CLEC Precedent for VoIP Companies

Birch, a competitive local exchange carrier that declared bankruptcy twice, has been sold to Access Integrated Networks. The combined company is based in Atlanta, has about 400 employees and will have revenue of $200 million to $210 million a year. The combination is but the latest in a continuing wave of consolidation in the independent CLEC segment, which like most other parts of the telecom business requires scale.

In many ways the VoIP business already has taken a path similar to that pioneered earlier by the "CLEC" business. The CLEC business was lead, in terms of market share, by just two companies: AT&T and MCI. There were lots of independent CLECs, but most had fairly small market share and sales.

Both AT&T and MCI were absorbed into SBC Corp. and Verizon, respectively, leaving the CLEC industry essentially "headless" in terms of national regulatory clout.

The experience of VoIP providers is analogous in many ways. Though the business was pioneered by independents, as was the CLEC business, it now is "lead" by U.S. cable operators, who might be seen as the AT&T and Verizon to the rest of the small independents.

Cable companies have distinct regulatory interests distinct from those of independent VoIP providers, for the most part, and compete directly with VoIP providers in a commercial sense.

One might argue that the independent VoIP providers now also will start consolidating, for VoIP also is a scale business. And some of the more interesting pairing will be of business-focused VoIP providers with business-focused CLECs.

SMEs Ripe for IP Managed Services, Says Nortel

Fifty percent of SMBs surveyed have voice networks three or more years old, and despite the fact that nearly half characterize themselves as "early adopters" or "on the leading edge of new telecommunications technology," only 40 percent have actually implemented VoIP or any IP-based mobile convergence solution.

"The research clearly indicates a great opportunity for service providers to target SMEs," says Alf deCardenas, Nortel general manager.

The research conducted by Ronin Corporation involved surveys of some 900 SME and enterprise decision makers across the United States, France and the United Kingdom.

Among other findings, the research found that SMEs are more likely to go to service providers than resellers for voice hardware and Internet services. The ability to make phone calls over WiFi and cellular networks using a dual-mode phone is the service SMBs are most likely to consider for implementation, followed by Web services like click-to-connect and converged desktop applications that allow them to easily control calls from any cellular phone using a laptop application.

More Competition in Small Business VoIP Market

Small business VoIP providers face a challenging year where competition in the small business space is heating up. Speakeasy, for example, has introduced a voice trunk replacement service called Integrated Voice, using a per-person pricing plan, available nationally and seemingly pitched to the sort of business that otherwise might buy a Cbeyond service.

Cable operators also are aggressively pitching their own small business VoIP services. Oddly enough, it is Comcast and Time Warner that arguably can claim better national name recognition that any of the other business VoIP specialists. And name recognition has been a problem up to this point, in the small business VoIP market.

The Best Buy-owned company is targeting smaller businesses with two to 12 phone lines that also want to keep their existing on-premises handsets and phone switch, and which also have a need for broadband Internet access.

Pricing begins at just $19.95 per line or user, with long distance charges of 2.9 cents a minute.

The phone line trunk replacement service combines voice and data services over a T-1 or high-speed DSL Internet connection, where bandwidth is dynamically allocated between voice and data. Speakeasy says the service will run over any existing broadband connection, but also sells the Speakeasy T1 and 15 Mbps Digital Subscriber Line service as well, the advantage being that Speakeasy can provide quality of service mechanisms if its own access is used.

Indian Company Slashes Voice Rates

India's State-run communications company MTNL has slashed international call rates to one Rupee per minute (about three cents) for its Voice Over Internet Protocol customers to about 100 countries such as Saudi Arabia, Pakistan, Japan, Malaysia and Kuwait.

The call rates to the United States, the United Kingdom, Canada, Australia, Singapore and Hong Kong are already stand at one Rupee (3 cents) a minute. For countries to which the calling rates were at Rs 6 (18 cents), 8 (24 cents) and 12 (36 cents) have now been reduced to Rs 4 (12 cents), 6 (18 cents) and Rs 8 (24 cents) per minute respectively.

For countries where call rates were Rs 2 (6 cents) and Rs 3 (9 cents) per minute, the rates have been reduced to one Re (3 cents) per minute.

The issue now is how market forces will work to lower mobile-initiated or terminated calls, as that's where the future lies in India, China and other markets.

Margin, Churn Improvement at 8x8

Revenues from Packet8 Virtual Office hosted business phone service now contribute 48 percent of total 8x8 revenues, up one percent from the previous quarter. Virtual Office revenue grew eight percent over the prior quarter. That's important given 8x8's intention to focus on business customers, even as it fills out its revenue with consumer customers.

In the consumer segment, revenue was flat, and declined by three percent year over year. So the consumer business appears stable.

During the December quarter, 8x8 gross margins were 65 percent, an improvement 8x8 attributes to improved scale. Overall service margins rose to 70 percent. Packet8 Virtual Office service margins increased to an all time high of 83 percent, an impressive figure rivaling the sort of return an efficient provider gets from far-simpler T1 services.

SME VoIP Still a Challenge

Plenty of challenges continue to face successful providers of hosted or premises-based VoIP services. In its most recent survey of IP communications demand in the small and medium business market, Savatar Research found some “good and bad news and some that is disturbing,” says John Macario, Savatar president.

“We were expecting a bump in the market, based on the last three years of work, or at least a growth rate consistent with the past,” he says. “The bad news is that adoption is flat.” There’s not a lot of growth, he says. SME adoption is stalled at about 17 percent.

“There’s increasing frustration among SMEs,” who apparently haven’t yet gotten the message about benefits, which are clear enough based on feedback from executives who have purchased and use IP communications products and services.

It isn’t that SMEs are buying legacy phone systems. They just are not moving. They’re “just sitting on what they’ve got.” And that’s true both for premises phone systems and hosted offerings, Macario says.

All of which suggests many service providers who don’t know how to serve the market, he notes.

Macario says there is some evidence that buying might even have slowed over the last year. For those who have purchased IP communications products or services, “more than 70 percent purchased more than one year ago,” Macario says. “Only 12 percent have purchased between six months to a year ago.”

“About 15 percent have bought last six months,” he says.

The good news is that “the buyers are insanely happy,” Macario notes. About three quarters of respondents say they have gotten economic benefit while 75 percent say the systems are much easier to manage.

About 84 percent say the quality of their IP systems is as good or better than their old systems. The same percentage say the IP systems are as good or more reliable than the old systems.

As you would expect, 82 percent say the IP feature set is far better. Astoundingly, 95 percent say they would recommend or highly recommend the service or system they now use.

They “really are enthusiastic,” Macario says. Among the most-used IP features is the auto attendant capability. For many SMEs, this is the first system that allows them to do so. Half of respondents say they use it. About a third use group-oriented features or informal call center capabilities as well.

About a third use find me/follow me or simultaneous ring, he adds. About a quarter use click-to-dial and the ability to integrate with Microsoft Office applications. “People are starting to explore the feature set and figure out what else they can do,” says Macario.

But it is wireless services of various types that seem to be top of mind and growing in importance. Wireless related services also seem to have huge potential for inducing churn.

Of those who have deployed some sort of IP communications capability, about 71 percent are very or somewhat interested in FMC as a desktop replacement service, if the pricing is acceptable. About 83 percent would be interested in using it as an add-on or replacement for at least some desk devices.

Asked what else they would consider buying from the same vendor who sold the IP communications service or system, about 40 percent indicated wireless was on the list. About one third would buy Web collaboration tools like WebEx or Live Meeting services.

Demand seems to be just as high even for respondents who have not bought any IP communications service or capability. About 75 percent of those who haven’t yet bought are somewhat or very interested in fixed-mobile solutions.

Some 70 percent said somewhat or very likely to switch from their wireline service to an FMC offering and 70 percent said they would switch from their current mobile provider to get the capabilities.

About 71 percent of respondents who haven’t yet bought an IP solution would be interested in mobile desktop replacement as well.

Respondents say they would be willing to consider replacing at least some desktop phones if doing do saves about 20 percent from their total communications bill.

About 35 percent of respondents say they now pay for employee use of mobiles, picking up between 76 and 100 percent of the cost of the service.

Traditional telcos also are getting more traction and mindshare in the business VoIP space, it appears. For two years, traditional phone companies have got a really low share where it comes to SME executive perception about “who” provides business VoIP servicers, says Macario.

This year, telcos moved seven points higher. About 24 percent of respondents now view telcos as providers of business VoIP. Interestingly, 29 percent said cable companies come to mind as providers of business VoIP.

Non-traditional providers fare best at smaller firms. As firm size goes up, telcos do better. In the 50 to 99 employee segment, only 20 percent say non-traditional telcos are logical providers. And note: the cable gets 22 percent of the votes in that segment category.

That might be surprising for CLEC and other executives who think cable will not get traction in the SME space. “When a CLEC or a pureplay provider knocks at the door, they want to know who they are,” says Macario. “Cable has a brand. That helps.”

Cable already has surprising share at the lower end of the broadband access market. In the one-to-four-employees segment, “about half use cable modems,” says Macario.

“Once you get up to five to 19 employees, then 11 percent have T1s,” he notes. “DSL share is 47 percent, 25 percent T1 at slightly larger firms.”

Overall, says Macario, service providers, in a broad sense, aren’t doing a good job of communicating the benefit of making a switch to IP communications.

Free "In Community" SME Calling from Fonality Trixbox

Trixbox Pro by Fonality Inc. is free software for enterprises with up to 20 employees that runs on any computer and nearly any phone, including IP and analog models, and providing IP PBX functions.

An Enterprise Edition upgrade for $9.99 per employee per month will provide some business features such as conference bridging, and a Call Center Edition costs $19.95 per call center agent per month.

TrixBox launches with TrixNet, a free in-network calling service to let any TrixBox Pro user call any other TrixBox Pro user, using their regular phone numbers, Lymon said. TrixNet will be extended in the near future to TrixBox Community Edition, a popular open-source software based on Asterisk.

The offering might make most sense for the reseller and value added reseller community, since it assumes some technical skills to deploy.

Resistance is Futile: IP PBX Has Killed TDM

Forrester Research recently interviewed 516 landline voice decision-makers in North America and Europe and found that enterprises plan to increase budgets for IP telephony or IP PBX systems and services during 2007.

This is not surprising, nor shocking. It is getting hard to buy systems based on older platforms, just as it now is very hard to buy a new PC that doesn't have Vista loaded as the operating system.

New shipments of IPT outpaced those of traditional PBX systems three years ago, and the installed base of IPT lines is expected to outnumber traditional PBX lines within the next few years.

North American and European enterprises indicated that in five years most will have completed their migration to IPT. All of which continues to create a window of opportunity within which non-telco providers can sell hosted VoIP services into the consumer and smaller business markets without fear the telcos will massively convert to VoIP.

Someday, when they have lost enough share, telcos indeed will stop offering POTS and themselves become VoIP providers. But only after VoIP has completely reshaped customer expectations about what a voice service is, and how it should be packaged.

The SME customer segments remain the most promising opportunities for most competitive providers, though the cable companies have real advantages in the consumer markets.

Enterprise VoIP: Not Sexy, Just Growing

Integration of voice with business apps might be the next wave of growth for IP-based voice. But for that to happen, basic VoIP calling has to be ubiquitous. Presence and unified messaging don't make sense until the basic voice platform has taken hold. And that is precisely what is happening in the enterprise space. Give a lot of credit to Cisco for pushing the business in the IP direction. Soon, we'll likely have to credit Microsoft as well for pushing the notion of what "voice" services are in the direction of unified communications. Voice really is becoming an application on the network.

SME VoIP: 30 Percent Annual Growth

IP Lines being installed into small and medium-sized businesses (SMEs) will grow 30 percent a year over the next five years, according to the Dell'Oro Group. IP lines will grow from slightly less than 20 percent of lines shipments into SME locations in 2006 to almost 60 percent in 2011.

In contrast, digital and analog line shipments will decline at an average of 10 percent a year through 2011. Traditional systems will fair even worse, declining to less that 5 percent of the total market by 2011, Dell'Oro says.

This might be the least controversial forecast it is possible to make. Once analog-to-digital transitions really get going, it is hard to buy the older technology even if one really wants it.