According to The Eastern Management Group’s Monitor^SM report, 1Q04 signaled a strong acceleration of the transformation of enterprise telephony from TDM to VoIP. With overall shipments exceeding three million lines, the equipment industry as a whole resumed its growth rate after the 4Q03 re-charging of batteries (see April's Analyst Corner article “VoIP CPE Shipments Reflect New Industry Dynamics”). For the third consecutive quarter, enterprise VoIP shipments exceeded one million lines; actually, shipments exceeded 1.25 million lines for the first time in 1Q04. Also, VoIP shipments reached another milestone in 1Q04, exceeding 40% of enterprise voice shipments--well on the way to achieving our forecast of 50% of all new shipments during 2004. 

With VoIP becoming mainstream in the enterprise, service providers--both existing and emerging--are addressing ways to obtain their share of the VoIP transformation. Hosted IP telephony (or IPT) deployments will be their vehicle. Both traditional service providers (such as the RBOCs, other LECs and some IXCs) and new hosted-voice providers focusing exclusively on IPT are coming to market. 

For the LECs, hosted IPT may be a way to re-invigorate or at least slow the decline of TDM’s historical hosted voice offer: Centrex. According to our Monitor^SM report, since 2001 the number of active Centrex lines has dropped from 18.5 million to only 13.4 million lines, almost a 30% decline. A portion of this decline has come from the growth of VoIP without very visible hosted IPT alternatives. This may change dramatically as hosted IPT offers begin to gain visibility and traction. Hosted IPT for the enterprise is, in a sense, playing off the more well-publicized residential offers of providers such as Vonage and Skype.

Many in the industry believe that hosted IPT can become a significant mode of VoIP transformation rivaling customer equipment solutions (IP-PBXs). The ILECs hope to use hosted VoIP or managed VoIP solutions as a way to counter the counter the decline of Centrex. With hosted IPT, the traditional Centrex benefits--no need to spend major capital dollars on equipment, no need for staff to manage owned equipment, the service provider manages technological obsolescence--can be added to the many benefits of VoIP. Some enterprises will find this admixture appealing and several service providers are betting that they will. Another benefit for the service provider is that both consumer and enterprise services may be delivered over a common platform and infrastructure, saving scarce capital.

Hosted IPT comes in several flavors, and with services still being launched and market acceptance still being explored, the successful business models are yet to be determined. We also do not know if businesses will turn to the telephone companies or to new purpose-built providers for hosted IPT. 

Several equipment subsystems are required to provide hosted IPT. The elements--call setup and control, signaling and media gateways, feature and applications servers, security devices, etc.--are similar to the elements that are combined into enterprise VoIP equipment solutions. The major difference is that the hosted systems need to scale beyond the size of typical enterprises, need to partition the systems to support multiple separate customers. Increased reliability--carrier grade--will also be required for hosted IPT.

Traditional telephony equipment vendors--both with carrier and/or enterprise backgrounds--data communications vendors and new hosted IPT vendors are providing equipment for this space. As the market is beginning to grow, we are already seeing some mergers and acquisitions and partnerships across this space. Both traditional and new players are buying, selling and partnering--very typical of a nascent market where the winners are not yet clear.  

Centrex may be the historical model or guide for Hosted IPT. Centrex is a hosted voice service that operates in TDM networks. Centrex software resides in a service providers’ (usually an RBOC or other LEC) central office (an analog to a VoIP call manager operating in a hosting or data center); connected to each Centrex extension via a direct circuit connection. Special Centrex station equipment was developed by manufacturers with standards based features and proprietary extensions (similar to MGCP and SIP). 

Adding VoIP capabilities onto an existing Centrex (termed IP Centrex) seems a logical extension. Adding softswitch call control and networking via IP or via TDM/IP gateways creates IP-connectivity for Centrex. This capability has been available from the traditional equipment manufacturers for a few years, although, until the service providers were ready to deploy, take-up and deployment by service providers has been slow. Recently, the RBOCs have begun to offer IP Centrex. While these may eventually replace existing Centrex, the initial offers are adding new VoIP lines to existing Centrexes--in some cases using the location-independent capabilities of IP to offer new extensions beyond the single wire-center limitations of traditional Centrex.

New hosted IPT models include a few flavors:

• Creating a full IPT-based solution on a new platform (in effect an IP-PBX) being hosted by a service provider (in a hosting, data center or central office) offering services to its customers
• Offering new services onto existing TDM telephony environments (via feature servers and an IP network) as an overlay, generally using a user’s PC as the linkage to provide the “added” services
• Outsourcing the management of the converged telephony equipment environment of customers, where the customer still chooses to purchase vs. “lease” the equipment but chooses to not hire specialized staff and, instead, has the system managed by a service provider
• Mix-and-match among the other models

Some equipment manufacturers and service providers currently use the same platform to provide enterprise as well as residential services. As the services offered to businesses and consumers mature and likely diverge, we would expect that some elements of the platforms will also diverge to better serve customers’ needs for scale, scope and applications capability. A question we will revisit over the next few years is whether hosted IPT can bring video out of the expensive conference room and onto the desktop or PC of mainstream employees.

David H. Yedwab is Executive Vice President of The Eastern Management Group, Bedminster, NJ. He can be reached at dyedwab@easternmanagement.com.

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