VoIP CPE shipments reflect new industry dynamics

But shipments of VoIP lines in the fourth quarter declined slightly from third quarter shipments (down 8% from over 1.2 million to about 1.1 million). Has the rate that VoIP is replacing TDM already hit an impasse? Certainly this question is relevant. 

Let’s examine this by starting with our view of the installed base. According to our analysis, at year-end 2003, the average age of the installed U.S. telephony equipment base was greater than eight years. This is older than we’ve seen previously. With many of these installed systems acquired pre-Y2K, many are at the end their economic life. So while an impasse to replacement is possible, we don’t think it will happen. Here’s why.

At more than 17,000, the number of new VoIP systems shipped in the fourth quarter grew faster than the number of VoIP lines.  Year-over-year VOIP systems shipments grew by over 120%, and fourth quarter system shipments exceeded third quarter system shipments by more than 15%. This makes us feel that the rate of TDM replacement is not slowing, but may even be increasing. The higher rate of growth for systems versus lines indicates that new systems have a smaller average line size; thus, VoIP is actually penetrating more broadly across the market. 

Distributed by size, 20% of the VoIP lines shipped in Q4 were in systems having less than 40 lines, 30% between 41 and 100 lines, 25% between 101 and 400 and 25% over 400 lines. The same distribution for TDM was 35% below 40 lines, 30% between 41 and 100 lines, 15% between 101 and 400 lines and 20% above 400 lines. So while shipped systems sizes are declining, on the average, new VoIP systems tend to be larger than their TDM counterparts, with over half of the shipped VoIP systems greater than 100 lines.

Contrary to popular opinion, the third calendar quarter has actually been the strongest shipment quarter of the year for both VoIP as well as for total CPE. Both for several years prior to and since the Y2K anomaly, shipments of voice systems in the third calendar quarter have been stronger than the historically-leading fourth quarter. This seasonality shift can be partially attributed to the fiscal years of many of the players not corresponding to calendar years. For example, five of the top six manufacturers--Avaya, Cisco, NEC, Siemens, and Mitel--have fiscal years that differ from the calendar year. Among the leaders, only Nortel has its fiscal year aligned with the calendar. The non-calendar year companies will have sales promotions and sales stimulation programs corresponding to their financial calendars, not during the traditional year-end calendar push found in many high-tech markets. These marketing programs have been shown to significantly affect a manufacturer’s reporting period results. The power of these marketing programs can be quite significant and is illustrated by one international manufacturer’s sales stimulation programs resulting in calendar 3Q shipments (when the promotions were in effect) totaling almost twice the sales achieved during the calendar 4Q (when the promotions were dropped). This seasonality shift has changed the traditional year-end spending pattern.

During the fourth quarter, many of the manufacturers introduced new versions (for some, the second or third generation) of their VoIP products. In many cases, these new releases incorporated improvements to provide enterprises with more robust security in their VoIP systems. This re-emphasis on security is countering a concern among a broad sampling of potential VoIP customers that, like their data networks, their IP-based systems could be susceptible to more attacks than traditional TDM equipment. In addition to security, the quarter included broader introductions of SIP protocol capabilities. Many vendors coupled introductions of presence with solutions focusing on increasing worker productivity through more effective collaboration, conferencing and web-based routing/coverage plans. These introductions, along with expansions of product families in both hard and soft IP-phones and the expanded application of unified messaging, have continued into early 2004. 

Not only have product extension and development continued, but customer interest in VoIP has grown substantially, as seen in growing attendance at specialized VoIP conferences and trade shows. Increased interest and attendance by enterprises indicates that more businesses are interested enough in VoIP to invest some expense dollars to further explore the technologies and increase the learning and knowledge base of their IT/telecom staff--strong signals of likely future purchases. And with the high attention VoIP is receiving in Washington and the multiplicity of VoIP services being launched and extended by many service providers, it does look like 2004 may finally be the year of VoIP.

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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