Convergence interrupted

As Internet Telephony takes off in the region, Lebanese businesses and consumers find themselves on the sidelines of a global paradigm shift in communication

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2004 is already shaping up to be the year that “converged networking” (CN) – the merging of voice, data and video communications into one seamless system – truly came of age. Although the concept is not particularly new, it can now be said, with confidence, that the technical problems surrounding CN have finally been solved for the serious enterprise user and casual consumer alike. Most significantly though, both the capital and operating costs of convergence have declined substantially while, in the process, even the corporate telecom behemoths, whose profits were largely dependent on a segregated voice and data market, have come around to accept, market and even welcome the inevitability of CN.

Former incumbent telephone monopolies like Verizon and AT&T in the US, among others internationally, have recently rolled out an array of new services that turn the trend into an even more viable alternative for small and medium sized enterprises (SMEs), individuals, and multinational goliaths. “There is a shifting in the market from corporate based [clients] to now also include individual based [clients],” said Samer Halawi, regional director of Inmarsat, a $500 million firm that provides mobile voice, data and video transmission services to major news networks around the globe. “We are not a telecom company anymore,” he added, “we are an IT telecom conversion company.”

Chief among the new CN products, and perhaps the most exciting from the perspective of markets traditionally overburdened by heavy regulation and high voice tariffs, is commercial internet telephony, or Voice over Internet Protocols (VoIP) – a technology that employs internet-based standards to send and receive voice traffic as if it was data traffic. At its most radical – and this is where government resistance, especially in the Middle East, comes into play – VoIP completely sidesteps the old Public Switch Telephone Network (PSTN) to make use of the new high-speed data networks that have been built up around the world (see diagram I).

In a clear indication of where CN is headed, last month the market research firm Insight Research predicted that VoIP phones in the enterprise will outnumber traditional phones by 2009. Meanwhile, in the Middle East and Africa regions, retail sales of VoIP technology are expected to grow by 50% over the next two years (from $260 million in sales in 2004 to $390 million in 2006), a development which, in part, has led the UN to reduce the weight given to fixed phone lines when it calculates a country’s “teledensity.”

“IP is the way the world will be connected in the next phase of communication history. The idea of switched networks like the one we have now is so old, and so archaic that it is going to end, exclaimed Said Ghazzi, Information and Communication Technology (ICT) associate technology expert at the UN’s Economic and Social Council for Western Asia (ESCWA).

When it comes to just the VoIP part of the CN revolution, according to a report from independent market research group Gartner Dataquest, traditional service providers “can benefit by positioning VoIP services among their retail offerings at the earliest opportunity; in this way they get a new source of revenue and reduce the amount of voice revenue they lose to alternative operators.” All of which is why the ministry of telecommunication’s (MoT) apparent fear of VoIP in Lebanon actually seems, at first glance, like a baffling position. Even if one were to take at face value the oft-assailed fact that Lebanon’s telecom sector is still a state-run asset, operating for the revenue benefit of the government and not the service benefit of consumers, fears of losing the old PSTN revenue should be balanced out by the increased revenue possibilities that exist with the provision of a whole new range of CN services, like VoIP.

After all, that’s what former monopolies have realized – replacing telephone revenue losses with data revenue gains – so one would think, logically, that an actual monopoly like the MoT, who controls regulation, data pricing and telephone pricing, would have even more of an incentive to push the trend. And since the government is also increasingly forced to compete against illegal VoIP calls from home PCs and internet cafes, leading the charge as soon as possible rather than fighting back would make more sense.

But, of course, the state-run telecom monopoly is not an independent company and it doesn’t adhere to conventional cost-benefit calculations. Indeed, the MoT is necessarily more risk-averse and change-averse than any corporate behemoth since it values the ultimate prizes in Lebanon, short-term stability and survival, above all else.

This is perhaps why, even though revenue from regular phone lines has dropped by 9% over the last five years in Lebanon – due mostly to illegal VoIP usage as well as the growth in the cellular sector – the government persists in projecting rosy assumptions about the growth in revenue from regular phone lines: last year the ministry of finance was off in its estimate of such revenue by 56%.

“The solutions are simple,” said Ghazzi. “Everywhere else in the world, the incumbents saw that the growth of voice revenue has slowed down or decreased, and their attempt to respond to that is to build converged networks that create completely new revenue streams for the incumbent.”

Unfortunately though, unlike Morocco’s Maroc Telecom, Bahrain’s Batelco, and others in the region like Jordan and Saudi Arabia that have begun to come to terms with CN and VoIP, Lebanon has not addressed what Gartner calls “the sensitive issue” of how far VoIP will “cannibalize” their PSTN revenue.

“The Middle East region is split,” the report said. “The lack of deployment… results largely from fear and a reluctance to change a market structure that works, even if it is not ideal.”

Even though the MoT itself now uses VoIP solutions internally to reduce the rate it pays for international calls (by as much as 70% over the last four years, according to an MoT source), Lebanon insists on holding court with the diminishing number of countries where most commercial VoIP services are illegal. The irony, and the beginning of a downward spiral really, stems from the fact that while the government uses VoIP for its international call routing, individuals are prohibited from using the technology. Thus, as more and more people use VoIP services under the table like Net2Phone – employed at many internet cafés in Lebanon to save callers almost 70 cents per minute on calls to the US – the MoT predictably digs in even more against the technology. Instead of seeing a market opportunity bolstered by its unique stance as both regulator and monopoly service provider, the MoT even goes so far as to prevent well-established corporations from using all but the most basic of VoIP applications.

A statement from one high-level source at the MoT captured the government’s predicament: VoIP technology “is supposed to achieve significant cost savings for businesses. When used by telecom operators, most probably new entrants, it will significantly reduce service costs and therefore charges on consumers. [However,] the incumbent [government] will normally be forced to practice lower prices consequently.”

Although the source explained that the MoT was considering the revenue effect of calling cards and some other limited VoIP services to offset declining call revenue, he made it clear that the government was primarily looking backwards at “recovering the investment cost of the traditional infrastructure.” This positioning has led to the awkward arrangement, whereby the government forces VoIP to stop at a company’s walls: the data is switched back to regular voice traffic and sent along to the PSTN, as any other normal call would be.

Despite the limitation, some companies in Lebanon are still doggedly pushing forward with VoIP deployment, and realizing cost savings and efficiencies in the process.

In fact, Cisco Systems, a major global supplier of internet technologies, recently sold a 2,500 VoIP phone system to a large company in Lebanon that now has a fully converged network: its four separate networks – surveillance cameras, administrative network, data internet, and the voice system – were all successfully collapsed into one unit.

The company had been paying $120,000 per year just for maintaining the voice system.

According to Hussam Kayyal, general manager Levant at Cisco Systems, the company was able to realize an 80% drop in annual operating telecom costs with the new system – even though the full power of VoIP is effectively cut off at the company’s door-step.

While the initial investment for such a solution is significant – IP phones are more expensive than regular phones – the generally accepted value proposition is that costs are more than recouped over time. Moreover, a whole new range of service enhancing applications moves into reach – voicemail and phones that can easily move across positions, call monitoring and profiling, the integration of email, voicemail and other messengering services. Indeed, the list keeps expanding with the march of technology. Added to this is the fact that, “they’re ready,” said Kayyal of his client. Ready for when Lebanon joins its peers in the region to recognize the potential that CN holds.

Although it is said that some major Lebanese banks have received waivers for VoIP, legality, not infrastructure or cost, is still the most immediate stumbling block for large enterprises, like the company which Cisco Systems outfitted. “Look, the infrastructure could be made almost immediately available, and all would love to join the converged network…it’s a no-brainer, but they do not want to be prosecuted,” said Imad Taraby, the CEO of FiberLink, a leading provider of corporate internet services in Lebanon.

Of course, the extremely high cost of broadband connectivity in Lebanon is still a significant problem hindering VoIP growth – especially for SMEs who can little afford the $12,000 – $24,000 that it costs to procure the minimal amount of bandwidth needed for CN. “Even if they did allow VoIP over the current infrastructure, it is not commercially justifiable to do it,” said Kayyal. Either way, time, it seems, is running out. According to an April 2004 report from the independent market research firm Datamonitor, “The Middle East, Eastern Europe and Africa are to become the main beneficiaries of Western Europe’s outsourcing of its call centers,” Already, Tunisia and other country’s in the region where international calling rates have been liberalized are seeing an explosion in call center employment.

Lebanon, with its high international calling rates and outright prohibition on international VoIP, has entirely shut itself out of this growth industry – despite the fact that the country suffers from an unemployment rate thought to be as high as 20%. This is perhaps one reason why, as Gartner put it: “Having no VoIP strategy is not an option. It is time that participants in the Middle Eastern market devised one.”