Commentary: Cranking up IP telephony

By Forrester Research
Special to CNET News.com
January 27, 2003, 3:50PM PT

By Vijay K. Bhagavath, Analyst

Despite years of hype and hundreds of millions of marketing dollars, IP telephony providers, from incumbents like Avaya and Siemens to new entrants like Cisco Systems, still haven't cracked the code of selling to big businesses.

Their current strategy--exaggerating the total-cost-of-ownership savings resulting from WAN (wide area network) toll-bypass and from easier moves, adds and changes--has apparently proved unable to convince skeptical chief information officers at enterprises to migrate to IP (Internet protocol) telephony.

This can be attributed to rapidly dropping long-distance voice prices, which cost about 10 cents a minute a few years ago and about 2 cents today, and to the availability of inexpensive Web-based management capabilities for legacy PBX (private branch exchange) systems. These make IP telephony a harder sell than ever before.

Forrester believes that the current business model and strategy of IP telephony providers are flawed--they are no different from those of their legacy PBX counterparts. IP telephony companies continue to build their entire enterprise telecom products, from the PBX to the handsets to the media gateways, using custom silicon and proprietary software. Their pricing strategy is identical as well. IP telephony providers continue to make the bulk of their revenue and profit margins from outrageously priced PBX per-station licenses (currently $400 or higher) and from $300-to-$600 IP phones, which cost a few dollars to manufacture.

IP telephony companies intending to lead this multibillion-dollar marketplace and to rapidly accelerate enterprise migration to IP telephony need to fundamentally rethink the way they design, manufacture and integrate their systems--or be left behind in the marketplace. We recommend a strategy requiring a radical change in the current way of thinking among providers, centered on three important attributes:

• Commodity economics. Today's IP handset and PBX license prices are based on old-school telco-style economics and cost structures. In contrast, tomorrow's must be based on Dell Computer-style economies of scale and price points. The result? IP phones that cost $30, not $300, that are sold through Dell or CompUSA, not by expensive Cisco or Nortel salespeople.



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We predict that commodity economics will drive the revenue volume that vendors desperately need to remain financially viable in the brutally competitive IP telephony marketplace. Once the compelling total-cost-of-ownership savings are in place, IP telephony companies can cement their market position by creating a rich networked applications environment.

• Building standard application frameworks. Rather than building proprietary APIs (application programming interfaces) and runtime environments, vendors should incorporate standard runtime engines like the Java Virtual Machine or Microsoft's .Net Common Language Runtime into their IP phones. Why? Because these environments are far more robust and mature than their proprietary counterparts will ever be.

More important, application frameworks like .Net and Java enable vendors to take advantage of the creativity, speed and collaborative workstyle of a worldwide community of millions of Java and .Net programmers to dramatically spur application innovations. These innovations will usher a richly interactive IP communications environment that will seamlessly merge the disparate worlds of telephony, video, e-mail and the World Wide Web. All of this is necessary but clearly not sufficient.

• Web services applications integration. Applications sufficiency will materialize from tapping an entirely new spectrum of value that is derived from integrating open-standards-based IP telephony applications with key enterprise applications, such as those from Siebel Systems, SAP, Microsoft and Oracle that run businesses. Vendors can cut application integration costs by a factor of 10 by embedding standardized Web services interfaces such as SOAP (Simple Object Access Protocol) into their IP phones and PBX server software.

Using these SOAP interfaces, developers will be free to integrate telephony into both new and legacy enterprise applications. For example, Web services could be used to send an Oracle SQL database query along with a phone call--so that when the call comes in, the supplier and customer are immediately looking at identical production schedules, without any need for setting a context.

Forrester predicts that the next major inflection point--truly large-scale replacements of legacy time-division multiplexing PBXs with IP PBXs--will happen in 2005 when vendors adopt commodity economics, open-standards-based platforms and Web services interfaces in their IP telephony systems.