The problem is that traditional financial methods such as Net Present Value (NPV), Internal Rate of Return (IRR), and Total Cost of Ownership (TCO) work well for short-term, bottom-line-type analysis, but they don't capture the effect of different types of uncertainty. Market uncertainty, for example, describes the uncertainty over the network services users will want, and how much they'll pay for them. Technical uncertainty describes the uncertainty over how technology is evolving. When these uncertainties are combined, it becomes impossible to estimate the future cash flows upon which traditional financial methods are based. However, both types of uncertainties (market and technology) can be captured and modeled using a Real Options framework. (For more information, see http://people.bu.edu/mgaynor/papers/.) Real Options extends the theory of financial options to value options on real (nonfinancial) assets, such as oil fields or an investment in IT infrastructure, thus linking planning and financial strategies. As with financial options, the Real Options framework limits the risk of loss on a design or investment decision without capping the potential profit. This theory illustrates that providing users with many choices and allowing the market to select the best choice generates the greatest value when uncertainty is high. With traditional voice services, the market uncertainty is low, which implies that experimentation with traditional voice architectures such as Centrex or TDM-based PBXs isn't worthwhile because of its low expected value. With VoIP, the market uncertainty is high, which increases the value of trying out new ideas. Vendors need to invest more in an immature market, but with the right feature set the return is also significantly higher than in a mature market. The same approach applies to comparing standard and proprietary protocols. For example, nobody knows what a future VoIP handset will look like, or what features it will have. Allowing many vendors to experiment with new concepts is exactly what's needed to find the best market match. Open standards promote this type of experimentation, but proprietary protocols don't. For now, the uncertainty with VoIP services and features implies that open standards will provide the highest value because they offer more choices to the end user. It now appears that the Session Initiation Protocol (SIP) will become the dominant standard for end-device control in VoIP, at least for the near future. SIP beats out proprietary protocols such as Cisco Systems' Skinny Client Control Protocol (SCCP) because SIP is open, and SCCP isn't. Its flexibility means that users can build infrastructure with either an end-to-end or centralized structure, unlike protocols such as Megaco (H.248) that force centralized control by prohibiting end-to-end services. SIP also promotes more innovation by letting end users experiment through intelligent end devices that provide customized services. This creates more choices for the user, which, according to our Real Options framework, generates more value--at least until the industry develops a common understanding of the required features for Internet-enabled voice services. |