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SMBs Driving Demand for VoIP Services

Posted on: Saturday, 19 March 2005, 03:00 CST

Large corporations have been slow to embrace hosted or network- based VoIP services despite the hype about lower costs and compelling applications.

Today, most of the momentum in business VoIP services - customer premises equipment-based managed PBX, hosted IP Centrex and network/ softswitch-based voice VPN - is in the small-to-midsize business (SMB) market. And of those services, hosted IP Centrex is the most sought after because smaller companies were traditionally TDM Centrex customers.

Similarly, because large corporations traditionally have had their own PBX networks, a managed or unmanaged IP PBX service is most appealing to them, analysts say As proof, they point to the large managed IP PBX contracts recently awarded by Ford, Bank of America, Boeing and Merrill Lynch.

"Hosted is primarily SMBs ... that have primarily been Centrex customers," says Will Stofega,an analyst at IDC. "The other thing we're seeing is this managed PBX service, especially in larger implementations."

MCI officials point out that there are a lot more SMBs than there are large corporations, so it only makes sense to target the largest number of potential customers. Smaller businesses also are more like consumers when it comes to making telecom services decisions and purchases, while large accounts have a much longer sales cycle.

"You're not going to the CTO to try to swap out a phone system,"says Jeff Ahlquist, Covad Communications vice president for product development."It's a much quicker sell."

Mqjor growth expected

That could be why IP telephony accounts for a bit more than 10% of installed voice lines in U.S. business, according to market researcher In-Stat.

SMBs are also a chief reason the U.S. market for hosted VoIP services will grow from $5.3 million to $4.3 billion between 2003 and 2008, according to IDC. Meanwhile, worldwide sales of IP PBXs will grow from $3.9 billion to $8.9 billion between 2005 and 2009, according to IDC.

The market is evolving this way because large corporations with entrenched and knowledgeable IT departments and scores of custom applications are reluctant to outsource theirVoIP infrastructures.They'd rather have a service provider manage the routers and IP infrastructure than dialing plans, call routing and administration of very specific feature sets.

Smaller customers don't have the wherewithal to staff an internal service provider, so they would rather farm it all out to a hosted service, which is essentially what they have been doing up to now with Centrex.

And for all of the hype surrounding voice/data convergence and all of the nifty applications it will spawn, the real driver behind VoIP service for businesses is the same driver for any business - money

"What's driving this market? It's cost reduction,"Stofega says."It's not find me/follow me, or visual voice e-mail or things like that. It's not increasing worker productivity Those things don't really hold water right noW

Somebody should tell that to Notre Dame.The Indiana university is going to pilot SBC's PremierServ HIPCS service next week on 220 Cisco 7960 and 7940 IP phones. If all goes well, the school could turn up 5,000 HIPCS lines over the next few years.

The chief motivator for Notre Dame is what it believes is the imminent obsolescence of Centrex. But right behind that are the applications - unified messaging, find me/ follow me, a Web portal to create custom dialing plans and integration with Cingular Wireless services, and basic Centrex features such as five-digit dialing.

"Cingular is going to play a very prominent role in our voice services," says Dewitt Latimer.the university's deputy CIO and CTO.Latimer expects to retire up to 3,000 Centrex lines in Notre Dame dormitories because most students use cellular phones.

"The tightness between the SBC HIPCS deployment and the Cingular infrastructure is an attractive proposition," he says.

IP voice business services on the rise

Latimer says the cost savings from VoIP will come years later, when price declines in traditional Centrex bottom out while those for HIPCS keep plummeting. Businesses can potentially shave up to 50% or more from their telecorn expenses by using a VoIP service, analysts note.

Resun Leasing in Dulles.Va., realized this kind of savings in just four months.The $200 million prefabricated modular building company opted for "virtual PBX" hosted VoIP service from MCI - something akin to IP Centrex - to take advantage of free on-network calling between 35 sites, says Resun CIO Emmanuel Ramos.

"Fifty percent of all long-distance that was charged was inter- company calling," Ramos says."WithVoIpthat was something we could immediately take care of."

But users' mileage might vary

The total cost of ownership (TCO) of VoIP might not be compelling enough to make a wholesale switch from traditional circuit-switched TDM services, according to Sprint. Sprint offers businesses a managed IP PBX service as well as voice support on its IP-enabled SprintLink frame relay service. The carrier also of fers Voice VPN and other enterprise VoIP services on a customer-specific basis, says Doreen Weiland, Sprint's director of integrated voice services and product management.

If users don't factor in all of the integration and eustomized engineering that VoIP services require, they could blow their own TCO expectations off the charts, she says.

"Customers really need to take a look at compression and voice coder technologies,"Weiland says."If the hosted offering uses the standard [voice coder] and no additional compression of headers for your voice traffic, you find that you can't really meet [vendor] total cost of ownership promises."

Even though compression might be required,squeezing the headers requires a lot of processing power and the associated delays.

"You may find that when you do the cost analysis, the processing power and the delay incurred by that for the multiple hops [in the network] really does not actually benefit you in going to VoIFf' Weiland says.'This is where we find the customers' needs have not really resulted in a cookie cutter [offering], especially in the hybrid [TDM and VoIP] environment."

"Customers are constantly competing with the economics of the TDM infrastructure," she adds."It's not enough just to say you have voice over IP - you have to prove the economics of it competing with the TDM infrastructure."

Proving the economics is why VoIP services have taken off faster with SMBs: smaller implementations involve less risk and more immediate and recognizable returns, says John Barnes, director of voice applications at MCI.

"The early uptake has been in smaller locations or in smaller- scale implementations within enterprises so that they can ensure that their TCO reductions are realized," Barnes says."Clearly in the SMB space, they've been able to take that with a lot less risk because the TCO amounts that they're looking at are substantially smaller. Enterprise customers have been slower to migrate, until recently, simply to mitigate the risk and ensure that their own analysis of the TCO reductions are accurate."

Evidence of change

However, Barnes adds that MCI has seen an uptick in demand from larger accounts for MCI's Advantage VoIP and Private IP voice VPN services over the past six to eight months. MCI will further stoke that demand later this year by enhancing MCI Advantage with features that foster interoperation with the leading IP PBX vendors. Those features include SIP trunking; and other network-based and hosted features that could potentially displace TDM and IP PBXs, such as local and long-distance gateway capabilities, autoattendant, number portability emergency services and call blocking.

The short-term hosted VoIP opportunity with large corporations is in those that are distributed, notes Covad's Ahlquist. Hosted services enable these businesses to have the same services features across the organization, regardless of where the location is, he says.

Ahlquist says large companies also will benefit from hosted VoIP in the long term.

"As larger enterprises become more comfortable with hosted providers being able to service their needs, I think it will be a natural migration into that," he says."But the reality of the market is a lot of the larger companies like to have that premises-based equipment.They're comfortable with it. Hosted IP will be used in very specific areas where it makes most sense."

Copyright Network World Inc. Mar 7, 2005

Source: Network World

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