IP Telephony Comes In Loud And Clear

New product features help break down barriers to entry

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What do you get when you combine falling prices, easier installation and more reliability? Answer: IP-telephony solutions,and a potential revenue stream for VARs who can support the related hardware, software and services.

A recent survey of 200 enterprise customers conducted by InfoTech found 55 percent had implemented IP telephony at one or more sites.

"Clearly, a high percentage of businesses believe IP telephony is the way to go," says Terry White, senior director at InfoTech.

In addition, analysts predict more customers will upgrade to IP-PBXs in the next few years. IDC, for one, forecasts IP-telephony equipment sales of $15 billion by 2007, up sharply from a projected $3.5 billion for 2003.

"The real sizzle now is applications,what productivity gains business customers can see from the management of a single network," says Brian Walker, director of communications for Missouri Information Solutions, a VAR in Kansas City. "It's a cool technology, but they don't just buy cool technology without the ROI and 'five 9s' [99.999 percent] reliability."

Vendors and VARs say customer-care call centers provide the ripest opportunity for IP-PBXs, because they have a compelling need for combined voice and data applications and the ability to prove their return to the enterprise's bottom line.

"Campus environments are also a fantastic application," adds Dan Gallagher, director of carrier services for AAA Networks, a VAR in Falls Church, Va. "I'm seeing a lot of business plans to sell dial-tone to all the companies in a business park off one IP-PBX." In addition, VARs say accounts that are physically moving offices are good prospects for a PBX upgrade, as well as those with PBXs at the end of their life cycles.

Pushing Packets

With the dominance of the IP protocol in enterprise networking, vendors have been experimenting with different ways to push packetized voice traffic for transport across IP backbones. The service software for an IP-PBX can be deployed at headquarters or a data center, and would power all the branch offices for their voice and data requirements.

The upsides to integrated voice and data are familiar to those who know the mantra of ISDN and CTI: Save money by consolidating the number of private T-1 or T-3 lines, and reduce the overhead associated with two separate networks. But vendors have downplayed that IP networks are designed to be best-effort networks. Reliability falls way below the five 9s' availability of the public-switched telephone network. Voice quality,and customer satisfaction,suffer when latency creates gaps, echoes or garbled speech. And the first models of IP-PBXs, meant for large enterprises, cost well above $100,000.

VARs and vendors have moved to correct those barriers in the past few years. Vendors have introduced backup and redundancy features, and improved quality-of-service mechanisms that guarantee throughput so as to minimize latency.

Still, customers' top concern with IP-PBXs remains reliability, according to Peter Lesser, managing director of Kraft Kennedy & Lesser, a New York-based IT consultancy. "At some point, the conversation will turn to how often the telephone system crashes vs. how often Windows crashes. It scares them to let a computer run their voice systems," he says. "While that's not a fair comparison, it's a hard perception that we have to overcome."

Vendors now tout a phased rollout by starting at one site and adding other IP-PBXs as the comfort level increases and the telecom budget decreases. In addition, IP-PBXs now scale down to fewer than 500 lines for a phased rollout or for smaller businesses to consider using them.

Closing the Gap

Improving the economics has also made it easier for VARs to approach accounts more credibly. "A conventional PBX runs you about $750 per seat," AAA Networks' Gallagher says. "IP-PBX prices are getting very close to that,and they have to be. Otherwise, customers aren't going to listen. It's a very apples-to-oranges comparison, but that's what you have to do."

Prices for IP telephone sets are falling too, though not as quickly. They can now be had for as little as $165 apiece,less than half of what they cost a few years ago.

But equipment prices aren't the only reason to consider IP-PBXs.

"They make a lot more sense as carriers start to raise long-distance prices and if you have lots of international traffic," says Deb Mielke, principal of McKinney, Texas-based consultancy Treillage Network Strategies, noting that bypass toll charges were one of IP telephony's original catalysts. "But for VARs, it's a big change,the guys who've always done just PBXs have to learn data, and the data guys have to learn about voice,and they've always hated that."

Gallagher says he has learned how to use that cultural gulf to everyone's advantage. Since AAA Networks has both voice and data divisions, the VAR already has established relationships with the right decision-makers, whether that's the head of telecom or networking, or someone in the executive suites. "The decision-making process is different when you sell an IP-PBX," he says. "The CIO is taking charge of the voice world more and more, and that causes confusion in some companies."

While he wouldn't specify his margins as a VAR of Cisco's Call Manager IP-PBX product, he did say that AAA Networks' ability to upsell the customer on a high-speed telephone line for the new platform sweetens the pot considerably.

"You're never going to get big margins on hardware, but with IP-PBXs there's a 2-to-1 margin with services because they're still fairly new," Mielke says.

But IP-PBXs can be just as viable without the services component, according to Tom Eggemeier, vice president of channel development for Alcatel's e-business networking division. While he wouldn't divulge any specifics, he says the company's IP-PBX VARs are earning margins that are "well into the double digits."

Another upselling option to consider: "With voice and data on the same network, routers may need to be upgraded to support the additional traffic," says David Orain, manager of business strategy for communications at Sun. "There's the application software with the IP-PBX, but there's also a network infrastructure piece to it as well. VARs may be able to play on one or both sides of that equation." n

Terry Sweeney (terry@tsweeney.com) is a freelance writer based in Los Angeles.

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