April 2002

Analyzing The Shrink

BY JIM MACHI

Lately I�ve heard people say the IP telephony analyst reports have �let them down� over the last couple of years � so much, in fact, that their businesses are now gone. (And I thought I got a letdown when the Giants lost.) My answer to these aggrieved souls is that when you believe in things you don�t understand, you suffer. This line from the Stevie Wonder song �Superstition� sums up what happens when you don�t really work to understand your target market segment, instead betting your product�s future on information from a single source � in this case, analyst report information.

Yes, product managers like me use analyst reports as one means to support our product story. But those reports can�t be the only means. To uncover the whole truth, you must look for the story behind the numbers and also talk to your customers and their customers.

That�s not to say that the numbers in analyst reports aren�t valuable supporting data for getting management to buy into more resources for projects, or for helping your sales force realize that your customers �must� buy more of your products because �tremendous growth� lies ahead. Analyst reports tell you things like how much, when, why, and where for your space. Best of all, they include numbers you can use to spin a story � any story. And therein lies the lure and danger.

In the IP telephony industry we�ve certainly seen some wild claims. Looking back at the 1997 and 1998 reports today, for instance, you might conclude the writers were playing a scratched Elvis Costello LP � listening over and over to the song �Pump It Up,� which perfectly describes the level of hype over IP telephony growth. Unfortunately, the exuberance turned out not to be supported by real numbers.

How did this happen? Let�s analyze the shrink in the report numbers. In 1997 we started seeing the first IP-telephony-specific reports from analyst firms that traditionally covered telephony. These were broad, general reports that analyzed mainly how many minutes would be using VoIP and how many gateways the industry would sell. Today you can get many different types of IP telephony analyst reports. In fact, it�s difficult to get an overall view of the industry from a single report. We�re reading specialized reports covering things like IP-PBXs, softwitches, retail minutes, wholesale minutes, VoIP minutes in the enterprise, and VoIP minutes from enterprise VPN use. What�s next? Maybe VoIP minutes from enterprise VPN use during a full moon?

As an example, let�s look at reports from both then and now by two reputable sources, Probe Research and IDC. Reading these reports, it�s easy to be taken in by the numbers alone. But when you really analyze and understand the reports, some of their predictions seem downright prophetic (or at the very least, obvious).
Probe Research put out some of the earliest and best reports on IP telephony. In its 1998 report, it predicted 44 billion minutes in the year 2001. (That�s the �expected� penetration as opposed to �high� or �low� penetration.) In its 2000 report, Probe had lowered the prediction to about 6.5 billion minutes for 2001. We see the same trend in predicted minutes for 2004 � from 141 billion to 92 billion.

Now let�s look at the IDC reports. In its 1999 �IP Telephony Services� report, IDC predicted about 27 billion minutes in 2001 and 135 billion minutes in 2004. In an October 2001 report, its estimates were updated to about 21.5 billion minutes in 2001 and about 223 billion minutes in 2004.

A more detailed look at the Probe Research reports shows the overall minutes decreasing with the general slump in the telecom market and with general IP telephony traffic usage growing more slowly than expected. However, the first report also gave clues to issues that could affect the forecasted growth. We can only hope anyone basing their business on the report picked up on these clues. For instance, the report pointed out if standards didn�t evolve as expected, the minutes would go down. The same result would happen with a lack of latency improvements. The results would also depend on whether or not, and how, incumbent telcos would respond (in other words, on whether rates would drop). Clearly, standards haven�t evolved as quickly as we�d all have liked, which has affected the take-up rate. Latency has certainly improved, but probably not as much as we all thought. And the telcos did notice. So while it�s easy to only take away the numbers from a report, really getting something out of them means understanding what�s behind the numbers. You can�t base a successful business plan on numbers alone.

While both reports show short-term decreases, one shows a decrease and the other shows an increase for years farther out. Why is this? For one reason, the reports were written in different years. And even the analysts learn about the industry as they move along. IDC first addressed the downturn in its 2001 report, predicting a minutes increase in 2004. Why is it going up? On a high level, IDC is predicting more minutes from the business-to-business market.

Overall, both reports are still predicting healthy compound annual growth rates and the continued decline of traditional telephony in favor of packet telephony. They�re just pushing it further out.

But before you build a business plan based only on an analyst report, please read it thoroughly, understand it, and use it to supplement your specific market segment knowledge. Don�t let it be your specific market segment knowledge. Otherwise, your new theme song may be Led Zeppelin�s �Communication Breakdown.�

Jim Machi is director, product management, CT Server and IPT Products, for Dialogic Corporation (an Intel company). Dialogic is a leading manufacturer of high-performance, standards-based computer telephony components. Dialogic products are used in fax, data, voice recognition, speech synthesis, and call center management CT applications. For more information, visit the Dialogic Web site at www.dialogic.com.

[ Return To The April 2002 Table Of Contents ]