June 2002

Deploying Next-Generation Enterprise Phone Systems

BY MELISSA KAY CARMAN

IP-based systems must address users across the entire enterprise, given the continuing migration from proprietary PBX phone systems to IP-based Enterprise Telephony Systems. The first part of this article addresses the successful deployment of mid-range IP phones into the enterprise and examines the current status. The second part of this article discusses the next leap forward for the enterprise IP telephone market, concluding that under the prevailing trend vendors will augment their successful mid-range offering with an affordable low-end IP Phone.

Where Have We Been?
3Com and Cisco went head-to-head in this emerging growth market via their acquisition strategies in the late 1990s. In February 1999, 3Com acquired NBX, which had released the first IP phone to hit the market on Halloween, 1998 � the NBX 100 IP Phone. Just prior to the NBX release, Cisco acquired Selsius in mid-October 1998 to attain one piece of intellectual property, a standards based IP telephone. As described in Cahners In-Stat Group�s July 2001 report, LAN Telephony 2001: Bell-Heads Go IP, by the end of 2000 Cisco owned 44 percent of the IP Phone market and 37 percent of the Server market, whereas 3Com owned 24 percent of the IP Phone market and 43 percent of the Server market. The same report noted that in 2000 Cisco shipped 209,970 phones, whereas 3Com shipped 114,020 phones. Meanwhile, the next two largest IP Phone vendors, Siemens and Avaya, have only captured 10 percent and 7 percent of the market respectively.

The early success of Cisco and 3Com demonstrate that the PBX markets can be penetrated. For several decades now the PBX has dominated the enterprise switching market. Albeit a system which is proprietary, closed, and expensive, the PBX has flourished mainly because it works well. A reliable voice solution is the most critical need within a corporation. These new competitors within the PBX market have sparked a sudden increase of innovation within a basically stagnant market segment.

Acceptance Of IP Phone Systems In The Enterprise
Last year saw legacy PBXs shipments drop sharply as customers began to implement systems based on IP technology. InfoTech reports that even enterprises that have yet to purchase these new systems are uncertain whether to continue buying traditional PBXs. According to the January 2002 new primary research study, IP LAN Telephony: Probing the Shift in Market Demand, over 40 percent of U.S. businesses with more than 500 employees have already begun implementing IP LAN Telephony systems. In 2002, the percentage of businesses beginning to implement IP LAN Telephony is expected to be over 75 percent. According to Marthin DeBeer, vice president and general manager of Cisco�s voice and video business unit, IP telephony vendors experienced a �chasm-crossing year� in 2001, which brought expanded adoption of IP-based technologies.

One of the best ways to gauge acceptance of new technology is by tracking the market leader. By late 2001, reports from InfoTech and Synergy Research Group, independent market research firms, ranked Cisco first in the overall VoIP market, as well as in virtually all of the enterprise, LAN telephony and IP phone market segments, and in many of the service provider market segments. To date, Cisco has shipped more than 500,000 IP phones and more than 6,000,000 VoIP ports.

Cisco reports that they have been able to maintain momentum with new customer wins. As an example, the City of Houston plans to deploy over 25,000 Cisco IP phones throughout its city offices by July 2002, at an expected savings of $5.4 million annually. Other leading corporations that use Cisco VoIP equipment include Cray, The Dow Chemical Company, H.B. Fuller, Merrill Lynch, Datek Online, and the New Zealand Ministry of Social Policy.

Important to note is that companies such as Cisco have managed to increase their market share despite new product introductions from other IP-PBX and traditional PBX manufacturers. At present, most IP telephones are sold into the enterprise as part of an overall LAN Telephony solution. Examples of these solutions are provided below.

Types Of IP Phone Sets Offered To Enterprise Consumers

• 3Com [www.3com.com]
  IP Phone handset sold with NBX 100 System
• Alcatel [www.alcatel.com]
  IP Phone handset sold with OmniPCX 4400
• Avaya [www.avaya.com]
  IP Phone handset sold with Definity PBX
• Cisco [www.cisco.com]
  IP Phone handset sold with Cisco AVVID
• Ericsson [www.ericsson.com]
  IP Phone handset sold with MD110 PBX product
• Mitel Networks [www.mitel.com]
  IP Phone handset sold with 3100 and 3300 Integrated Communications Platforms
• Nortel [www.nortel.com]
  IP Phone handset sold with Meridian PBX with an IP line card
• Siemens [www.siemens.com]
  IP Phone handset sold with HiPath 5300/5500 PBX

Future Steps
In considering deployment of the next-generation enterprise phone systems, one of the key questions to consider is what are the potential building blocks of such systems. Will the market continue in the traditional, proprietary PBX-like model, where IP phone handsets are merely an extension? Or will the market drive toward an open architecture model? Current evidence points toward the latter model, as it is this model that is being pushed by the current market leaders. At the CeBIT 2002 Show in Germany in March, Cisco devoted over a quarter of its booth to its third-party VoIP network. Cisco has strategically developed an open architecture for its VoIP phone, such that any vendor can build VoIP phones based on an open specification. In fact, Cisco is encouraging multiple vendors to develop a wide range of VoIP phones.

In addition to encouraging third-party participation by creating open architecture for these proprietary systems, market leaders must also expand their product lines. As this market emerged, success depended on replacing standard business telephone sets, and IP phones had to meet the minimum requirements business users expected in their PBX telephones. Accordingly, most currently available IP phones are targeted for management and executive professionals. Present generation IP phones provide toll-quality audio and do not require a companion personal computer, allowing the IP phone to be installed anywhere on a corporate local or wide area IP network. Across the board, these IP phones provide two-line, speakerphone functionality, conferencing, call transfer, telephone directory access, and programmable line/feature buttons. This implementation strategy was extremely successful in igniting this market.

Now that initial adopters have embraced this technology, widespread acceptance and deployment can occur if lower cost solutions are made available. The average cost of the current IP phone solution � $500-$700 per IP phone handset � is making it difficult for businesses to deploy these systems corporate-wide, especially when many applications within a business cannot justify the price point for these feature-rich phones. To meet a broader spectrum of business needs, the next generation of IP phone offerings will include lower cost IP phones with standard non-executive features, as well as enhanced business manager/executive offerings.

The most basic functional offering IP phones will have a target price of $100-$150, with the intended location being common-use areas such as lobbies, break rooms, and hallways. These phones will be one-line devices with a 12-button keypad, no LCD screen and no programmable function keys.

A step above the most basic functionality will be the standard IP phone, with a target price of $250-$350, for use by non-management personnel. This phone will be a two-line device with a 12-button keypad with a �hold� key and will include a two-line LCD display. This standard IP phone will not provide speakerphone capabilities, programmable function keys or conferencing.

Finally, vendors will continue to offer the high-end executive phones with a price point of $350-$700. In addition to the current functionality included in these phones as discussed above, possible new features will include Web browsing, advanced messaging, scheduling tools, and PDA synchronization. It will not be until a future generation deployment that we will see a separation from the PBX and IP-PBX framework or volume interest in an expensive, graphics intensive IP phone.

Vendors will find a greater acceptance of, and an expanded market for, their IP phone products throughout the marketplace when they extend their product lines to cover all the business needs within a corporation. Given the current economic conditions and focus on cost savings, businesses can ill afford to pay a premium for functionality they do not need. However, businesses will find a compelling reason to move to cost-effective IP networks when vendors offer a range of IP phone products with targeted functionality and price points.

Melissa Kay Carman is the IP- phone product manager for Texas Instruments, a leading silicon and software provider to over 80 percent of the IP Phone manufacturers. Please visit their Web site at www.ti.com.

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