The end is here for traditional telecommunications

Recently, Dutch telecoms operator KPN reported an 11 percent drop in net profit for the second quarter of this year, blaming the rise of internet based telecommunications software. A couple of months back, Deutsche Telekom announced a massive 37 percent drop in its net profit. Etisalat, the UAE’s largest telecoms provider, saw its second quarter profit drop by 14 percent. New Zealand’s Telecom watched its profits drop by 32 percent. South Africa’s Telkom reported a 35 percent drop in its full year profit, a month ago. The telecommunications giants are struggling.

While each player presents different reasons, it is clear that traditional communications are under threat. Some carriers may also put some of the blame onto mobile communications providers, it is obvious that as devices become increasingly convergent and take more advantage of the internet, the mobile carrier networks are eventually going to face similar problems.

Over the last few years, I have noticed that a number of papers have appeared warning the telecoms industry of the impact of internet-based telecommunications on the industry. VoIP technology certainly put PSTN to the sword, but most telecoms providers caught onto that fairly early and took advantage of VoIP within their own switching infrastructures to deliver long-distance calls.

Companies like Metaswitch, who specialise in switching infrastructure, took early heed and jumped onto the VoIP bandwagon right at the start and are seeing massive growth as the telecoms industry scrabble to upgrade their technology to support new demands. Other companies, specialising in Asterisk, an open-source PBX and VoIP gateway, have sprung up up all over the place as businesses have started to recognise that there are alternatives within the communications game.

VoIP technology has been shifting so rapidly that the challenge traditional telecoms providers face is slowly becoming insurmountable. In the industry the problem that VoIP presents is usually presented as a four-headed monster.

The first major issue is that VoIP technologies are increasingly “decentralised”, so that users can take advantage of them from any place in the world, without relying on particular network infrastructure in order to perform their communications. This is very obvious in services like Skype, which can be installed on any computer anywhere and once you are logged in, you can make a call, regardless of the network that you are using.

Less obvious, but equally serious to the industry is the problem of “democratisation”. The fact that developers and providers no longer need to gain direct access to prohibitively expensive switching hardware has opened the market to absolutely anyone who can build an interesting solution. This means that there is a much wider range of providers, and much steeper competition.

Then there is “hybridisation”. Telecoms used to be just about voice communications and didn’t concern itself with many other technologies. Now integration is everything. Voice communication is bundled up with so many other services that it is becoming impossible for traditional telecoms companies to compete. With Google Voice set to take advantage of Google service users, and Facebook and Skype teaming up, there seems to be no end to how telecoms applications can be integrated into a wider set of services.

Finally, there is “enrichment” where instead of simply carrying voice across the network, we’re now seeing Video, presence detection and other data being carried within the data stream. That’s easy when end-user devices support the technology, but traditional phone companies are struggling to muscle in on this market because users have software alternatives to the traditional hardware terminals used at the end of the line.

It’s not all doom and gloom for the carriers. Our telecoms providers still provide the backbone for a large portion of internet communication. As the bandwidth requirements to support the massive hybridisation and enrichment of telecommunications increase, those old copper cables are going to come under strain. The market for fibre-optic connectivity is already taking off, but laying cable is an expensive and time-consuming task.

The industry is also finding demand in places that are harder and harder to reach. There is still some scope for these businesses to explore ways to improve their business models by accepting a different position within the market. As the internet becomes an increasingly dominant force in the telecommunications industry, telecoms providers are still in heavy demand to provide the network infrastructure to carry all of these packets to their destinations. Of course, this has only been a small slice in the great pie that providers have been gorging themselves on up until now, so I expect that we will see many of these companies having to slim down to face up to much greater competition in the industry. Whatever happens, we are bound to see telecoms providers coming up with some interesting innovations in an attempt to stay alive.

While PSTN is not dead yet, and many businesses are still afraid to make a complete switch to IP-based telecoms due to migration costs and a lack of familiarity with some of the technology, the financial reports for much of the telecoms industry this year has certainly spelled out that traditional communications are nearing their end.

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