C&W to pay Nortel £950m to expand internet voice technology plans

Leaps in technology are slashing costs and forcing telecoms firms to rewrite business models

The cost of long distance phone calls, already just a fraction of the rates charged only a few years ago, is destined to fall substantially further over the next few years thanks to the accelerating roll out of a network technology called Voice over Internet Protocol or VoIP.

The cost of long distance phone calls, already just a fraction of the rates charged only a few years ago, is destined to fall substantially further over the next few years thanks to the accelerating roll out of a network technology called Voice over Internet Protocol or VoIP.

The latest impetus to the spread of this technology came yesterday when Cable & Wireless agreed to pay Nortel Networks £950m over 10 years to upgrade its global network to VoIP. That will bring voice, data and internet protocol on to a single network and involves changing all the switches on C&W's existing network over the next three years.

VoIP technology uses high speed, fast expanding internet data networks to transport telephone voice messages, turning your computer into a telephone and vice versa. With the technology at an early stage the quality of voice communication is inferior to the high quality telephone service we take for granted but that's changing fast.

For telephone companies, such as C&W, the capacity of the fibre optic networks means that voice calls will use just a fraction of the system's capability. Consequently, users will be offered a wide range of services, notably videophones, at increasingly lower prices as economies of scale and competition increase.

Mike McTighe, chief executive of C&W's global operations, said: "With [the Nortel deal], C&W is taking a lead in VoIP, addressing both the national and international voice business. Our full-service internet protocol network will give customers better end-to-end control, a wider variety of high quality applications and more cost efficient voice services." C&W believes that the network will drive its cost of handling voice telephony to around a quarter of current levels. "The cost effectiveness is massive," said Mr McTighe.

C&W will spend £475m in the first three years of the project, which will see Nortel design and build the VoIP network. For the remaining seven years of the contract period, Nortel will receive a further £475m for managing the network.

Clarence Chandran, Nortel's chief operating officer, said: "This is a landmark agreement, not just for ourselves and C&W, but for the industry as a whole. Migrating a circuit-switched global network to an IP-based packet-switched network is a very complex challenge, but a necessary one for carriers who want successfully to leverage the power and value of the new high performance internet."

What lies at the heart of the transition is a fundamental shift in technology. This will see the old style circuit-switched means of accessing a telecoms network superseded by the use of packet-switched technology, employed originally in computer networks, becoming the means of communications at the heart of the internet. This is forcing telecoms companies to rewrite traditional business models.

With voice telephony, a circuit opens when a caller picks up a phone and is completed when another person answers. The period that the circuit is engaged determines the calling charge.

With packet-switching, packages of data are sent from computers into a fibre optic network where they get routed to their intended destination. Since packets of data use less network capacity for a shorter duration of time than voice transmission packet-switching is far cheaper and much more efficient.

The economics of packet- switching over the internet mean that any call, whether to Brazil or a next-door neighbour, would have no marginal cost, beyond your monthly internet connection fee. The key reason for this is that packet-switching allows multiple users on a single, high capacity, channel.

Until recently, telecoms companies routinely operated separate networks for voice, data, mobile and internet services. However, the rise of packet- switching technology and the advent of non-proprietory internet protocol technology levels the playing field for new service providers and slashes unit costs for existing companies.

For big, cumbersome, former monopoly operators like British Telecom, VoIP offers pitfalls and opportunities in equal measure. The potential to slice through the company's existing cost base is balanced by the threat of cut-throat competition.

For evidence of the impact on BT one need only examine its quarterly accounts. In its fiscal first quarter to June, BT racked up an estimated 15 per cent rise in fixed network calling time. That healthy volume growth, however, translated into a 5.4 per cent decline in fixed-line calling revenue to £1.411bn, and contributed to a 19 per cent fall in operating profit to £755m.

The emerging business model for telecoms companies of the future has three strands: a set monthly rental charge; pay-per-use charges for accessing video-on-demand and interactive games; and commissions from providing the network conduit facilitating e-commerce. Paul Cronin, voice product marketing manager for Europe at Cisco Systems, the leading internet router maker, said: "The whole model has shifted from being virtually totally dependent on voice minutes to a monthly charge (augmented by) pay-per-use and impulse purchase revenues."

The services to emerge from the spread of VoIP will range from low-cost video telephone to unmetered long distance calling for a flat fee. One offering, called Dial Pad, allows free US long distance calls in exchange for callers looking at target advertising. Dial Pad charges the advertiser.

"Service providers in the US are going at full speed to keep up with demand," notes Cisco's Mr Cronin, commenting on VoIP. "We'll see that service coming here soon."