South America will experience a CAGR of 96 percent in revenue growth reaching 5.5 percent of global IP telephony revenues in 2003. South America’s geographic remoteness will boost growth in this particular market. The Asia Pacific market will be bolstered by the increasing penetration rate of IP telephony gateways and IP PBXs, growing from a 12.1 percent share of revenues in 2000 to 15.9 percent in 2003.

Gareth Williams, Director of Research at TekPlus, states that, 'the business end-user market has tended to steer clear of IP telephony, but improved quality of service and increased provision of 'must have' applications delivered by IP telephony service providers are beginning to change their perception of the technology.' Moreover, the value being delivered to the business end-user community in turn is forcing IP telephony service providers to provide more and more value as opposed to cheaper calls. Gareth continues, 'this value is being increased with the addition of 'mini-killer' applications that delivers excitement in different end-user communities, rather than one all encompassing killer application. IP telephony service providers have realised that end-users require applications and services tailored to individual requirements rather than generic bundled services.'

The IP telephony market is undergoing a transformation from a volume/minutes based business model to one that is value-based, this is shown in figure 1.2. This is as a direct result of:

• Falling arbitrage opportunities
• Expanding business end-user segment
• Increasing demand for call handling and call application features
• Evolving industry structure and new ecosystems
• IP telephony providers changing the way they leverage value from end-users and how they are influenced
• Voice minutes enable value and revenue generation rather than being the revenue generating facet

There will be winners and losers as the new business model rears its influence over IP telephony service providers. Exchange carriers and simple wholesalers will come under increasing pressure to add value to their basic voice offering. Some IP telephony service providers have already started to change their tact or indeed leave sectors of the market. Dr Mitul Mehta, Managing Director of TekPlus, says' IP telephony service providers must work hard to protect their revenue streams and not get sucked into relying on volume calls. They must not fall into the trap that former incumbents and other PSTN service providers have demonstrated, by relying on present market models as a basis for future growth.'

Companies such as GRIC Communications see that margins are already beginning to shrink in the wholesale business and have decided to move out of this sector. GRIC, for example, will concentrate on remote access services as a result. This trend will be reciprocated amongst other IP telephony service providers, either leaving the market all together, being acquired or forming a partnership eco-system to succeed in the value business model.

Figure 1.2 Value Stack Evolution and Impact on Industry Participants and End-User Community. TekPlus Value Model Ladder