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How the Net Can Save Telecoms

For a moment, it appeared that the telecom world might quickly jettison its 100-year-old technology and adopt the faster, cheaper, more versatile standards of the Net. Back in the late '90s, a few long-distance companies began installing so-called Internet protocol (IP) gear. "The idea was that the transition would quickly spread through the rest of the network," says Niel Ransom, chief technology officer of French telecom-equipment giant Alcatel (ALA).

It didn't happen. As the industry went into financial crisis in late 2000, capital spending slammed to a halt, and the IP transition slowed. As the downturn wore on, equipment makers tried to sell IP gear on the promise that it would lower their distressed telecom customers' costs. How? IP equipment breaks data into tiny digital packets that share circuits. That's more efficient than phone technology, which reserves an entire line for a single call.

However, the pitch fell flat, recalls Ransom, a 30-year industry veteran who has worked in reseach at Bell Labs and BellSouth (BLS). The number of phone lines began to shrink as people started switching to wireless, which freed space on the old phone switches and gave them a new lease on life. Telecom customers decided the cheapest alternative of all was to keep their old phone switches, which continue to work just fine, Ransom recalls.

SLOW TRANSITION. Now, the talk of digital convergence is reviving yet again. And it has a new sales pitch. Phone companies have moved beyond mere cost-cutting and are now interested in figuring out new ways to generate revenue. So, suppliers are stressing IP's usefulness as a platform for developing new moneymaking products and services (see BW Special Report, 10/20/03, "The Wireless Challenge"). "The rise of IP can serve telecom companies well, because it can generate new kinds of revenues," says Mark E. Tolliver, chief strategy officer at Sun Microsystems (SUNW).

The transition will be slower than people expected, though. Cisco Systems (CSCO) Chief Executive John Chambers says the change to a single packet network that serves voice, data, wireless, and Internet service is inevitable. "The debate at Telecom World is how to get to the next-generation packet network," Chambers says. But he expects telecom carriers to take anywhere from 1 to 10 years to make the move. In some parts of the world -- such as Asia, Eastern Europe, and the Middle East -- countries with limited telecom infrastructure will leap directly to new technology.

In more developed regions, the process for individual companies will probably average three to seven years, he says. He spoke during a press briefing at ITU Telecom World 2003, the giant trade show held in Geneva every four years under the auspices of the International Telecommunications Union, a U.N. agency.

INFO ANYWHERE. Where exactly will this new IP-based revenue come from? At Telecom World, the aisles are filled with people eager to help phone companies figure it all out. Sun is trying to advance its idea of "network computing." The proposition is that complex and expensive PCs and notebook computers will be replaced with stripped-down machines that include just a monitor, a keyboard, and a little device that reads a memory card that people will carry around with them.

They can plug the card into one of these network computers anywhere in the world, and all their data -- from e-mail to massive multimedia files -- will just pop up. Telecom companies can benefit by hosting the data and from increased traffic as people tap into the system.

And there's more. Alcatel is selling IP-based office phone systems, also known as PBXs. It's pushing increasingly powerful forms of high-speed digital subscriber line (DSL), which will allow phone companies to offer video and other bandwidth-intensive features. Alcatel is also helping regular local-phone networks offer certain kinds of features like short text messaging, which have been available for years from wireless carriers.

"MICRO-MARKETS." The prospects for video over the telecom networks, always elusive, appear a little bit closer to reality. Microsoft (MSFT) last week unveiled new software to support movies, TV, and other forms of video delivered over the Web by telecoms. And on Oct. 12, Hewlett-Packard (HPQ) announced that it would start building core telecom infrastructure based on its servers and on open Internet standards. That would clear the way for video and all sorts of other applications.

One way or another, new services are essential, if telecoms are to truly recover. Cost cutting isn't enough. "In the past, telecom companies were happy if they introduced 10 new services a year. But the business is changing. In the future, they will need 500. There won't be any killer apps, just micro-markets. That's where the new revenue will come from," says Phillip McKinney, vice-president and chief technology officer for HP's network and service-provider business. Let's hope that at least a few catch on. By Steve Rosenbush at ITU Telecom World 2003. Follow BusinessWeek's exclusive telecom coverage, only on BusinessWeek Online

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