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The Economics of TDM & IP

Most telecommunications decision makers understand the basic differences between transmission architectures and related technologies. Most of us have grown up with PBX systems based on TDM, that tried and true standard for telephone trunking. And how could we not be attracted by IP-based architectures, the relative newcomer that promises to provide all sorts of new options for services and end user devices. We know that TDM has been the perfect solution for circuit switched networks like the Public Switched Telephone Network, reliably creating 64Kbit tributaries for channeling voice signals. We’re used to IP-based packet-switched networks in data contexts and understand the potential of these new technologies as the need for voice and data convergence continues to emerge. It’s clear that the foreseeable future is one that includes both TDM and IP. But how does the interplay of these two technologies impact the marketplace and how does this impact influence negotiations with suppliers? These questions are fundamentally economic questions that turn out to be a bit more complicated.

The key is to take a holistic view of the market, striving to appreciate the dynamics from the prospective of the supplier as well as the user. For the user, the question really comes down to reliability, flexibility and the need for capital investment. We have come to take the reliability of TDM networks for granted. This is perhaps not surprising when you consider that TDM networks provide an essentially dedicated circuit from point to point, and have been doing so for decades. IP networks rely on packet switching over a highly dynamic network and, as a result, cannot not offer a comparable level of reliability…yet. But the technology is improving every day. Further, because IP infrastructure is not proprietary like TDM, it can offer an unprecedented level of flexibility and interoperability. The resulting service innovation is really where the action is. Sure, users need to concern themselves with ROI and other capital management issues but the leverage provided by the emerging technologies will more than compensate for the relatively modest investments in non-proprietary infrastructure, much of which is already being managed in existing IT departments. Bottom-line, users are looking for reliability gains and service innovation that can make a strategic case for investment.

Suppliers recognize this and are scrambling to carve out segments of the emerging market. For suppliers, questions focus on continuing ROI on TDM, the attractive cost structures in IP, and the need for increased R&D investment. TDM represents a cash cow for most carriers, but as these legacy networks age, the cost of service and maintenance is on the rise. IP networks, on the other hand, are far cheaper to deploy, service, and maintain. Herein lies the double-edged sword – the non-proprietary nature of IP networks reduces costs, but they reduce costs for all suppliers and open the technology in a way that makes R&D absolutely critical. Suppliers want to squeeze as much return as possible out of existing TDM networks, while at the same time creating advantage in emerging IP markets that are open and highly competitive.

“How does the interplay of TDM and IP technologies impact the marketplace and how does this impact influence negotiations with suppliers? These questions are fundamentally economic questions that turn out to be a bit more complicated.”

This is generally good for users. But what we are witnessing is not a simple, mostly linear, supply and demand curve. Appreciating the whole picture and embracing the complexity at hand suggests three take away points from this discussion.

It’s not all or nothing. The reality is that most users will rely upon some combination of TDM and IP for years to come. But how these hybrids will be made available is going to become increasingly complicated and will depend on the varied technology portfolios of suppliers across the industry.

A 10,000 foot view is required. As these portfolios shift, it’s not going to be possible to optimize your demand across the offerings of one or two suppliers. To achieve truly world class contracts, a global view is going to be required, with constant surveillance on both the demand side and the supply side, industry wide.

Constant change is certain. We are nearing a tipping point, where IP technologies will come to exponentially dominate the market. Cost structures will dramatically shift. Suppliers may experience these changes at different times and with differences in pace. As the shift to open IP technologies comes about, competitive pressures driven by R&D will flood the market with new and game-changing innovation. To stay competitive, contracts will no longer be negotiated over multi-year terms, but rather will be monitored and optimized on an ongoing basis.

Written By:  Pete Wilson, CEO, TelAuthority, LLC

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