Voice wholesalers face IP challenges

On the face of it, the international wholesale voice market is sliding into a state of terminal decline. Average prices are reducing dramatically, margins are being squeezed, and volumes are not increasing at the rates necessary to offset declining prices. Indeed, in some markets traffic volumes are even falling.

 

International voice wholesalers must act now to address two considerable challenges: the intense margin squeeze, and market transformation as VoIP begins to dominate.

 

The forecast increases in wholesale international voice traffic volumes will not be sufficient to cover the overall downward trend in revenues, and margins will be squeezed more and more. It is no surprise that carriers are increasingly talking about bottom as well as top lines: managing costs and gaining economies of scale are at least as important as, and in some markets more important than, volume growth. Our latest forecasts project a doubling of international wholesale voice traffic over the next five years, but we expect revenues to fall over the same period.

 

International wholesale traffic volumes will grow to 349 billion minutes in 2016 (8.2% CAGR 2009–16), with the greatest growth in Asia-Pacific and South & Central America. However, in the same period net wholesale revenues (i.e. excluding termination) for carrying international voice traffic will decline to $2.9 billion (€2.1 billion) as a result of continued downward pressure on prices.

 

Consolidation of the market is inevitable, but this is taking the form of outsourcing contracts rather than mergers or acquisitions. National carriers are increasingly outsourcing international termination, and even some wholesalers are outsourcing their international off-net traffic to a small subset of international wholesalers that have the scale and efficiency necessary to garner the economies that make the business viable.

 

VoIP is a double-edged sword for international wholesalers. Most international carriers have invested heavily in next-generation, IP-based network infrastructure, which offers considerable cost savings for the carriage of voice and data traffic together on a single integrated network. We estimate that nearly three-quarters of international voice traffic in 2010 was carried using VoIP, and expect that to rise to virtually 100% by 2015.

 

However, the real challenge for retail and wholesale telcos has come from Internet-based OTT VoIP services such as Skype and GoogleTalk, which are perceived as free or extremely low-cost. These services attack the traditional telco international voice business model because they use the public Internet to connect callers, cutting out the need to pay for international transit and termination separately.

 

 

If Internet VoIP grows to dominate the international retail voice market, then the international wholesale voice market will disappear as no-one will be prepared to pay for it. Wholesalers must act now to avoid this worst-case scenario through a combination of service differentiation (primarily based on quality and security) and the bundling of voice with other services.

Our forecasts demonstrate that by 2016 the vast majority of international voice traffic will be mobile-originated. This will be due to a combination of fixed-to-mobile substitution in developed markets and the rapid growth of mobile connections in the emerging markets of Africa, Asia, and Latin America. However, the OTT VoIP service providers are hungrily eyeing this traffic growth as an opportunity to increase their market share through bypassing the established international carriers.

 

To compete, the mobile industry body, the GSMA, developed the IPX (IP exchange) concept. This supports retail and wholesale carrier roles, and potentially differentiates from OTT-provided VoIP through service interoperability, quality provision, and cascading payments on a single, secure, managed IP network. Although developed by the mobile industry, IPX is equally relevant to fixed operators. Furthermore, it makes sense for international carriers to become IPX hub providers as they already have the necessary business and network infrastructure.

 

Some carriers argue that a network of interconnected IPXs has few advantages for the exchange of international VoIP and TDM voice traffic compared to a system of global carriers with established interrelationships.

 

However, that is missing the main justification for IPX. The future of voice will be about integrating telephony with other services – messaging, video, apps, social media – on a one-to-one, one-to-many, and many-to-many basis. This is exactly what IPX has been designed to support.