With Telephony Features Becoming Commodity, Applications = Profit

Since the FCC approval of the Carterphone decision in 1968, customer premises telephony equipment providers and resellers have earned billions of dollars in profits selling closed, proprietary telephone systems to small and medium sized businesses (SMB). Profitability was assured as the manufacturers and resellers controlled end user access to even the most basic telephony features.

Over time a "good old boys" network developed where the typical sales process went something like, "Look at my new whiz bang [insert proprietary phone feature name here] feature!!!! How many phones? How many lines? Press hard three copies. Let's go to lunch."

Of course this is an oversimplification, but the point is all phone systems provided the same basic functionality. The sale was won or lost based on the sales persons ability to sell their product, not on their specific understanding of the customers needs. This model remained secure and basically unchallenged for thirty years. Regardless of the line size and application, selling basic voice features was a profitable business opportunity. Established manufactures and resellers in this space flourished.

Starting around 1998 everything began to change. First, inexpensive products manufactured in places like China and Taiwan finally overcame quality issues that had prevented their acceptability. As quality improved, these products began to steal market share from the incumbents. Second, Voice over Internet Protocol (VoIP) matured from a way for technogeeks to make free calls over the Internet into a legitimate business application. Thus the traditional providers no longer owned a closed network, but shared an open network with data applications. Finally, new open standards for voice communications such as SIP and H.323 emerged that promised to break the stranglehold the proprietary telephone systems had on the market. The promise of SIP and H.323 was to deliver the basic calling features most people used 95 percent of the time, that previously were only available in an expensive, proprietary solution through an open standard accessible by any developer.

Initially these changes were below the surface as the foundation was being built. Now in 2005 weve reached the point of acceleration. At risk is the survivability of the legacy solution providers and manufacturers.

Why?

Well for starters, there is more competition. In 1998 a certain company with zero percent market share in CPE voice equipment was making billions selling routers and switches. Today, over 20 percent of IP lines sold belong to them. That is one example of a data company stealing market share from a traditional voice provider. There are many more examples that we do not have time to get into here.

Second is the commoditization of the proprietary voice features and hardware. In the past, basic voice features such as conference, call forward, voice mail/ automated attendant, and call record were proprietary features that could only be had for a high per station price accessible only from a proprietary piece of hardware. Today, with an open standard such as SIP, and the price competition at the low end of the market, these features are available to the end user at a much lower per station cost. This trend continues to accelerate as SIP-based applications are now embedded in products ranging from television sets to cell phones to laptop computers. Today a small business owner can literally create a phone system by downloading a SIP-based call control feature set from various developers, buy a PSTN gateway or IP trunk service, and purchase a few $50 phones and have access to all of the features mentioned above.

So it looks like doom and gloom for companies selling voice processing equipment to SMBs. But the picture is not quite as bleak as what I have painted above. While its fact that the profits are slowly being squeezed out of commodity phone features and hardware, there is a great opportunity in this market space to actually increase profits and recurring revenue opportunities. Fact is, the market is growing in this space in both the number of business and total revenues.

We estimate price is the driving factor in about 80 percent of telephone systems sold to companies with fewer than 100 employees. These companies are looking for basic voice processing features at the lowest price possible. It is this segment of the market where profits are shrinking for manufactures and resellers alike. But what about the other 20 percent?

It is there that the opportunity lies. These 20 percent of companies are looking for something more than basic voice features. They are looking for help solving problems greater than replacing worn out telephone equipment. With convergence, the bridging of voice and data onto a single network, come integration issues and new application opportunities that extend to every area of the customers business. In this new environment, to successfully sell terminal equipment and make a healthy profit requires first listening to the customer and understanding their business processes. Then, a company must have the skill set to integrate voice and data products from multiple vendors into a custom solution that solves the specific customer needs. Most importantly, the voice products they deploy must inherently support the generally accepted standards under the hood: SIP, H.323, VoIP, and TDM. This new generation of voice products must be scalable, customizable, and configurable to operate seamlessly with data proce ssing programs, off-the-shelf terminal devices and endpoints.

The successful technology providers relationship with the customer only begins at the initial sale. Customers are looking for a single source provider willing to take ownership of all the applications running on their converged network. Its the companies that can step up today, address the customers total need by leveraging the power of convergence, perform the integration services, and provide the long term application support that will survive and flourish.

For many companies in our industry the time has come to make a critical decision change or die. IT

Michael Marchioni is director of product marketing for Iwatsu Voice Networks, a Founding Member of the Enterprise Communications Association (ECA). Marchioni maintains a seat on the Board of Directors. For more information on the ECA, please visit www.encomm.org.

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