VoIP

Level 3 Tees Up VoIP Launch

Almost a footnote in its press releases, Level 3's ISPCON announcement that it will replace 800 numbers with local phone numbers is actually the first step in an ambitious, sweeping plan to introduce VoIP-enabled services.

by Max Smetannikov [May 15, 2003]

Level 3 has been toying with the idea of selling telephony services almost since it was founded in its present form in 1998. During the late 1990s, the company gained CLEC status in all 50 states, gaining the right to sell local and long distance telephony and compete with the phone companies.

Level 3 also developed its own softswitch technology, which the company claims allows it to achieve remarkable savings on the wholesale dialup front and now would enable its voice strategy. Also, Level 3 has built a healthy wholesale VoIP business of moving long distance minutes around the country over its IP network by encoding circuit switched voice traffic into IP packets, a capability enhanced with the company's recent Genuity acquisition.

However, partially because times are lean and telecom carriers are in a "show me the money" mood, Level 3 saw no reason to describe its voice telephony plans. Thus, when Level 3 executives told 50 session attendees at Spring ISPCON that they are going to begin to swap out 800 help numbers for local numbers in the company's service areas, few people made the connection between this mundane announcement—almost a footnote on a press release describing carrier's growing dialup coverage area—with the much anticipated VoIP service enhancement. Nevertheless, the announcement is the beginning of a wholesale voice-over-broadband rollout, Level 3 executives say.

"We have a road map to launch voice," said Steve Branch, Level 3 vice president overseeing VoIP efforts. "We are starting with product marketing and getting a sense of what users might want to do with the service."

In case of business, break glass
Level 3's business case for voice looks plausible. After purchasing Genuity's wholesale voice business and luring away a fair share of MCI's (ex-WorldCom, ex-UUNet) dialup users, the company believes it covers 90 percent of the U.S. territory with its service and has 30 percent of the wholesale market, second only to MCI with 39 percent. This means the overwhelming majority of U.S. households are only a local phone call away from Level 3's network.

The softswitch platform that Level 3 has built and owns is capable of processing not only circuit switch calls into IP, but also perform this function in reverse—a must for processing VoIP traffic. Instead of becoming a PSTN phone company and receiving phone calls from end users into its network—and building the kind of overhead that MCI or AT&T have—Level 3 wants to let its existing customers (large enterprises and service providers) get into voice business.

There are different avenues that Level 3 is exploring which include voice over DSL and voice over cable modem, Branch said. In both of these scenarios, an end user (a customer of either RBOC or a cable company) would buy a telephone set that would connect to the broadband modem, and would start making phone calls using that pipe as opposed to telephone.

The phone calls would travel over the Level 3 network and then would be handed off to local phone companies for circuit switch processing and termination. Although IP phone to IP phone calls are the least expensive, non-IP phones remain the norm. As long as the majority of phone users have not adopted VoIP, Level 3 will have to enable IP phone to circuit switched phone calling—something the company is well equipped to do since its network covers 90 percent of the country.

The customer monopolies
Granted, Level 3 has no customers would market this service, let alone make money on it. Potential customers are mainly cable companies, and to a lesser degree DSL broadband providers (who are almost exclusively RBOCs at this point).

One possible scenario is that the broadband provider would sell the IP telephone set at a discount, and then charge a low flat fee for all you can eat phone calls—an attractive scenario for consumers and especially for business customers. While long distance prices have plummeted, local phone service plans have never fallen below $30 or so dollars per month. Even that price does not take into account an IP phone's special features, such as unified communications, which would allow a customer to receive fax, e-mail, and voice messages on any home phone, cell phone, desktop computer, or laptop—at home or on the road.

Personally, Branch is a convert of this new technology, having used the service in his Broomfield, Colorado home. One drawback was that he had to buy a new telephone system for the house since households with multiple phones typically get only one jack with this service and users like Branch had to go wireless in order to pick up the same line from different phone sets. Branch refused to name the company that he used for the service, only indicating that it was no longer available.

Will other companies follow Level 3's lead? It seems unlikely at the moment, especially given that many cable companies have flocked to Level 3 lately, that it is prominent with many last mile broadband providers, and that it has positioned itself in the market as a neutral player, making this technology equally available to all players—and especially given that this service is bound to take a long time to fully deploy.

Level 3 should have this field all to itself, and all of those contacts mean that Level 3 should be able to develop a strong network of channel partners and resellers of its own. Wall Street analysts tracking Level 3 are not surprised and are supportive of company's planned move into the voice arena.

"This is a way to play with the broadband deployment undertaken by Level 3 customers," said Vik Grover, managing director of equity research at Kaufman Bros., a Wall Street financial firm. "As IP phones move into the mainstream in lockstep with broadband deployment by cable MSOs, RBOCs and CLECs, many of which are Level 3 customers, VoIP minutes of use will move through a steep growth curve driving substantial value for Level 3's IP network."

However, not everybody is thrilled with Level 3's VoIP direction. Farooq Hussain, a partner with research firm Network Conceptions, believes Level 3's addressable market for the voice service is small and that Level 3 missed the boat with competition.

Level 3, Hussain explains, wanted to own a softswitch platform and thus ignored SIP standards based softswitch developments that have enabled MCI, Verizon, SBC, and CableVision, as well as startups such as Vonage, to start offering integrated voice and data service with a Cisco SIP phone, basically the service Level 3 has in mind. MCI, for instance, has been selling a service like this for over a year.

The takeup on voice-over-broadband wasn't great, Hussain said, with 250,000 users being the highest projected number—and Level 3 is handicapped right out of the gate. "Level 3 doesn't have an E911 capability resolved," Hussain said.

E911 is a capability to let those answering emergency calls know where the calls are coming from. FCC regulations require every telephone company selling telephone service to have E911 capabilities, with fines levied on those who fail to deploy . If Level 3 doesn't have this functionality, it can't sell its voice over broadband service as a replacement for the RBOC phone line, living Level 3 with a second line market, which is a strictly vanity business play.

Hussain doesn't believe that even if the service gets launched the most susceptible audience Level 3 has for it—cable operators—would go for it. "They'd be better off waiting another year for the E911 issue to get resolved," Hussain said.

—End