Telephony: A Billion-Dollar Market
By Brian Strachman, Cahners In-Stat
It finally happened. In 2001, the U.S. market for LAN (local area
network) telephony reached the billion dollar range. Well, almost. The
actual number was $976 million, but given the typical margin of error
analysts work under, it's close enough. Considering the current state of
the U.S. economy, and the fact that the LAN telephony market almost didn't
exist as little as three years ago, this is a remarkable feat.
LAN telephony sales in 2001 (tracked by stations and revenues) were
approximately triple what they were the prior year. LAN telephony exploded
onto the scene a little over two years ago and has been one of the hottest
markets ever since. The market really began when NBX (since acquired by
3Com) began shipping the first packet-based handset on Halloween, 1998. In a
substantially less-publicized move, Siemens also began shipping a similar
product just a few months later. Shortly thereafter, Selsius (since acquired
by Cisco) also entered the market, and with that, the race began.
In the beginning of 2000, most vendors were only beginning to ramp up their
sales and there was little actual revenue to speak of. Yet, amazingly, the
U.S. market reached one billion dollars in end-user revenue in 2001. What
accounts for this dynamic change and what have the vendors done to create
- Cisco, now the vendor with the greatest market share (34.4 percent),
grew their sales by 140.9 percent in 2001 over 2000. Cisco's sales in 2001
actually exceeded the sales of the entire market in 2000. LAN telephony has
become a major priority for Cisco, and their efforts are showing. The
800-pound gorilla of the data networking world now has a similar foothold in
enterprise voice communications. Originally, Cisco was thought to have
several holes in their offering in terms of features (the average PBX has
over 500 while the average IP PBX has about 20.) However, Cisco seems to
have figured out the demands of the voice buyer and corrected their product
- Nortel and Avaya, two leading PBX vendors that in 2000 had only
announced their strategy, entered the market in 2001 and finally began
shipping products. Although many of these shipments are add-ons to existing
PBXs, they still count as station shipments, and thus revenue. These two
legacy PBX vendors have a real opportunity to capitalize on this market, if
they don't blow it. They understand the needs of the voice buyer, where
many data vendors don't. Nortel and Avaya also have an installed base to
be envied. They simply need to migrate their current customers and suddenly
they have a new billion-dollar revenue stream. It remains to be seen if they
can do it.
- 3Com, which arguably was first to market in any significant fashion,
still has a sizable market share, selling almost 200,000 stations in 2001.
It acquired NBX (the first real LAN telephony product vendor) several years
ago and never looked back. Without exception, the NBX product has been the
longest shipping, fully functional LAN telephony solution in the industry.
Unlike the legacy players such as Nortel and Avaya, its network is pure IP.
These are not just PBX line cards to enable IP. Every 3Com system is a full
transition. 3Com still has lower average system sizes than some of its
competition because in the past its systems didn't scale and the company
didn't target the large installations such as call centers. All this has
changed. Expect 3Com to enter the large system market in the coming year.
- IP is no longer scary. Concerns about network reliability have come
and gone. Customers have realized that the technology is there to
reliably transmit voice over an enterprise data network. However, the
market is not overly exuberant about IP the way it once was. Customers
are no longer buying IP simply for the sake of IP ' they want results
such as ROI and enhanced features.
- The economy wasn't as bad as it seemed. For most vendors, Q1 and Q2
of 2001 were quarters of substantial growth in the LAN telephony market.
Although many saw declines in Q3, vendors again reported gains in Q4. So
far, 2002 is looking up and hopefully the sales will continue to
- System size grew. The average number of stations per installation grew
in 2001 to 67.5. This is almost double that of 2000 and indicates a
trend of more confidence. Instead of the 'toe in the water' strategy
of using LAN telephony on a very limited basis, it is now being used for
entire offices and expansions to existing buildings. The simple fact
that LAN telephony is becoming a large enterprise product rather than
simply a toy for small or remote offices means that the market is poised
to grow exponentially.
- ROI figures are coming in. After a year or two of being on the market
and only having a vendor's word that LAN telephony saves money, there
are now clear facts and figures that LAN telephony is a cost saver. Most
large enterprises are getting a return on investment in 18 months. Both
Cisco and 3Com have ROI calculators, marketing tools to demonstrate the
potential savings of moving to a LAN telephony solution. While these are
surely tailored to prove a savings, a visible ROI still goes a long way
to prove the viability of a product.
The Future Of LAN Telephony
I believe the future will be equally bright and have been predicting a
hockey-stick-like growth curve. To begin to forecast the LAN telephony
market, you must look at the total enterprise switching market, which
includes both LAN telephony and traditional circuit-switched technology.
While the market is moving downward somewhat, there were still 6.2 million
enterprise voice stations sold in the U.S. last year. Next, consider the
rate of migration toward voice on the LAN. Drivers such as lower equipment
costs, simpler administration and enhanced applications will move buyers in
this direction. Forecasting the number of enterprise voice stations in the
U.S., multiplying by the percentage of voice on the LAN, and applying a
price per station, you can extrapolate a forecast of over 4 billion dollars
in U.S. revenue by 2006.
I predict a high rate of migration toward LAN telephony in the future.
The market was very good this year and there is no reason the trend cannot
continue into the future.
Brian Strachman is senior analyst, Voice and Data Communications,
Cahners In-Stat Group. He may be contacted at firstname.lastname@example.org.
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