While voice over Internet Protocol (IP) has received a significant amount of fanfare over the past 3 to 4 years, it is traditional time division multiplexing (TDM)-based voice services that still dominate traffic and revenues of the enterprise local and long distance voice services markets. Some of the key factors responsible for the dominance of TDM-based voice services (also labeled as traditional voice services in this article) within the enterprise markets include declining prices for traditional services, VoIP quality of service concerns, and limited enterprise capital spending on network upgrades. Among the leading enterprise voice carriers, a majority have deployed some form of IP telephony services, including premise-based and hosted voice services for small, medium, and large enterprises. While these providers continue to realize growth in their IP-based voice services portfolios, overall, TDM-based services still account for a majority of the enterprise carriers’ revenues and profitability. This article examines some of the key trends impacting the U.S. enterprise voice services markets and also provides a competitive assessment of the leading enterprise voice services providers. The competitive assessment also analyzes the impact of recently approved acquisitions of AT&T by SBC and that of MCI by Verizon.

Enterprise TDM-based voice services market revolves around local, long distance, toll-free, and audio conferencing services. The traditional local segment includes private branch exchange (PBX) as well as Centrex services. Long distance voice includes both domestic and international direct dial as well as card calling services. In addition, long distance services also include toll-free services as well as audio conferencing services. Below are some of the key trends impacting the traditional voice services markets.

• The enterprise local voice services market continues to experience a decline in the total number of end user switched access lines. The total business end user access lines are estimated to be 63 million in 2005 and are projected to decline at a compound annual growth rate (CAGR) of negative 4.4 percent over the next 5 to 7 years.
• Key factors responsible for the decline in business switched access lines include migration to VoIP services including implementation of IP PBXs, IP-Centrex, and hosted IP telephony services.
• At the end of 2004, competitive local exchange carriers (CLECs) accounted for nearly 25 percent of the total business end-user switched access lines in the U.S.
• Recent regulatory changes that limit competitive access to incumbent local exchange carrier (ILEC) networks are likely to impact the overall enterprise local voice services market. However, the impact is more likely to be borne by non-facilities-based competitive operators that utilize either a pure resale approach or rely on UNE-Ps for provision of local voice services to business customers. At the end of 2004, nearly 26 percent of total CLEC end-user switched access lines were owned by the competitive operators and the remainder, 74 percent, were provisioned through either resale or UNEs. Changes in regulatory environment, however, are unlikely to completely stop the access line loss for ILECs. Continuing migration to IP telephony by enterprise customers will remain a major threat for ILEC’s switched access lines.

• The U.S. enterprise switched long distance voice services market is expected to continue to experience a steady decline in traffic and revenues due to continuing end-user migration to low priced packages, wireless substitution, and greater usage of email and instant messaging services among enterprise customers.
• Although the RBOCs have continued to expand their share of the enterprise long distance voice services market over the past 3 to 4 years, traditional inter-exchange carriers such as AT&T, MCI, and Sprint have remained market share leaders due to their large entrenched customer base within the large enterprise segment.
• Within the long distance voice services market, domestic direct dial services are expected to decline at a much faster rate due to utilization of IP-based toll services. Furthermore, the strong pricing pressures within the direct dial market will further accelerate the rate of revenue decline. The enterprise domestic long distance services market is estimated to generate 550.5 billion minutes of use in 2005. The per-minute revenues are estimated to be $34.2 billion in 2005. While both minutes of use as well as revenues are expected to continue to decline in future, the revenue decline rate for traditional long distance services is estimated to be nearly twice as much as the minutes of use.
• Within the toll-free services market, there were an estimated 22.2 million domestic toll-free numbers in the U.S. in 2004.
• Toll-free call volume was estimated at slightly over 61 million in 2004 with a majority of this traffic terminating within a contact center environment.
• Dedicated toll-free services accounted for a majority of the toll-free minutes of use in 2004.
• Unlike domestic direct dial services, toll-free services reflect much flatter revenue and traffic growth trends. Although, web-based services are likely to reduce the need for toll-free calls in future, over the next 2 years, toll-free revenues and minutes of use are expected to remain rather stable.
• Within the traditional enterprise long distance voice services market, audio conferencing services are expected to continue to grow over the next several years. The U.S. audio conferencing services market is estimated to generate $2.5 billion in revenues in 2005. This market is projected to generate approximately 21 billion minutes of use in 2005.

From a competitive standpoint, traditional long distance carriers AT&T, MCI, and Sprint have historically dominated enterprise voice services market. The incumbent local exchange carriers have remained prominent within the local voice services segment by targeting small and medium-sized businesses. Over the past 3 years, the ILECs, specifically the RBOCs, have undertaken several initiatives to increase their presence within the very large enterprise segment by offering bundled voice, data, and wireless services. Moreover, both SBC and Verizon are set to further increase their share of the enterprise traditional voice services market through their AT&T and MCI acquisitions, respectively.

AT&T and MCI offer an impressive portfolio of TDM-based voice services that range from local voice to audio conferencing services. In addition, the two interexchange carriers also have an entrenched customer base within the large enterprise segment including government. Both AT&T and MCI have also invested resources in development and deployment of IP-based telephony. Provision of IP telephony is likely to enable these two carriers to alleviate the impact of IP migration/substitution on their overall revenues as a large number of enterprise customers adopt VoIP. Unlike AT&T and MCI, Sprint’s enterprise voice services strategy revolves around leveraging its various wireline and wireless assets to offer cross-product bundles thereby providing it with a degree of defense against wireless substitution.

Among business CLECs, providers such as XO Communications, Time Warner Telecom, US LEC, and others offer a range of TDM-based wireline voice services to enterprise customers. Still others such as Cox Business Services are also actively targeting small and medium-sized businesses with their traditional voice products.

From an end user’s perspective, greater competition within the traditional wireline voice services market has rendered it difficult to discern one provider’s product and pricing packages from the others. This homogenization of products and packages, therefore, is leading to a shift in the way carriers’ position themselves as voice services providers. The end user vendor selection criterion has also shifted as products and services become relatively identical. Vendor differentiation is increasingly a function of factors such as provider’s network reach, breadth and depth of product portfolio, reliability, financial stability, and excellent customer support. While price-based competition continues to exist within the enterprise voice services markets, some of the other variables listed above often drive vendor selection within the medium and large enterprise segments.

Figure 1 evaluates the various U.S. enterprise TDM-based voice services providers on the following 6 attributes:

1. Network/Market Reach
2. Network/Service Reliability
3. Product Line Breadth/Depth
4. Target Market Penetration
5. Customer Support
6. Financial Stability

The figure ranks various providers on a scale of 1 to 5 where a score of 1 reflects low and 5 equals high.

It is to be noted here that carrier evaluation in Figure 1 only pertains to enterprise TDM-based voice services. Data services, wireless, professional services, and wholesale services are not included in this evaluation.

Network/market reach refers to the extent of a carrier’s network in reaching out to its potential target market. In this regard, AT&T not only covers the U.S. market but also has significant international capabilities allowing it to follow its customers in several foreign markets. Both MCI and Sprint have strong national networks, however, their international capabilities are relatively limited compared to AT&T. The RBOCs, at the time of this writing, are mostly focused on their regional footprints. The acquisitions of AT&T and MCI by SBC and Verizon, respectively, will significantly boost these carriers’ (SBC & Verizon) reach within the U.S. market. SBC in October 2005 announced that after the completion of the acquisition, the company would adopt AT&T as its corporate brand. SBC’s decision to retain the AT&T brand name further supports the fact that AT&T brand is not only more prominently recognized as a national brand but is also backed by a nationwide network that serves a variety of business customer segments. Overall it is the regional/metropolitan-specific nature of current RBOCs and CLEC networks that caused these carriers to receive a relatively lower score in Figure 1. Moreover, recent changes to local competition regulation are expected to further limit CLEC access to ILEC networks thereby further confining their market reach. It is to be noted that other prominent enterprise TDM-based voice providers include Global Crossing, BT Infonet, and Equant - with T-Systems also beginning to make its mark on the U.S. enterprise telecom services markets. However, due to Global Crossing’s financial and operational woes, BT Infonet’s focus on multinational enterprise customers, and Equant’s relatively limited penetration within the U.S. business voice services market, these firms were not analyzed in Figure 1.

With regards to network/service reliability, with the exception of the CLECs, the matrix scores are similar across the traditional interexchange carriers as well as the RBOCs. From a large enterprise’s viewpoint, network redundancy is an important criterion in selecting a voice services vendor. In this regard, AT&T, MCI, and Sprint lead the charge in network reliability with AT&T slightly ahead of its rivals. AT&T has continued to invest in network deployment and upgrading activities over the past decade. In fact, network redundancy is one of AT&T’s strong competitive advantages over rivals. The relatively lower score for the CLECs is driven by the fact that 74 percent of the CLECs’ local access lines were provisioned through other carriers’ facilities/networks. In addition, operational and financial difficulties on the part of several non-facilities-based CLECs further contributed toward a lower score on network/service reliability measurement.

Product line breadth refers to the number of different products/product lines offered by a voice vendor. Product line depth reflects the varying products/packages available within each of the product lines. For instance, AT&T’s long distance, local, toll-free, and conferencing services reflect the various product lines offered by the company. The several product/packaging variations within its toll-free services such as switched and dedicated services exhibit the product line depth. While AT&T offers an excellent array of traditional wireline voice services to its enterprise customers, its top rivals MCI and Sprint have also deployed broad product portfolios to attract enterprise voice customers. AT&T’s product portfolio is likely to significantly enhance SBC’s current voice offerings in the enterprise markets. For instance, AT&T has remained a market leader in development and deployment of toll-free services. The enormous array of toll-free call routing and management tools offered by AT&T will provide a strong boost to SBC’s own toll-free services revenues and minutes of use in the future. Both the RBOCs as well as CLECs have lagged behind AT&T, MCI, and Sprint in their enterprise product packages.

Both AT&T and MCI rank much higher than their rivals due to their large entrenched customer base within the medium and large enterprise segments. However, the fact AT&T and MCI received a less than perfect score is reflective of the continuing loss in market share experienced by these two carriers. Sprint had generally remained behind AT&T and MCI in penetrating large enterprise markets including government and hence received a lower rating than its rivals. Lack of national footprints has hindered the RBOCs’ ability to capture a bigger share of the large enterprise market. However, this trend is soon to reverse as SBC and Verizon complete their AT&T and MCI acquisitions, respectively. Majority of the CLECs’ customer base remains within the small and medium-sized business segments and the fact that these operators account for only a quarter of the total U.S. business end user switched access lines, further impacted their rating in the target market penetration measurement listed in Figure 1.

In terms of customer support, most carriers have shied away from putting a strong effort behind traditional voice services and have instead chosen to focus on data, wireless, and other next generation applications/services. Superior customer support within the enterprise TDM-based services market involves implementation of effective customer self-help capabilities, seamless billing and customer care, quick problem resolution, and minimal customer downtime (due to network/service outages). Among enterprise TDM-based voice services providers, AT&T has implemented its customer care portal AT&T BusinessDirect with the aim to empower its customers in management of their relationship(s) with AT&T. AT&T BusinessDirect provides both service and network management tools to its enterprise customers. While a number of carriers offer online account management tools, the AT&T BusinessDirect portal’s eBonding capabilities further allow customers to electronically integrate their internal systems with those of AT&T which in turn results in faster order entry and processing. From a customer support viewpoint, AT&T’s benchmarking customer service (including its BusinessDirect portal) is likely to significantly enhance SBC’s overall customer support activities after the completion of the merger.

The financial uncertainty that has hovered around the technology sector in general over the past 3 to 4 years has also had its impact on the enterprise voice services segments. A number of carriers (incumbent providers as well as CLECs) have not only experienced a significant decline in their market values but have also struggled to maintain revenues and profitability. Apart from Sprint, the other providers have faced numerous financial and operational challenges. For instance, AT&T has undergone a serious of operational changes that involved spin-offs of its assets as well as significant workforce reductions. In addition, the company has faced a decline in its market share within the long distance voice services markets. Similarly, the CLEC sector has had its own financial and operational woes. Among the RBOCs, Qwest has faced a number of regulatory inquiries spanning its financial reporting. MCI’s recent financial and operational difficulties have been well publicized in the media and analyst communities.

From an overall rating’s perspective, AT&T fares ahead of its rivals, specifically with regards to network reach, network reliability, and customer support. While Sprint leads in financial/operational stability, there is little differentiation among traditional inerexchange carriers with regards to product line breadth/depth.

Overall, TDM-based voice services are likely to continue to represent a majority of total enterprise voice services revenues and traffic over the next two years. Individual carriers are likely to experience varying degrees of IP telephony adoption rates among their customer base, which in turn can impact the decline rate for TDM-based voice services. Carriers such as AT&T, MCI, and others that have already deployed extensive IP-based networks and services are likely to offset some of the substitution impact of traditional wireline voice services by VoIP. Successful bundling of traditional wireline voice with advanced applications and services will also help TDM-based voice vendors to stabilize the decline in revenues and traffic-at least in the short-term anyway.