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July 31, 2008
SMB VoIP Trends -- Q&A with John Macario, Part 2By Jon Arnold, Principal, J Arnold & Associates In my last Service Provider Views column, I featured a Q&A with John Macario (News - Alert). He’s the President and a Founder of Savatar, which has a strong niche serving the SMB market. We discussed various trends for SMBs, as well as how Tier 2/3 service providers are coming to market with IP-based services. This column presents Part 2 of our interview, and the focus here is on Savatar’s current SMB VoIP market research. Their research is a solid touch point for the current state of this space, and I’m pleased to share some highlights here for our readers.
Savatar has been tracking the SMB market for 5 years now. To start off, tell us a bit about why you’ve chosen to focus on that space?
I’d like to say we had some special strategic insight but it all started with a client having a problem. Back in 2002 one of our telecom clients had tried to introduce a Hosted VoIP product into the SMB market but sales were nowhere near their goals. They called us in to help figure out what the problem was.
While evaluating their Go-To-Market approach, we found no good sources of primary research on the SMB market for IP Communications so we did it ourselves. We needed to understand what might motivate SMBs to make a switch to VoIP and what the competitive landscape looked like. The research uncovered a set of fascinating facts about the market that were a surprise to us and the client. Once we reoriented their approach to better address market realities and competitive positioning, their sales performance improved dramatically. Since no one else was really focused on SMB despite the obvious market opportunity we moved in to fill the void.
What are the key drivers today for SMBs to adopt VoIP - and the broader menu of IP communications - and how has this changed from when you first started tracking SMBs?
The easy answer is that SMBs will adopt VoIP when it provides an economic benefit to their company. This has been a consistent theme in every study we’ve done: SMBs are cheap. The real issue is how service providers can deliver that economic benefit.
The changes we have seen have less to do with end user attitudes than with how service providers are packaging, pricing, marketing and selling their IP products. SPs, especially the larger ones, tend to treat SMBs like little enterprises by selling technology and productivity benefits. SMBs do not respond well to that approach. The VoIP pure plays, smaller SPs and, increasingly, the cable MSOs are beginning to listen to the market and are developing the right offers for SMBs.
Your core focus is the U.S. market, but you also track Europe. How are these markets different and what is the research saying?
VoIP adoption is slower in the EU market and the competitive landscape there is not as dynamic. I’d put the EU market about 18 to 24 months behind North America in terms of adoption and end user interest. EU service providers may be even farther behind in positioning their products for success. We’ve been talking to a number of very large EU providers over the last few months and it’s clear that they don’t understand the market or their competitors very well.
Are you seeing much difference in the mix of IP communications services being used by small businesses versus medium-sized businesses? Is one more focused on VoIP and the other more on the broader range of IP?
The medium businesses, which I’d classify as over 100 employees, are showing a lot more interest in Fixed Mobile Convergence (FMC) and Unified Communications (News - Alert) (UC). In our last study, nearly two thirds of companies who have already deployed IP communications told us they were very interested in FMC.
Interestingly, we couldn’t really find a consistent definition of FMC in the market, so we told the survey respondents that FMC meant access to the same feature set when using their mobile device or desktop phone, free, on net calls between mobile devices and desktop phones on the plan, a single voice mail box and, if they wanted it, a single number for both devices.
Our research also shows that interest in FMC varies by size of business, but as Figure 1 shows, it’s higher among the larger customers.
 Overall, what trends in the SMB market really stand out in your current research in terms of how they’re using IP communications services? For example, is it to grow ARPU, retain customers, enter new markets, etc.?
It depends on the type of service provider. The large ILECs are playing defence. They want to have a portfolio of IP offering for SMB customers who approach them looking to switch. We don’t see them as aggressively pursuing the SMB market although they might if the MSOs make a hard push into the market.
Smaller carriers, VoIP pure plays and MSOs are focused on stealing share from the ILECs, for them it’s a pure acquisition play.
Looking now at the service provider side of the equation, how does the landscape look today in terms of who is serving the SMB market?
It’s pretty crowded. In our latest competitive study we looked at 21 offers from 14 different service providers. They included ILECs, CLECs, MSOs, IOCs and VoIP pure plays. More players are entering the market, especially Cable MSOs who appear poised to jump in first at the low end of the market but there are indications that a few of them will pursue larger customers who are traditionally owned by the ILECs. We think that the MSOs may become a real force in the market. Figure 2 illustrates how the mix of service providers differs between SMBs with under 100 and over 100 employees.
 What does your research tell us about which types of service providers are having success, and what are they doing right?
Right now, it’s the VoIP pure plays that are having the best success. They are laser focused on the SMB market and are offering simple, easy to understand solution packages that include phones, CPE, broadband connections, feature sets and voice usage.
The larger, more traditional carriers are doing a very poor job of servicing SMB. The enterprise sales approach that we talked about is a big part of the problem. Here’s a real startling contrast: one way we measure sales responsiveness is how long it takes from the time we first make contact with a service provider to the day we get a quote for service. In our last study, the VoIP pure plays had a quote in our hand in less than 48 hours. The larger SPs took 8 to 12 weeks.
Hosted and managed services are well-suited for SMBs and adoption seems to be growing. What does your current research say, and where are you seeing the most traction?
Most SMBs aren’t sure what they want. In the last study, well over half of the respondents from companies with fewer than 100 employees had no preference for solution type. In the larger companies about 20% favored a hosted solution, 35% favored a managed premise solution and the rest weren’t sure. You can really see how this uncertainty characterizes the low end of the SMB market in Figure 3.
 What are you seeing in terms of SMBs getting beyond VoIP? Service providers have so much more to offer, especially in areas such as wireless and FMC. Will this type of adoption have to be pushed out to the market by the service providers, or are you seeing signs of demand from the SMBs?
It really needs to come from the providers. So far they haven’t done a very good job of educating the market about the basics of VoIP. In our latest study, 70% of the SMBs thought that the VoIP feature set would be “the same or worse” than their current system. 81% thought that a VoIP system would be “as hard or harder” to manage. These are clear misconceptions.
I’m fond of saying that there is no organic SMB market for VoIP. What I mean is that no SMB owner wakes up at 3 AM thinking, “If I don’t switch to VoIP, my business will fail!” Service providers need to educate the market to create demand for VoIP and all that will follow.
One of the unique aspects of Savatar’s research is your focus on how service providers are going to market with IP communications. What are some of the best practices you’re seeing right now?
There are two big, positive trends. The first is the recognition by SPs that they need to offer turnkey solutions and take responsibility for all aspects of the solution. The best SPs are offering complete voice and data solutions that include phones, CPE, broadband access, installation, voice services, etc. SMBs are fearful of technical change so providers who can hold a customer’s hand through the whole process and make the migration as smooth as possible are having the most success. They are using standard CPE configurations to effectively replace the customer’s LAN to provide better quality of service and make the installation easier to support. This practice also drastically reduces the time to quote and vastly improves the sales process.
The second is the commitment to the channel as an extension of the SP. In our last study we found that nearly 65% of the VoIP purchases by SMB were made through a channel partner. The partner, usually a VAR, was able to get the SMB over their concerns about VoIP (mostly around quality and reliability) and ease the migration. Of course, they also represent one throat to choke. The best SPs are aggressively pursuing data networking VARs as a sales channel and training them to provide voice services as an application over the data network.
What are some of the mistakes service providers have made trying to serve the SMB market, and are you seeing signs of improvement? Where are they learning the most, and where are they still missing the market?
How much time do you have? We’ve seen so many mistakes but they all stem from a major strategic flaw. Most SPs truly don’t understand the needs of the SMB market. Consequently, they make mistakes in four major areas: product marketing, targeting and qualification of prospects, channel marketing (by working with the wrong partners), and sales process.
Smaller SPs are making strides in all areas but their success is being constrained by a lack of brand recognition and an inability to scale. Larger SPs, well, let’s just say they have a long way to go.
Jon Arnold (News - Alert) is Principal of J Arnold & Associates, an independent telecom analyst and marketing consultancy with a focus on IP communications. Previously, he was the VoIP Program Leader at Frost & Sullivan (News - Alert), where he was responsible for managing their subscription service for Global VoIP Equipment Markets. To read more articles by Jon Arnold, visit his columnist page.
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