Jack Pot!

While many solution providers today are seeing stellar growth by building VoIP solutions that put equipment from vendors such as Cisco Systems, Avaya and others on-site, a growing number of VARs are finding success by partnering with service providers to sell hosted VoIP.

Through the services, sometimes called IP Centrex, VARs can help customers achieve VoIP&'s promised cost-savings and productivity gains for a fixed monthly fee without investing in a lot of equipment up front. On average, customers can save thousands of dollars by deploying hosted VoIP instead of premise-based VoIP equipment, and they can cut their bills by an average of 20 percent to 40 percent compared with their existing phone services, solution providers said.

And for Simmons and other VARs like him, hosted VoIP services could be a jackpot. In the seven months since signing on as a channel partner with service provider CommPartners to sell its hosted VoIP services, MAS has sold more than 7,200 seats, a figure Simmons said is growing daily. “By this time next year, we should be pushing a 75,000-seat count, if not 100,000,” Simmons said. With MAS maintaining typical margins of around 35 percent on each seat&'s average price of $34.95 per month in recurring revenue, the size of the opportunity quickly becomes clear.

IP Centrex services will account for only 300,000 lines this year in North America, but that number is projected to skyrocket to 6 million lines by 2009, according to research firm Gartner, figures representative of a trend that isn&'t going unnoticed by vendors.

Earlier this month, Cisco&'s Linksys division launched a new business unit and product platform dubbed Linksys One that is specifically designed to capture a piece of the hosted VoIP market (see CRN, Nov. 14). In concert with MCI, Linksys is pushing its VARs to bundle the new Linksys hardware with hosted services to target small-business customers in exchange for recurring monthly revenue. San Jose, Calif.-based Cisco sees so much potential in the market that it created a new Advanced Technology dubbed Hosted Small Business Services around the product line. Advanced Technology is Cisco&'s designation for product groups it expects to grow into billion-dollar annual businesses.

That followed announcements in September that Microsoft teamed with Qwest Communications International to build SMB-focused hosted VoIP services, while Avaya nabbed Sprint as its latest VoIP services partner. Service bundles from both partnerships will eventually filter through channel partners&' hands.

Buoyed by all the activity in this market, Simmons is set to double-down on his bet. He&'s spinning off his hosted VoIP practice into a separate company dubbed Protocall Communications and adding personnel to support it. While finding success in his native Las Vegas—Protocall is on the verge of closing a multiphase deal with a large gaming organization that would begin with 1,000 seats and grow from there—Simmons has broader aspirations. He already counts customers in several other states and plans to sell his Protocall-branded services nationwide. “The VoIP side of this is going to far exceed on a yearly basis anything that MAS has ever done,” Simmons said.

BIG WINS IN SMALL BUSINESS
Like Simmons, Matt Briggs, partner at Single Path, is winning big with hosted VoIP. After losing a few IP telephony deals to competitors with hosted VoIP solutions, the Crestwood, Ill.-based integrator began to realize the technology&'s potential. “We felt like we absolutely had to embrace the hosted model because we were going to leave money on the table if we pursued a ‘premise-based-only&' strategy,” Briggs said.

Now Single Path, a Cisco IP telephony partner, is bringing in millions in revenue selling services from Covad Communications Group, San Jose, and GeckoTech, a regional player based in Chicago. Over the past 12 months, Single Path has increased its staff by 20 percent, adding personnel in sales, project management, engineering and training, all to support its growing hosted VoIP opportunity, Briggs said.

The majority of solution providers and service providers see the sub-100-user small-business market as the sweet spot for hosted VoIP services, targeting customers that want the features and flexibility of VoIP but are constrained by limited IT resources and tight budgets.

NetTeks Technology Consultants is targeting a small number of customers with 25 users or fewer with hosted VoIP services from Covad, said Ethan Simmons, partner at the Boston-based solution provider. “We&'re working with it for customers that have many small sites or remote salespeople that need something they can get up quickly and don&'t want to invest in the infrastructure,” NetTeks&' Simmons said.

NetTeks is one of a number of partners that Cisco has encouraged to consider partnerships with Covad, which has built its infrastructure on Cisco gear.

While on the surface it might seem counterintuitive for a provider of premise-based VoIP equipment to encourage its partners to add hosted VoIP to their portfolios, Cisco sees the strategy as a means for partners to fill out their offerings to meet a full range of SMB customer needs, said Peter Alexander, vice president of global commercial marketing at Cisco. And, of course, if the service provider itself has standardized on Cisco equipment in its infrastructure, the vendor is still getting a piece of the pie.

“We&'d rather there be a multitude of offerings available and they be Cisco-based vs. saying we won&'t go into an area because it could be competitive to other areas [we play in],” Alexander said.

Still, both Alexander and solution providers said they don&'t see hosted VoIP sales cannibalizing sales of Cisco&'s CallManager or CallManager Express IP telephony products. Instead, hosted services bring a whole new customer group to Cisco through sales of IP phones and LAN infrastructure upgrades to support those services.

“For the most part, this is incremental business because the hosted offering gives us the ability to play in the ‘S&' part of the SMB market where it wasn&'t viable to sell Cisco premise-based equipment to a 15-person office,” said Single Path&'s Briggs.

LAYING THEIR CARDS ON THE TABLE
While solution providers tout the benefits of hosted VoIP, they are also quick to concede that the services aren&'t the best fit for every customer. Those that need high-level, customized integration between their VoIP services and other applications might be better suited to premise-based offerings. Others might have qualms about outsourcing such a business-critical application.

“We haven&'t seen [hosted VoIP] services gaining all that much traction,” said Pat Schekel, Cisco practice director at Berbee Information Networks, a Madison, Wis.-based solution provider. “I think a large segment of customers are not willing to trust outsourced voice,” he said.

Brad Edwards, CEO of business relations at Telebay, a telecommunications reseller based in Fort Worth, Texas, said the biggest concern business customers have about VoIP is reliability. Telebay addresses those fears by carefully selecting its service provider partners—which include Fonvantage, Opex Internet Voice and Packet8—and keeping a full range of options available, Edwards said.

“We have had to do a lot of work just educating our customers,” Edwards said. Over the past two years, Telebay has expanded its sales force from 2,000 nationwide representatives to more than 9,000, driven primarily by the popularity of hosted VoIP services, he said.

In many cases, VoIP providers targeting business customers have their own private networks, so unlike consumer-focused offerings from players such as Skype and Vonage, these calls never touch the public Internet, solution providers said.

Many hosted VoIP offerings also provide a level of failover and redundancy that customers couldn&'t afford if they chose premise-based VoIP offerings instead, said George Brennan, vice president and co-founder of Telesis Communication Services, a Massapequa Park, N.Y.-based provider that has partnered with M5 Networks.

“M5 provides redundancy through two fixed circuits, so if there is a circuit failure, there is automatic failover,” Brennan said. “That&'s a powerful statement for anyone with a T1 or dedicated circuit that has had outages,” he said.

Customers also question the availability of 911 emergency services when they consider hosted services, an issue many service providers have addressed. Cascade Networks, a Longview, Wash.-based solution provider doing business as Last Mile Gear, has found a successful niche selling hosted VoIP services to construction sites, where having failover systems in place and access to 911 is critical, said Brian Magnuson, president of the company. His hosted VoIP partner, Packet8, a division of 8x8, was one of the first VoIP providers to offer 911 services.

While some channel partners are just as uneasy as their customers when it comes to betting on hosted VoIP, they likely won&'t be able to avoid its impact. Since service providers are shouldering much of complexity involved in hosted VoIP deployments, channel partners aren&'t required to bulk up on certifications and specializations to offer the services.

“Hosted solutions really open up the market to VARs where today VoIP communications solutions aren&'t part of their core competency,” said Tracy Butler, president of Acropolis Technology Group, a Wood River, Ill.-based solution provider that offers both hosted and premise-based VoIP solutions. “There&'s going to be much more competition,” he said.

Single Path&'s Briggs agrees. “There is going to be more competition, but at the same time, this isn&'t something that&'s going away. You can embrace it or battle against it,” Briggs said. “We&'ve chosen to embrace it and make the most of it.”

Dan Neel contributed to this story.