Small business has become almost an undefined term. Virtually every industry participant has its own definition, driven by both product and go-to-market models. For purposes of this column, let's use a simple differentiator: 500 employees. Interestingly, the U.S. work force is split just about 50/50 by this factor. Some 57 million people work for 5.7 million firms (operating in 6.2 million establishments) employing less than 500 employees. Let's call this half small business. Fifty-six million work for some 16,000 firms (operating in just more than 1 million establishments) with more than 500 employees. Let's term this half large business. This is according to U.S. Census Bureau figures for 2003 — the latest data available. Think of an establishment as a business work location.

However, business voice-over-IP (VoIP) penetration rates are far from being so evenly split between large and small businesses. Today, almost three-fourths of all telephones sold are VoIP. More than 70% of large businesses have at least a VoIP pilot deployment. For small businesses, the deployment rate is far less. Why such a disparity?

Weren't we all of the opinion that IP technologies such as the Internet and VoIP allow small business to be like big businesses? As far as IP telephony is concerned, small businesses haven't shared that opinion.

How and why do small businesses buy? Typically, small businesses buy because there is a need not being met, they move to a different location or form a new business. Then they will buy if a product is available to meet the need at a reasonable price from a local seller they trust.

Telephone service is certainly a need for all businesses, regardless of size. Maybe IP telephony has not yet become a mainstream small-business need. Or maybe no one has convinced them to change their business telephone systems to take advantage of VoIP and unified communications.

Certainly there has been a recent spate of new product launches and enhancements to voice systems by the major and niche manufacturers to address the unique needs of small businesses. And there is a full range of IP telephony solutions available, from traditional equipment purchase models through new hosted models — and even a model in between owned and hosted: termed managed. But small business VoIP deployments have yet to become truly mainstream. Perhaps an effective IP telephony channel to reach the small business at their time of systems need has still to mature.

Let's look at the why and how small businesses buy telephone systems in an attempt to identify what may be missing. Small businesses usually buy a phone system when they have a compelling event — when they are formed or when they outgrow their current system or change their location(s) of business. Typically, they look to either their local telco or their business systems provider to meet their need.

Telcos, the traditional channel for small business telephony purchases, mostly have focused on market segments where they are seeing major competition. The consumer markets have seen fierce competition emerging from cable industry or “over-the-top” providers (represented by well-publicized names such as Skype or Vonage). In the large enterprise space, major industry consolidations have raised the levels of competition dramatically. So, the telephone companies have been distracted and have not been aggressively selling IP telephony to small businesses.

The local computer value-added resellers have been attempting to add voice solutions to their data repertoires, being recruited to sell hosted-VoIP services by many regional/local and a few national providers. However, as the IP telephony market now closes in on a decade of maturity, the situation will dramatically change. The balance of 2007, 2008 and through the end of the decade will see the emergence of VoIP solutions across small businesses — and the half of U.S. employees working in firms with less than 500 people will be able to serve their customers and deal with their suppliers as effectively and efficiently as larger businesses, which have already deployed VoIP solutions.

David Yedwab is a founding partner in Market Strategy and Analytics Partners LLC. He can be reached at (908) 879-2835 or david.yedwab@mktstrategy-analytics.com.