If you thought we were on the home straight as far as Integrated Services Digital Networks are concerned, here’s a little cold water to dampen your enthusiasm. A new report from The Yankee Group Europe, ISDN: The Illusory Holy Grail, paints a controversially gloomy picture of the technology’s immediate future, finding little motivation for telecommunications operators to deploy the service. While the report sees political incentives for doing so, its author, Keith Mallinson, finds economic arguments in favour of sticking with existing services. It is not only that problems on the network side will stymie development, but equipment suppliers are predicted to adopt a cautious approach due to the perception of ISDN as a high-risk, investment-intensive business.
Cattle prod
The picture is not all bleak though. ISDN does offer a number of advantages, including greater reliability, cheaper maintenance costs, cost savings for connection, and the opportunities offered by new value-added services. But while the report acknowledges these arguments, it concludes that they are simply not strong enough to offset the hefty investment costs. Ranged against the advantages are many costs above and beyond the obvious research and development budgets and the the need to upgrade fixed network infrastructure. Telephone operators get saddled with changing organisational and administrative systems, technical training for the installation and maintenance of equipment, and high incremental line equipment costs. There is always the political cattle-prod however, and the European Commission has been a key force in the development of the technology. But once again, the report looks askance. The political pressures which led European telephone operators to commit themselves to national coverage, is now inhibiting its appeal to those very same operators. Traditional methods of making national availability of services cost-effective – by offsetting the costs of links to outlying areas with higher charges all round – are seen as inappropriate to ISDN. Even for the core business market, ISDN will have to compete on price with other technologies to attract customers. The situation is exacerbated by the fact that non-core users, including residential customers, are thought to be happy with existing telephony arrangements in the absence of new dynamic ISDN services. As the report points out, even video-telephony heralded as ISDN’s star service – is under attack with the introduction of low-cost analogue systems. But wait, what about the successes? France for example, where the politicians have moved mountains (of money) to make ISDN available. Well, yes. The report uses France Telecom’s monopolistic position as an example of how, in restrictive regulatory climates, it is possible to cross-subsidise ISDN deployment costs to provide competitive tariffs. But, in the author’s opinion, even this aggressive deployment fails. The report provides a model of the company’s gross and net revenue, its estimated incremental costs, and concludes that at projected growth rates, profitability will be achieved only at the end of the decade, with return on capital coming even later. At the other end of the scale, the UK’s liberalised market is thought to have led to a cautious approach by British Telecommunications Plc, since the cherries – those highly profitable markets – which would enable cross-subsidies and an aggressive approach to ISDN deployment, are being picked off by other companies able to compete in the free market.
By Matthew Woollacott
The differing commercial environments in the UK and France have led to different implementation strategies, according to the report, which characterises BT’s as one of installing ISDN lines on an ad hoc basis. This is an assertion that the company itself disputes. Taking these factors into account, The Yankee Group identifies three likely operator strategies, each of which makes grim reading in terms of widespread ISDN deployment: to bury ISDN costs with increased tariff levels; to go halfway by providing ISDN capabil
ity using an overlay; or to hold off to see if ISDN becomes a plum or a lemon. The case is much the same for equipment vendors, where the disadvantages seem to tip the balance against ISDN. On the positive side, there are opportunities – the opening of the market to new equipment, with the possibility of higher margins; the chance for new companies to enter the market; and economies of scale that pan-European products could bring, viewed as leading potentially to more viable low-cost, high volume equipment with powerful capabilities. On the other side of the balance sits ISDN’s high development and manufacturing costs, the possible continued fragmentation of the European market and the emergence of other technologies (such as Frame Relay) providing potentially more profitable opportunities. Because of these disadvantages, vendors will be cautious about investing heavily in ISDN, supplying firm orders from operators, but not trying to develop the more risky products, such as customer equipment, on a speculative basis. From the users’ perspective, ISDN is going to have to compete with alternative low-cost offerings – back to Frame Relay again. The report points out that the task will be made all the more difficult by the fact that the most appealing aspects of ISDN will be those applications likely to be most unprofitable to the operators. Take, for example, the use of Basic Rate connections – two by 64Kbps – as lightly-used links for back-up or overflow, or alternatively thin tails to outlying locations. Both are costly for operators to install, can be well served by other technologies, but most of all, bring in little extra revenue for the service operator. This analysis is illustrated by a recent pick-up in user demand that the report identifies. While this is seen as good news in itself, the fact that it is in the areas of peripheral data communications to non-core, costly-to-serve localities, or to replace analogue PABX access, means that operators are having to compete with other technologies. They are installing relatively costly links for business they may well have attracted anyway. Indeed, the trend towards lower ISDN charges to bring them into line with Public Switched Telephone Network tariffs, which has helped to boost the increase in demand, is expected to have little positive effect in the long term.
Little extra revenue
The report points out that by taking business from existing services, ISDN brings little in the way of extra revenue – and yet this is what the operators really need to offset their deployment costs. The ability of ISDN developers to find core applications to deliver real benefits – compared with alternative technologies – and to stimulate demand without taking revenue from existing services, is therefore seen as a key issue. Not surprisingly, those companies that have been investing in ISDN take issue with some of the report’s findings. At first, British Telecom was rather non-plussed at being asked what benefits it gets from building a digital network, as opposed to those derived by its customers. But once the company got its teeth into the question, the answer was confident and cogent. Digitisation of the network was carried out for good commercial reasons that had little to do with ISDN. ISDN, it argues, is merely the icing on the cake and the cost of digitising the last bit of the local loop is cheap compared with that for the rest of the network. Undoubtedly the UK is something of a special case, but the alacrity with which network operators around the globe are digitising their telephone networks must leave some hope that the quest for the Grail is not a totally misguided one.
