Apps join savings as spur to VoIP sales growth

The third quarter of 2003 continued the robust growth of voice-over-IP customer premise equipment (CPE) sales, as buyers cite applications and capabilities rather than just costs savings as reasons to make the move. The one million-line shipment milestone was exceeded during the quarter, marking a growth rate exceeding 30% from the prior quarter. According to our Monitor report, VoIP shipments in the United States were over 1.25 million lines. The overall U.S. telephone equipment market, including time-division multiplexing (TDM) and VoIP, also showed more than 15% sequential growth to almost 3.4 million lines. VoIP shipments were over one third of the total market for the first time, with a more than 35% share of total line-shipments.

To understand the reasons for this increasingly rapid adoption of VoIP, we asked our Enterprise Panel, as part of our ongoing analysis of this market, why they are stepping up their VoIP purchases now.

The reasons they provided for VoIP purchases today move far beyond the expectations of cost savings from long-distance toll bypass--the early selling point--towards the more advanced applications and capabilities provided by VoIP. These capabilities include increased support for mobility, location independence and centralized administration. Integrated messaging applications--allowing for voice access to e-mail and a common, single mailbox for voice, e-mail and IM--also seem to be moving from hype to happening with recent VoIP purchases. Questions about reliability and quality of service still remain, but these concerns are ebbing as we move beyond the early-adopter segment of the life-cycle curve.

The vendors have also eliminated some of the barriers to VoIP procurement. Some early users were disappointed to learn that, in addition to buying the new phone system, they had to also upgrade their LAN/WAN data network--a bitter budget pill, especially in the sluggish economy at the time. Today, most of the vendors eliminate this showstopper by conducting pre-sales LAN/WAN assessments before making a sales proposal. Thus, buyers now feel more comfortable with both the full costs of the change (including upgrading the data network infrastructure, where required) and the level of risk they are undertaking. Similarly, the large price reductions in Gig and 10-Gig Ethernet switches have cut the costs of upgrades to a more manageable level.

Many vendors, generally those who were traditional players in telephony CPE, have also made the transition to VoIP a more palatable upgrade with converged systems, rather than the full replacement required of earlier first-generation systems. Converged platforms now allow the enterprise user to mix and match IP and TDM phones on one system and replace individual handsets only as it makes sense--logically, financially or technically. New departments or locations may get new IP phones now, while existing locations or stable departments don’t need to change until it is appropriate.

Also, some of vendors have made a subset of their IP instruments look, operate and feel identical to the TDM instruments they replace, so the user may not even be aware that a change-out has been made unless they are using new VoIP-based capabilities. These would include the ability to be more mobile, to use softphones on their PCs when out of the office, or, for teleworkers, the ability to connect from home offices via an IP-VPN. And, all the time, the callers contact the users as if they were in their office.

The Session Initiation Protocol (SIP) standard has the promise of providing further flexibility in how users can adopt VoIP. Because it uses an industry standard, a SIP phone can connect to any SIP-compatible system, even from another manufacturer. Today many large businesses have TDM phone systems from more than one manufacturer in locations across the enterprise, but in the TDM world, the phones are all proprietary--a phone from one manufacturer can only be used on the same manufacturer’s systems (or maybe even on only on a sub-set--PBX or key, not both). With SIP, a phone can connect to any manufacturer’s compliant system. Thus, it will be even easier to support VoIP within the many enterprises that today are multi-vendor and appear to be “locked-in.”

Expectations of a stronger economy are also fueling the growth, with buyers concluding it is finally appropriate to begin to replace phone systems acquired in the late 1990s as part of the Y2K replacement cycle.

While year-end numbers will not be available for several months, early indications from both the vendors and users are that the VoIP trend will continue to accelerate. It might be possible for VoIP shipments to reach 50% of the market during 2004--an amazingly rapid technology transition.

David H. Yedwab is Executive Vice President of The Eastern Management Group, Bedminster, NJ. He can be reached at dyedwab@easternmanagement.com.

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