SMBs driving demand for VoIP services

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."

Major 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 their VoIP 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.

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 telecom expenses by using a VoIP service, analysts note.