While VoIP Adoption Explodes in Enterprise, Carrier Spending Lags

Enterprise users and small-to-mid-size businesses are showing a growing interest in VoIP as their telecom technology of choice. Their embrace may not have risen to the level of “fervent,” but certainly the positive energy is there.

By contrast, in a new study, Dell’Oro Group reports that traditional wire-line telcos – once fairly enthusiastic customers for IP infrastructure – are becoming less interested in purchasing the media gateways and softswitches that would convert their aging TDM voice networks to VoIP-driven models.

“We think service providers are slowing down their investments in VoIP,” said Dell’Oro Vice President Greg Collins. “In this tight economic time, they are really focusing their capital spending on newer services that can generate incremental revenues.”

Dell’Oro’s “IP Telephony Carrier Quarterly Report” shows that global sales of IP phone infrastructure to service providers fell 8 percent in the second quarter of 2008 to $861 million, as compared to the same quarter a year earlier. The decline from Q1 of 2008 was an even more noticeable 10 percent.

To be clear: These numbers don’t reflect the amount carriers are spending to deliver VoIP services at the user end. That’s a separate issue entirely. Rather, the study refers to hardware purchases that would convert carriers’ own networks from traditional TDM to VoIP technology.

The drop in this type of VoIP spending among the big telcos can be attributed largely to rising competition coming from cable and wireless LAN providers who, in addition to providing TV, are horning in on the voice game. Small-business owners and enterprise executives see packages of video and data and voice bundled together at a reasonable price and it’s hard to say no. As a result, the traditional voice offering begins to loose appeal. Subscriber numbers for “plain old telephone service” (POTS) drop as users shift allegiance to more up-to-date products.

This declining market share – along with decreasing profits from POTS in general – leaves the traditional telcos scrambling to find a new competitive edge.

In this environment, Collins said, the need to upgrade old infrastructure with new VoIP equipment seems less pressing than the need to discover new revenue streams. AT&T for example is pursuing its U-verse IPTV-and-high-speed-Internet offering, while Verizon continues to invest heavily in FIOS, its fiber-optic-based equivalent – each as a response to the changing landscape and their declining voice-only subscribership.

“Those kinds of things seem to be overtaking projects that would upgrade existing telephony infrastructure,” Collins said. The traditional voice service “is a declining business, and they don’t feel a big need to upgrade the infrastructure in order to improve that declining business.”

Certainly the telcos would stand to gain something if they were to invest in VoIP upgrades to their systems. As Collins notes, aging systems can be replaced with VoIP architecture at a lower cost than traditional hardware. But a less costly expenditure is still an expenditure, and management these days is looking to demonstrate revenues, not exhibit cost savings.

“The top-line growth is more important than saving some money operationally,” Collins said. Investments in new products eventually show up in the plus column, in the form of increased sales, where investments behind the scenes for maintenance appear as money spent – even if such VoIP spending would likely represent a long-term savings.

The net result has been a quarter-by-quarter drop in spending. “Some of these investments that are designed to improve legacy-type service have really fallen off,” Collins service.

All this stands separate from the sale of VoIP gear in the enterprise and SMB markets, where interest continues to rise. That’s good news for the VoIP community overall, Collins said. Growing demand for VoIP among business users could give vendors a way to keep equipment sales flowing even as carriers are putting off such purchases.

“If you do have a newer operator providing innovative voice over IP services, that will help sustain the market,” Collins said. Even in the absence of big buys by the carriers, “that still represents a very substantial potential market for the vendors.”

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