Internet-based calling is forecast to see another year of dramatic growth in 2006 as service providers and carriers push voice over IP further into the small and medium-sized business market. SMBs are simultaneously becoming more familiar with VoIP and more open to learning about how it can help their businesses reduce costs and upgrade outdated PBX key systems.

What does this mean for broadband service providers? How can they compete, as new entrants to the VoIP telecom market are rapidly gaining market share, while traditional telecom providers are facing cannibalization of their own switched line services?

While it may seem like a threat to many, VoIP should be considered as a chance to incorporate this changing landscape into short- and long-term business plans and tap into a tremendous opportunity to keep current customers happy and gain new customers. By understanding barriers to adoption and buying triggers, broadband service providers who are considering offering or expanding VoIP services can realize new revenue streams. They can also provide their customers with new features and applications made possible through hosted PBX solutions and leverage new technologies that are transforming the design and operation of broadband networks.

While the market for traditional telecom services is shrinking, the VoIP market opportunity is expanding, but not by as much. This could leave broadband service providers that don’t make the jump to VoIP left with a dwindling market and bleak outlook.

Juniper Research predicts the global business VoIP services market will reach $18 billion per annum by 2010, while at the same time, Service Providers will experience a loss of traditional service revenue to the tune of $56 billion – creating an industry net loss of $36 billion globally.[1]

VoIP services are creating dramatic disruptions in service delivery across Service Provider sectors. At the basic level, migrating from traditional circuit-based switches to a softswitch architecture delivers immediate network efficiencies and creates a more open environment for service creation. Packet-based technology is delivering cost-savings not only to the end-user but also to the network provider, and is creating a unique environment for application interoperability.

The telecommunications industry will continue to redefine itself in order to address this dramatic service delivery model shift. Recent consolidation trends between RBOCs and IXCs will also continue, with increased focus on the wireless services component. In addition, Cable MSOs, ISPs, and even desktop application players such as Yahoo, Google, and Microsoft are integrating voice services into their portfolios. After years of hype and speculation, the market for VoIP services now has momentum and is poised to approach and cross the inflection point on the growth curve toward mass adoption.

In the U.S., In-Stat research projects that the IP Centrex/Hosted PBX market will experience “explosive growth over the next four years” with revenues reaching approximately $1.3 billion by 2009.[2] This rapid adoption is aided by residential market leader Vonage, which during 2004 and the first three quarters of 2005 spent $232.4 million to market its VoIP services. While customer acquisition costs make such a level of activity problematic over the long run, Vonage’s aggressive activity promotes recognition of VoIP to everyone’s advantage.

Other major players now helping to raise awareness include Skype Technologies and a public awareness and education campaign from the Internet Voice Campaign (www.von.org/voip.asp). Additionally, VoIP service roll outs targeting traditional telco wireline voice services are underway from AOL and Comcast Corp. The chart below shows Frost & Sullivan’s forecast for residential VoIP phone lines as well as Hosted IP/ IP PBX lines.[3]

Figure 1: Hosted IP Centrex/IP PBX Line & Residential VoIP Line Forecast, North America, 2004-2010

All this publicity will certainly roll over into the SMB sector. Small and medium enterprises accounted for approximately 73% of Hosted IP lines installed in 2004.[4] In ongoing research of the SMB marketplace, Savatar has found that awareness and interest in VoIP services is high among SMBs, but incumbent providers are not yet responsive, and their sales forces are certainly not well prepared to effectively address the market.[5] As a result, no clear market-leading SMB provider has emerged, and opportunity abounds for Service Providers able to effectively address this market with a compelling VoIP services offering.

Despite their disruptive nature, technology improvements enable the pace of commerce that every business – SMBs included – seeks in order to create competitive advantage and accelerate profit growth. It may therefore seem counter-intuitive that most SMBs are not pre-disposed to procure new telephone services. Barriers to adoption remain, including perceptions of service reliability, E911 concerns and simple lack of awareness.

Research—as depicted in the chart below—suggests some of the factors that can compel mid-size businesses to undertake the technological leap to VoIP.[6]

Figure 2: Factors Driving VoIP Adoption Among Mid-Size Businesses

In the last 25 years, U.S. businesses have adapted to numerous technology changes, including mobile voice and data communications, email and more complex network requirements (inherent in WAN and LAN deployments, for instance). Before 1998, Google was just an idea that two Stanford grad students had; it is now one of the five most popular sites on the Internet. But, how have these advances been adopted on a massive scale in the market?

Although there are several major factors that contribute to bass adoption, never underestimate the importance of references and word-of mouth between trusted SMB owners. This personal trust factor is very often key to gaining market traction, and is the most common and profound application of Malcolm Gladwell’s[7] interaction between Connectors, Mavens and Salespeople in real-world settings. No one wants to be left behind when a trend takes hold. But, how can you help drive such momentum in your market?

A number of factors, taken together, can overcome barriers inherent in the marketplace and compel SMBs (both early-adopters and followers) toward implementation of a VoIP solution. Cost savings, of course, are material to the discussion – but cost savings alone are often not enough. The fact that VoIP technology has evolved to a point where it is now used to empower customers and support business productivity improvements is important, suggesting an adoption ground-swell to typical SMB prospects. SMBs are beginning to realize the ease-of-use benefits of VoIP (self-administered moves, adds and changes; Web based call management) and productivity applications (unified messaging, vertical market applications, Web conferencing).

Of course, businesses already planning major changes, such as office moves, a new communications system, and so on, are ripe for a conversation about the benefits of a VoIP solution. But, even if major change is not being contemplated, functionality of a VoIP solution can be highly appealing and dramatically improve the way SMBs interact with customers and colleagues. These new IP enabled capabilities include find-me/follow-me, inter-office abbreviated dialing, click-to-dial contacts with Microsoft Outlook integration and the ability to easily manage voicemail as email via the PC.

Furthermore, there are very specific tactical issues that are meaningful to many SMBs on the one hand, and that VoIP can help address on the other hand. Based on Savatar research,[8] some of these tactical issues include:

• Moves, adds, changes & deletions (reported as an existing obstacle for 16% of SMBs surveyed).
• Limited feature set (an existing obstacle for 15% of SMBs surveyed).
• High feature pricing (an existing obstacle for 15% of SMBs surveyed).
• Managing multiple offices (an existing obstacle for 15% of SMBs surveyed).

Other proposition components that can resonate with SMBs include the relative ease with which they can do business with your Service Provider company – this is almost certainly true in comparison to most experiences that SMBs have had with large, established carriers. This reinforces the strength of a proposition that incorporates ‘single point of contact’ and ‘responsiveness’ elements for the SMB marketplace.

VoIP is one of the greatest opportunities for today’s broadband executives and managers; one of the greatest threats is not taking advantage of VoIP and not understanding the dynamics of this limited window of opportunity.

Rich Grange is founder and CEO of New Global Telecom.

Visit New Global Telecom online.

[1] Juniper Research, “Global VoIP – Hosted & Non-Hosted Services: Business & Enterprise Markets, 2006-2010”, March 2006 p.2 p.3
[2] In-Stat, “Steady Growth Ahead for Hosted VoIP Solutions US IP Centrex/Hosted PBX Services”, Report #IN0501848BD, December 2005
[3] Frost & Sullivan, “North American Enterprise IP Telephony End Point Markets”, Report #F696-62, March 2006 and “North American Residential VoIP Services”, Report #F362-61, June 2005
[4] Frost & Sullivan, “North American Enterprise IP Telephony End Point Markets”, Report #F696-62, March 2006
[5] Savatar, SMB primary market research, March 2006
[6] Frost & Sullivan, “North American Enterprise IP Telephony End Point Markets”, Report #F696-62, March 2006
[7] The Tipping Point: How Little Things Can Make a Big Difference,” Malcolm Gladwell, Little Brown and Company, New York, 2002, p. 7
[8] Savatar, SMB primary market research, March 2006