell it to customers,” says Whittier. “At the opposite end, very-large ILECs and other service providers will want to use wholesale, at least for an interim period, because it’s such a huge migration, and you can’t do it flash cut.”

Of course, the decision matrix is quite different for companies that have substantial investments in Class 5 switching assets. “We’re going through the exercise now,” says Bob Bailey, Choice One Communications senior vice president, whose firm has settled on a voice-over-ATM approach, in part to preserve its investment in Class 5 infrastructure. “IP becomes a way to provide hosted services, so we’ll put in soft switches for customers who want those features,” Bailey says.

Among those applications is ubiquity and transparency for customers that operate at multiple sites in multiple cities, where it is difficult to provide the same features at each location. “IP gives me the ability to do that,” Bailey adds.

“I’d say, if I were a switchless reseller, that I’d be inclined to outsource my VoIP capability,” Bailey says. But not everybody’s business model allows for that option.

“We’ve found that we need to be able to fix a problem ourselves, so all of our core products have to be our own,” says US LEC CEO Aaron Cowell, Jr. The company plans to be operational in seven to 10 markets by the end of the year and will focus on using VoIP as a way to enhance its allocation of bandwidth on its T-1 connections. Then it will load more than 24 voice lines on a T-1, following with a hosted Centrex offering.

As one might expect from a company that has a considerable amount of deployed infrastructure, US LEC will use gateways to convert traffic to IP format for access but maintain compatibility with its Class 5 switching base and legacy PBX support.

Partners looking for a consumer-grade wholesale offering, especially those built on a “bring your own broadband” approach, need to keep in mind that, “over time, quality of service will drop, as you get more congestion,” says Don Brown, Verso Technologies director. By definition, hosted service providers don’t have quality of service agreements with the access providers. “Your QoS ends the first time your traffic hits a router not configured the way yours are,” says Brown.

“So it’s important to have QoS agreements if you’re buying wholesale,” Brown warns. “Also, if you aren’t doing the provisioning yourself, you have to understand the customer experience and what will happen when a problem develops.

“I’d also ask how many terminating agreements your wholesaler has and to where,” Brown continues. “In some cases, especially when buying a business-focused service, I’d want to know what advanced features – beyond Class 5 – are available.” (Think hosted PBX and Centrex features, says Dagda Mor).

Terms, Conditions

“Take or pay” probably remains a familiar and basic business arrangement for many providers of wholesale VoIP services but not exclusively. “We need some volume to turn up a partner,” says Harden (of Volo). “We’d typically like to see billing within 90 to 120 days of $25,000 a month and 1,000 to 2,000 subscribers.

But that’s far from universal. Greenpath Networks, for example, does not require minimum volume from its partners. The company, which recently partnered with ECG, also offers its partners a branded back office and billing service, as a result. “Calls to their call center are answered with our partner brand name, and the billing is branded as well,” says Dean Parker, Greenpath Networks CEO.

Greenpath uses DSL for its residential offerings and a T-1-based VPN for business customers, Parker says. At the moment, the company is not offering a residential service under its own name and is looking for partners to handle services in that segment, Parker says.

Level 3 Communications, for its part, isn’t so immediately concerned about partner volume commitments, at least for its (3)Tone enterprise-focused VoIP products. “We’re picky but aren’t so focused on ‘take or pay’ right now,” says Gordon Boyes, wholesale vice president. “We have a partner review committee but aren’t real sticklers about revenue in the first 12 months.”

In any event, Level 3 is an 800-pound gorilla in the space. “We have close to 1.3 million local trunks in service, all enabled for voice,” says Myrle McNeal, Level 3 VoIP services vice president. “Our local calling capability reaches 93 percent of the U.S. population.”

By the end of the second quarter, Level 3 expects to have a full-featured local calling product in place, with 911 support, local number portability and directory assistance. “We can handle SOHOs, SMEs with up to 400 or 500 employees with hosted PBX and standard Class 5 features,” says John Guillume, Level 3 vice president.

Covad Communications, historically known as a wholesale provider of DSL connections for Internet service providers and carrier customers, now is developing a wholesale VoIP offering, built on its GoBeam acquisition. That offering originally was designed for businesses with 20 or more employees. But it will be reconfigured to support businesses with four to 12 lines, says Dave McMorrow, Covad vice president. A consumer offering also is in the works and is expected to be available in the first quarter of 2005.

The Covad offering will feature the same “heavy on the automated back office” support originally built for its DSL customers, says McMorrow.

Also, some retailers are adding wholesale operations as well, especially as they aim for nationwide coverage. Pingtone Communications, for example, historically has focused on the Northeast corridor from Boston to northern Virginia. But the company “is in the process of expanding to the top U.S. markets within the next couple of months,” says Jerry Cady, Pingtone CEO.

In addition to its base of data value-added reseller partners, Pingtone sells to providers serving multiple dwelling units and high-end residential communities. “Eventually, at least some of our MDU partners will want to buy wholesale and offer service retail under their own names,” says Cady. The same will be true for its satellite partners.

Z-Tel Technologies, for its part, plans to have a national VoIP presence by January 2005, with “various flavors of connectivity, including cable modem, DSL, EELS and so forth,” Smith says. “As an industry, we have to make the enterprise more virtual, develop applications that create business improvements.”

Texas-based Optiva Networks, for its part, also plans to “go national,” eventually, but is really focused on its “Central Texas” footprint right now, says Richard Sorenson, CEO.

“On the consumer side, a year from now, you’ll have 150 different suppliers,” says ICG Communications CTO Michael Kallett. The hosted PBX business will be tougher, though, Kallett argues. “Who’s going to do the site surveys of premises LANs? Who’s going to fix something that breaks?”

The problem, Kallett notes, is “there’s a lot of process engineering on site, just like when you install a PBX. Most CLECs can’t do that.” He likens selling a hosted PBX service to selling an Oracle financial applications package. “You just have to provide lots more support,” he notes. “So installation and maintenance will be a big issue over the next couple of years.”

Features, not Calling

In the final analysis, though, VoIP will not be about access or dial tone or low prices. To paraphrase and extend an aphorism, “It’s the features, stupid.”

“You want to deliver features that are impossible in a TDM environment, such as delivery of calls to non-traditional interfaces like PCs or handhelds, or place calls from the Web,” says Bendickson.

“In a couple of years, people will understand that this is not about POTS replacement but business process enhancement,” says Smith. “It’s about inbound call management, the detection of your caller’s presence and then handling of the message based on where that person actually is, right now, and how that person wants to handle that particular message.”

Vertical markets will play a large role, in that regard, says Sorenson. “Attorneys may benefit from call recording, for example, says Richard Primeaux, Voxpath Networks chief marketing office. “That way, they don’t require specialized hardware and software for taking depositions, for example.

“One company we know is in a $17 million litigation right now because they can’t prove they said something to a client a year ago,” Primeaux adds. “So VARs with strength in particular industry verticals need to figure out how to package, bundle and market communications features built on VoIP that enhance basic business productivity.”

“From our perspective, VoIP is an application, so the value lies in integrating that application with others,” says MicroCorp CEO Brad Miehl. “How do you integrate voice into other business processes, like Microsoft Outlook, for example?” Businesses use all kinds of tools, so you want to voice enable them, Miehl argues.

Creating seamless campus environments is one example of such process integration. So are hosted billing features specific to certain vertical segments. “A business has lots of contacts in a database, so you want to tie those entries to a phone database, track calls and messages and then deliver them, using all that information,” Miehl says.

“Screen pops and quick access to information, as well as collaboration features, is where the value is found,” says Miehl. “A major shift in the way people look at voice is coming,” he notes. “It will be tightly integrated with other tools.”

“Today the value is the economics,” says Grange. “But, ultimately, what drives adoption are the applications that will be developed, especially those that have business impact.” So we ought to be looking for companies to develop ways of embedding voice functionality into customer relationship and enterprise resource planning systems, for example.

And make no mistake, that’s a big change in industry thinking. It used to be that people saw themselves as being in the business of building and managing networks, and getting paid for the services the network provides. In the future, executives are saying, the whole thing we call the “network” will be a piece of the overall reason people buy services from you. In other words, being a provider of network connectivity, or a distribution channel, will not provide the highest margin and the highest perceived value [Ed. note: dumb pipe.

In fact, in an IP-centric world, it won’t make much sense to recreate service delivery mechanisms, at the physical level. “Leave the media where it makes the most sense,” says Widmar. One wants to control the signaling and deliver the bearer traffic by any means the called party wants to receive it, irrespective of who owns the particular circuit or connection the called party wants to use, at that particular moment.

To put matters in the simplest of terms, it used to be that ownership of a physical circuit or facility meant control of a customer account. That increasingly is not true. Ownership of a connection means owning part of a customer wallet. But control and use of that connection might be under the control of some other party, whose primary value lies in managing message signaling.

We all know which way the horses are headed. But you still have to pick your horse. A wholesale solution is one way of ensuring your jockey is in the stirrups facing the same direction that the horse is going to bolt out of the gates. Then you get to run your race. FAT