New research by business and financial adviser Grant Thornton predicts that despite the global downturn, consolidation in the VoIP (Voice over Internet Protocol) sector will continue apace as Telcos and IT companies battle for chunks of the expected £13.5 billion in global revenue VoIP will generate in 2010.

The research, part of a report by Grant Thornton into VoIP convergence, predicts that migration from fixed line to mobile and VoIP services will increase exponentially over the coming years and result in a raft of consolidation in the sector through 2008, signalling the death knell of traditional telephony.

Sarika Patel, head of technology at Grant Thornton, cites the doubling of the VoIP customer subscriber base in 2006 and four fold in the last two years as just one reason to believe that the VoIP worldwide customer base with top 250 million in two years.

"VoIP is no longer next generation telephony, it is here now, and 2008 should see strategic acquisitions of independent software developers and ISPs by large Telcos looking to consolidate their VoIP offerings," says Patel. 

Patel says that the past 12 months brought about tremendous change for VoIP with improving technology solutions and enhanced ability for ISPs to cater for VoIP calls resulting in the rapid increase in the uptake in the technology and changes at the heart of the communication's industry business plans.

Patel: "VoIP has disrupted the traditional value chain in the communications industry with the focus now falling on IP rather than traditional voice calls. As such, there is a bitter turf war taking place in the fragmented market of service provision, particularly for customer ownership."

She continues: "Incumbent operators are looking for traction in the VoIP sector and are aiming to offset declines in traditional voice revenues and retain customers by grabbing a stake in the software developers heading up the VoIP wave. A surge of M&A activity in 2007 is testament to this and consolidation with continue this year, despite tight credit conditions."

Patel believes potential targets for acquisition in 2008 may include some of the many UK independent residential and enterprise ISPs and resellers such as Luminson and NDO, Prodigy Networks, Fast.co.uk, Firefly Internet and Breathe Networks.

"The Telcos will be looking at the smaller players as acquisition targets in order to develop the business model and IP necessary to grab a strong foothold in this market. Private equity will also see plenty of opportunity in this sector. Already, venture capital has poured in nearly £1bn into VoIP and related businesses in the four years to 2005 and although many thought funding would dry up over the past two years, VoIP continues to attract the overtures of the private equity community."

Patel says there are still concerns in the sector which need immediate action in order to cement VoIP as the next generation of voice and video communication.

"Security remains a major concern," says Patel. "VoIP is more secure than it ever was, but eavesdropping, viruses and fraud are still a threat. Currently, software encryption products are available, but it is inevitable that encryption will be integrated directly into VoIP systems in the near future. If this is successfully managed and brought to market, VoIP will garner the confidence of business and uptake will jump."

Patel believes other concerns include quality of service issues, reliability, scalability and the development of sensible industry regulation. She also believes that once these creases are ironed out that the next great horizon for VoIP is Internet Protocol Television (IPTV) as it will allow telecom operators to charge for a "triple" or "quad-play" package of services. 

"Already, IPTV is showing the types of customer numbers that will have the big operators drooling, for example, BT has already reported signing up 150,000 subscribers to its BT Vision which was launched in December 2006. For that reason, all the major Telcos are looking to acquire the software developers that will keep them in the IPTV game, there'll be plenty of bidding action in this market this year."