In a new report “European Incumbent Telcos’ VoIP Road Map,” Forrester Research B.V. (Nasdaq: FORR) has laid out a timeline for Western European VoIP deployment — from 5 percent of total end-to-end fixed voice traffic in 2006 to 100 percent in 2020. Forrester believes that the shift from circuit-switched (TDM) to packet-switched voice (VoIP) networks represents the biggest challenge for European incumbent telcos like BT and Deutsche Telekom over the next two decades. TDM voice (PSTN/ISDN) is a €140 billion per year industry in Western Europe — and incumbent telcos’ biggest cash cow.

“A shift to packet voice (VoIP) networks threatens incumbents’ pricing model of multiple subscription charges for the same copper line and metered, distance-dependent usage charges. But contrary to vendor hype, this shift will take 17 years to complete. Such a massive, long-term shift requires telcos to get out of their complacent, short-term mood and respond with an integrated, consistent migration strategy that spans the network and service provider divide,” said Forrester Senior Analyst Lars Godell.

The migration to VoIP will be fraught with complex and costly network changes that rival UMTS. And vendors like Alcatel, Cisco, and Siemens won’t be ready with carrier-class, scalable, and cost-effective gear for at least 24 months. It will take two years to solve VoIP quality challenges for end-to-end public network services as well.

“The heavy capex spend required to replace more than 100,000 local switches and remote concentrators will be another big VoIP showstopper,” said Godell. “There simply isn’t much cash available to fund this, and the incumbent telcos lack a positive business case to move ahead with an aggressive rollout of VoIP networks and services. But the combined effect of competitive pressure and obsolete TDM networks will force telcos to slowly bite the VoIP bullet.”

In 2006, Forrester asserts that the enterprise market will lead VoIP adoption, with 10 percent of business end-to-end traffic being VoIP. VoIP’s share of the total European end-to-end fixed-voice market will increase to 45 percent in 2010, riding on the back of European residential broadband penetration that will reach 40 percent in 2010. As a result, VoIP will capture 30 percent of the residential market in that year. Overall VoIP penetration will pass 85 percent in 2015 and is expected to hit 100 percent by 2020.

“Telcos need to start preparing for a staged migration now; their first step is to assess the competitive threat and the packet voice business case,” said Godell. “This will vary from incumbent to incumbent in Europe. The critical piece for end-to-end VoIP migration is in the access network with around 100,000 switches. Over the next three years, incumbents should only evaluate, and not deploy, new multiservice access switches.”

In the near term, monthly residential ARPU of between €30 and €40 in most countries means there’s little competitive VoIP pressure to prompt activity. But with enterprise users offering higher ARPU and margins, competitors have already launched services. Telcos will gain traction with hosted VoIP services like IP Centrex on top on the standard offerings. SMEs represent the biggest prize, with little competition in this market and clear demand for better-integrated IT and telecom solutions.

Between 2007 and 2012, telcos must complete the replacement of the core network, roll out new multiservice access switches in limited areas, and focus on new value-added SME and residential VoIP services like video telephony.

“Rather than face huge upfront costs from a nationwide rollout, incumbents should limit their initial deployments to urban areas where competitive pressure, concentration of SMEs and enterprises, and residential broadband penetration combine to demand early action. With stable, scalable, and cost-effective carrier-class VoIP technology and TDM networks at the end of their useful lives, telcos will finish their VoIP migration from 2013 onward. To finalize the VoIP migration, operators must complete the access switch upgrade and launch more value-added services.”