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Softswitching - Accelerating in 2004
Kenneth W. Muth
Action
kmuth@rwbaird.com Softswitching has become mainstream in 2004, which is a year earlier than we originally
414-765-3773 thought. It allows carriers to offer new services and lowers network operating costs.
Wireline, Cable and Wireless operators as well as Enterprises are all in early
Theodore J. Moreau, CFA deployments with this next-generation equipment. The next-generation equipment
tmoreau@rwbaird.com
414.765.3922
market was $1.3 billion in 2003 and is forecasted to be a $13.0 billion opportunity over
the next four years.
Brad Zoltak
bzoltak@rwbaird.com Summary
414.765.3757
• A Softswitch is a software-based switch that converts a telephone number into an IP
address, or packet, and then switches the call in software to its destination.
• Infonetics estimates the next-generation equipment market will be $14.0 billion
Please refer to ('03-'07). Millennium-Skyline Project predicts the entire U.S. replacement cycle over
"Appendix - 15-20 years for next-generation switching could be about $40 billion.
Important • There are about 2,600 carriers in the U.S with an installed based of 23,650 local
switches, according to Millennium-Skyline.
Disclosures" for • Carriers are upgrading to Softswitches to lower operating costs, handle data and IP
important packets more efficiently as well as offer new services to customers.
disclosures. • Large carrier adoption such as Verizon, SBC, British Telecom, Telecom Italia, Cox,
Comcast, Bell Canada is accelerating the Softswitch market as competing operators
must react in order to stay price competitive and profitable. Carriers now agree that
Softswitch technology is stable, reliable and scalable for deployment and now it is just
a matter of when and where to roll it out.
• From a geography perspective, North America is the early adopter with Asia / Pacific
second and Europe last, which is about 12-18 months behind.
• New services available with Softswitches are VOIP, IP VPNs and IP Centrex. Carriers
can lower operating costs 50%-70% by deploying Softswitches versus operating less
efficient legacy switches.
• There are four addressable markets for Softswitches: Wireline, Cable, Wireless and
Enterprises. Active deployments: Wireline deployments are happening now, cable will
be 2H'04, Wireless in '05 and Enterprise will be '05 / '06.
• Public companies that participate in this market are Nortel, Siemens, Ericsson,
Tekelec, Sonus, Lucent, Alcatel and Cisco.
• Nortel is the best positioned at large carriers due to its DMS (old switch) incumbency,
and its Softswitch product portfolio was commercially available for early customer
trials and now live deployments.
• In the second tier of vendors, we believe Tekelec is well-positioned with its Santera
portfolio for larger deployments and Taqua portfolio for smaller deployments.
April 5, 2004
Details
Next-generation worldwide addressable market - $ in thousands
Total
2003 2004E 2005E 2006E 2007E '03 - '07
Integrated Softswitch $68,160 $130,188 $243,222 $389,809 $517,964 $1,349,343
Circuit-based SS $281,651 $339,419 $389,105 $423,678 $450,944 $1,884,797
Packet-based SS $98,680 $161,854 $479,794 $981,880 $1,423,415 $3,145,623
Total SS $448,491 $631,461 $1,112,121 $1,795,367 $2,392,323 $6,379,763
Lines Central
Line Size Switches (in M) Lines / Switch Offices
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April 5, 2004
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Benefits of a Softswitch
The difference of next-generation Softswitch architecture is the ability to distribute to the
edge of the network (media gateways, application servers and session controllers) up to
1,000 miles away from the hosted Softswitch. This mesh, or distributed, architecture
provides carriers incomparable flexibility in network design and maximum flexibility for
their customers.
Other benefits are:
• Cost savings - capex and opex.
• Open and flexible platform.
• Ease of deployment.
• Initiation of new services in shorter time.
• Scalability.
• Extend geographic coverage (out-of-territory).
There are four addressable market opportunities that will use Softswitches. The major
carriers (Wireline, Wireless and Cable) are deploying this equipment today, but the larger
equipment deployments at the major carriers will likely be 2006 - 2009.
Wireline Network Operators
Large North American Wireline operators (Bell Canada, MCI, SBC, Sprint and Verizon)
have been the first to embrace this next-generation architecture first in their
long-distance, or backhaul, networks and now slowly into their local networks. European
operators like Telecom Italia and British Telecom are among the larger European PTTs
deploying Softswitches in their networks. We believe Wireline Softswitch rollout will first
occur in North America, followed by Asia / Pacific and then Europe.
The large incumbent vendors of traditional switch equipment like Nortel, Lucent, Siemens
and Ericsson will likely win the majority of this marketplace over the long run. Large
carriers are comfortable with these OEMs because of scalability and dependency these
large operators place on these vendors to help run their networks. A large carrier like
Verizon depends on Nortel to take the traffic off of the legacy Nortel DMS switch and
"jump" the traffic onto its new Succession Softswitch platform. Obviously, Nortel has the
best working knowledge of both switches compared to trying to have a new vendor like
Sonus Networks, which could cause interoperability issues.
Changing the Local Switch and The PSTN Network
There are approximately 23,650 local circuit-switches in the U.S. and about 750-1,000
long-distance circuit-switches. The local switches are also known as the public switched
telephone network (PSTN). The PSTN is the combination of the world's public
circuit-switched telephone network, and similar to the Internet, which is based on IP
packet-switched network. The PSTN network started its upgrade from analog to digital
switches in 1997 and took 15 to 20 years to complete.
Over the last three years, carriers have been testing and deploying Class 4 Softswitches
for long-distance backhaul, which does not impact the local network. Now, major telcos
are moving to these local circuit switches, which is a much larger and complicated
endeavor. We believe the large U.S. carriers will upgrade the majority of their local
switches over the next ten years. These operators will start in more urban geographies
because it covers a greater proportion of their network traffic and finish the upgrade in
more random and rural locations.
Verizon stated five main reasons why it is upgrading to a next-generation Softswitch
network: 1) offer new services, 2) exhaust of central offices - out of capacity, 3) old
network is using discontinued gear, 4) FTTP broadband build out and 5) ability to
seamlessly integrate its wireless and wireline networks.
Top Wireline Softswitch vendors to major operators: Nortel, Siemens, Lucent, Ericsson
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April 5, 2004
and Cisco.
Top Wireline Softswitch vendors to CLECs, IOCs and smaller ILECs: Tekelec (Santera
and Taqua), Sonus, Telcordia, MetaSwitch and CirPack. These smaller carriers with
10,000 lines or less can purchase a very compact Softswitch that has complete
functionality integrated in 1 server-like box. It has the call control and the media gateway
all inside the same box.
Wireless Network Operators
Wireless operators are slower adopters of Softswitching technology because their
networks are newer and the vast majority of their traffic today is voice. There are between
15,000-20,000 mobile switches worldwide that could be converted to a Softswitch
architecture. This yields a worldwide next-generation Wireless equipment market around
$40 billion. As pure 3G (EV-DO or UMTS) networks get commercially launched and data,
INTERNET surfing and e-mails become more prominent on their networks, they will
convert to their switches to Softswitches.
We believe the US Wireless operators will be the first to deploy this technology, followed
by Asia / Pacific region and then Europe. We only know of one Wireless operator,
T-Mobile USA, that is running live traffic with Class 5 Softswitches and Media Gateways.
T-Mobile is using Spatial Wireless Softswitches and Tekelec's Media Gateways, which
Tekelec OEMs to Spatial. Spatial specializes in GSM wireless protocols and Motorola
with its acquisition of Winphoria Networks (ex-Lucent employees) in April 2003 that
specializes in CDMA protocol. AT&T Wireless is using Sonus's Class 4 Softswitch for
some long-distance purposes. Other US Wireless operators are currently in trials but we
believe this market starts its early roll outs in 2005.
Top Softswitch Wireless vendors: Spatial, Motorola (Winphoria), Nortel, Ericsson and
Lucent.
Cable Operators
As the large cable operators roll out voice services in greater masses, they will upgrade
their voice networks to Softswitch platforms. Large cable operators like Time Warner, Cox
and Comcast are utilizing Softswitches today but we expect the cable market to ramp
Softswitch deployments in 2005 and 2006 as additional voice users come on their
networks. Because these operators have a relatively small voice customer base, the
Softswitch equipment market in this vertical is less than $300 million over the long run.
Unless cable operators really take a lot of market share in the consumer voice market,
this will remain the smallest market opportunity. Similar to large Wireline operators, we
think the large cable operators will dual source its next-generation equipment vendors.
Top cable vendors: Cisco, Nortel, Siemens, Cedar Point and Telcordia.
Enterprise
In our opinion, this category will be the last to embrace Softswitch technology. Softswitch
OEMs are partnering with application providers like Sylantro and Broadsoft to provide
enterprise applications such as hosted PBX, IP Centrex, Consumer VOIP, call center and
other desktop applications. The Softswitch OEM sells its main equipment to the service
provider, like Verizon, and then the service provider offers this application to the
enterprise end customer.
Top application vendors: Broadsoft, Sylantro and Nortel.
Worldwide Market share - $ in millions
The chart below lists the market leaders in each major category. An integrated Softswitch
is a solution that has all the functionality in a single box (call control, signaling and media
gateway) and is sold to CLECs and IOCs with 10,000 lines or less. The Softswitch is the
"brain" in large carriers' networks and controls the other next-generation equipment that is
connected to it such as media gateways and application servers. Media gateways
deployed today are mostly ATM switches with DSP cards that takes TDM voice calls and
packetizes them. The true purpose-built media gateways are called Convergence
switches and are made by vendors like Nuera and Tekelec.
Tekelec has investments in three VOIP entities. In early 2002, Tekelec invested a total of
$16.5 million in Telica and Broadsoft and in return owns approximately 15% of equity in
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April 5, 2004
those two companies. In 2001, Tekelec gave Spatial Wireless signaling code and in
return was granted about 15% equity in that entity. We believe the total value of these
entities combined today is between $300 million - $500 million. This values Tekelec's
equity stakes at $45 million - $75 million.
Telica - a softswitch and media gateway provider.
Broadsoft - a software-based VOIP application provider.
Spatial Wireless - a wireless softswitch provider for GSM/UMTS networks
Remember, this market is very young in its adoption curve and market share statistics
and market sizes can change quickly and dramatically as one or two major carriers starts
to deploy equipment into its network. The market is not sure what Sonus's market share
will be as it is undergoing restatement of its financial statements.
Asia/Pacific NA Asia/Pacific
$0
27% 40% 26%
NA
45%
EMEA EMEA
28% 25%
Competition
The market is sliced into a number of different equipment categories for next-generation
equipment.
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Next-Generation Vendors
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