January 2000

The PBX In The New Millenium

BY DAVID LAUGHLAND

The basic voice switch used by every major business enterprise will enter the new millennium facing the biggest question yet concerning its future role for the enterprise market: Will the advent of IP telephony over local area networks result in the replacement of PBXs as the basic voice switch for enterprises and small businesses? The answer lies in the responses from a recent survey of about 500 U.S. end user customers. First, a little background.

FIN DE SI�CLE
As we close out the 20th century, the PBX and its smaller cousin the key system have become the mainstay of businesses, enabling multiple users to have voice communication with each other and to access the PSTN without an outside line for every telephone set. In parallel, over the past 15 to 20 years these same businesses have installed PCs with LANs that enable PC-to-PC connection and access to outside databases as well as to the World Wide Web. The explosion in these data LANs has been accompanied by a mature modest growth for PBXs, key systems, and the hybrid PBX/key system.

The basic voice switch has attempted several approaches to accommodate the data traffic now flowing over LANs, but it never successfully penetrated this explosive growth opportunity. The proprietary software and interface of the voice switches could not equal the versatility of the open Ethernet LANs that enable interconnection of many different devices manufactured by various vendors. Even the very first assault on the PBX voice switch with an open architecture built on a PC met with minimal success. The emergence of IP telephony, however, has triggered an all new approach that has the traditional voice switch manufacturers and the major new data switch manufacturers pursuing multiple approaches to IP telephony solutions.

Why would a business consider moving to an IP solution for their voice communication? Three forces are driving end users to consider an alternative to the traditional PBX and key system:

• The total cost of ownership including the cost of network management for both a voice and data network on their premises.
• The opportunity to reduce corporate network costs by using intra-corporate IP networks for both voice and data communications.
• The advantage and possibilities IP telephony presents for new applications such as e-commerce.

THE SURVEY SAYS…
The Phillips Group-InfoTech undertook a comprehensive survey focusing on the impact of IP telephony on the PBX market. This study used primary market research and covered about 500 end users as well as numerous distributors and suppliers. The survey was intended to provide a forecast for IP telephony demand by customer segment. In addition, the study was to identify the most likely distribution channels to be used by enterprises to support their implementation of IP telephony.

The end users were asked the likelihood of implementing IP telephony over the LAN to replace their PBXs during the next five years, and the response demonstrates the overall wide acceptance of IP telephony.

• Over two-thirds of the decision-makers indicated they were “very likely” to implement IP telephony over the next five years.
• Only seven percent of end users indicated that they were unlikely to implement IP telephony during the same period.
• These multi-location businesses indicated that half of the installed PBX and key system lines could begin to be replaced with IP over LANs in the next five years.

The survey also uncovered that the demand for IP telephony existed across all market segments — there was little difference between small and large businesses. The survey respondents believed that a majority of their locations with over 400 lines would be candidates for IP telephony, not just smaller locations, which has been a primary focus of most manufacturers. Most industry segments indicated that 35–50 percent of their sites were very likely to implement IP telephony over the LAN. Colleges and universities led all market segments with 77 percent of the sites being likely to implement IP telephony.

HOW SOON?
Already 20 percent of the end users have undertaken trials, and almost half expect to trial IP telephony by the end of 2000. Market leaders in both the PBX and the LAN markets have introduced major products targeted at IP telephony over LANs. The end users perceive this as the natural evolution of the voice switch, and the distribution channels for both voice and data switches are prepared to support this migration.

The pace at which this migration will occur depends on several factors, including the price curve established for IP telephony over LAN systems. Initial prices in the year 2000 are expected to be on average 80 percent more than the average price of PBXs, but at higher line sizes the price differential is much less. And these voice LANs will initially be two-and-a-half times the price of key systems used by smaller locations. The reason for the more competitive price at the higher line size results from the cost of the server being spread over more users and thereby lowering the cost per user.

The analysis assumes that prices for IP telephony will decrease sharply, similar to the decline for Ethernet LAN switches. Therefore, by 2002, IP telephony will be at price parity with the PBX and hybrid PBX/key system. It will take several more years before IP telephony LANs can achieve price parity with key systems. However, even in those cases where LAN voice systems represent a premium when compared to either the PBX or key system, some end users will look to install the next-generation technology instead of the older technology of the voice switch.

COST ANALYSIS
The premium that exists today for IP telephony can be overcome when end users consider the total cost of ownership. The fact that one IP network can accommodate both data and voice applications will result in savings of staff and administration. A PBX may have as much as one-third of its total cost associated with staff for design and administration as well as for adds, moves, and changes. When an end user integrates the voice and data traffic over the LAN, much of this staff cost can be reduced. Adds, moves, and changes become simpler and will result in further cost reductions.

The early adopters will be those end users with larger, multi-location sites that can justify cost savings from a single network management approach and the savings of lower cost over IP WANs. The icing on the cake for these enterprises will come with new applications that will generate new revenue sources such as business e-commerce using the IP telephony LAN.

The advent of voice over an IP network within the end user’s premises can lead to new and exciting applications. For example, consider the use of small screen telephones. Most businesses have moved company directories onto their intranets, and with a screen phone or PC with a soft phone application the directory can be accessed with a touch of the finger. Similarly, customer data can be displayed and transmitted via e-mail to a customer with a touch of a finger.

Community-of-interest networks become more effective with IP telephony and a WAN. A hospital and its affiliated doctors can easily access and update patient records with a touch screen. Doctors in their homes using an IP telephone and an ADSL line can access all patient records and conduct transactions as though they were at the office. E-commerce can be conducted on every telephone and supplies can easily be ordered from a touch screen phone. Those businesses looking for a competitive advantage and desiring to eliminate most paper transactions will uncover many more applications that will improve customer service while reducing their costs.

Other major factors that will constrain the deployment rate of IP telephony LANs are the reliability and voice quality of the systems and their current inability to scale up to several hundred lines. Advances over the next two years in IP technology will enable these systems to achieve reliability and quality on par with PBXs and key systems as well as to grow and scale similarly to the PBX.

THE DEMISE OF THE PBX? NOT YET
The PBX and key system will still be around for a long time. Even today, some businesses still use 1960s analog technology and are quite satisfied with these systems. The digital technology introduced in the early 80s, however, quickly became the standard whenever an older analog system had to be replaced. Digital systems have replaced over 95 percent of the installed analog voice switches even though the early digital systems were sold at a premium over the analog systems.
The end users in our survey indicated that they view IP telephony as another inflection point for the PBX and key system like the analog to digital transition. As the IP telephony LAN declines in price, improves in quality, and increases its scalability, end users replacing PBXs and key systems will increasingly turn to an IP telephony LAN. Within five years almost half of all lines shipped for multi-site businesses will be IP telephony systems, although it will take longer for single-site businesses mostly using key systems today to make this transition.

The emerging market for IP telephony over LANs is forecasted to grow at 138 percent annually to $1.9 billion in 2004. At stake is the installed base of PBX and key systems, which has an embedded value of about $100 billion.

The trend toward IP telephony certainly does not constitute the demise of the PBX and key system, but it does represent the beginning of the demise. This transition will take many years to complete, but it will offer untold new applications for end users and new challenges for the suppliers and manufacturers in the industry.

David Laughland is senior executive officer at The Phillips Group-InfoTech. A 33-year veteran of the telecommunications industry, Laughland joined The Phillips Group-Info Tech after an impressive career with AT&T and Lucent Technologies, where he served as vice president of marketing and as in-house legal counsel. The Phillips Group-InfoTech is a division of The Phillips Group with over 100 professionals at offices in Parsippany, NJ, and in London, specializing in strategic solutions for corporate clients in the telecommunications and information technologies industries. For more information, please visit their Web site at www.thephillipsgroup.net.