I´m becoming increasingly convinced that IP Telephony projects for large enterprises will be primarily customized, built and managed through integration service agreements rather than home grown projects implemented by internal staff. We are entering an IP Telephony period which delivers productivity and increased customer satisfaction benefits through collaborative and customer relationship management applications respectively. There are huge savings to be gained too through a single IP
infrastructure for voice and data which is the starting point for many IP Telephony projects. However, large enterprises may be ill equipped to take advantage of IP Telephony´s benefits on their own. In short, IP Telephony may very well be an integrator´s game.

The future of the enterprise network market will be all about IP Telephony. (See The Lippis Report #: 006: The Future of VoIP: A Distributed Service In An IP Network at our back issues section.) Sure security is very important, there is market momentum around Storage Area Networks and the Wi-Fi or WLAN market is booming. But make no mistake about it; IP Telephony is the
next major enterprise network spend measured in the tens of billions of dollars annually over the next business cycle. With IT spending in 2003 projected to be +/- 3%, 2003 will be a year where networking vendors look to gain share and be well positioned for the IP Telephony spend cycle.

Is it Safe To Run Your Business on IP Telephony?

IP Telephony is at the same maturity point that IP networking was in 1994/1995. At that time I remember delivering the keynote at a US West conference in Denver with my main message being, it´s safe to run your business on IP. I used the new NASDAQ IP network as my proof point. IP Telephony is approaching the point where the main message can be, it´s safe to run your business on IP Telephony. We should reach that point in 2003 when a few high profile IP Telephony projects go public. While the early stages of IP Telephony will focus around preparing the infrastructure to support both voice and data in IP, the later stages will be all about custom collaborative applications that drive cost/expense down and productivity and earnings up. When you think about it, IP Telephony suppliers will be companies that sell software, end points (hard and soft end user communicating devices) and services, and not necessarily in that order.

IP Telephony A Services Business

This model of the ideal IP Telephony vendor for large enterprise is very reminiscent of IBM today and the transformation it underwent with Louis Gerstner at its helm. Gerstner took over IBM in 1993 when the mainframe business was assumed dead and the company was viewed to be the same. When IBM offered early retirement to its employees, they expected 25,000 to
take them up on the offer. It turns out that 50,000 took early retirement, sending a clear vote of no confidence to IBM executive management, its customers and shareholders. Gerstner saved IBM by focusing on the Internet from a total solution services perspective with its e-business campaign. IBM customizes e-business solutions to large enterprise customers. Key to this
strategy is that IBM sells a lot of its hardware through the general contracting service. Enterprises want services to solve complex projects with huge payoffs. Since IP Telephony projects change transport and application architecture, the implementation skill set must span these areas too. Large enterprise IP Telephony projects require broad and multiple skills making them complex
yet deliver hard measurable business value. In short, there is pain and gain. This is why many large enterprises will seek total solution based services with quick payback for their IP Telephony projects. Payback or return on investment (ROI) has to be in the 10 to 18 month time frame. As Nigel Morris, the president and chief operating officer at Capital One Financials says: “We’re willing to spend a dollar to make more than a dollar back.” Mr. Morris enforces what he calls the 10-10 rule: a project must take
“no more than 10 months, no more than $10 million.” William Zollars, the chief executive of the Yellow Corporation, a trucking and logistics company says, “We never do anything we can’t complete in under a year,?¬¢‚Äö?ᬮ¬¨?? Budget is there for projects that pay for themselves within a year. In IP Telephony, it´s difficult to rely upon staff to design, implement and manage the solution since it may take at least six plus months for them to get up to speed. CIOs are looking toward IP Telephony vendors to customize their IP Telephony solutions for their businesses and build it for them. In the small and medium size business market, IP Telephony is much less complex and can be implemented by a combination of value added resellers, channel partners and internal staff.

An effect of this shift toward services to deliver IP Telephony solutions is that network hardware will increasingly becoming second to services. Already the router market is looking more and more like the old PBX market. It took Cisco over a year to release version 12.0 of its IOS. The time between releases has opened a window of opportunity for many companies to build products that deliver features around the router. This is very similar to the adjunct processor market which grew around the PBX. Products such as firewalls, VPN tunnel terminators, Route Control, load balances, web caches, and SSL acceleration devices, etc, have sprung up around the router to deliver critical features.

Looking to the west there are a few large Asian firms such as UTStarcom, www.utstar.com Huawei Technologies www.huawei.com and Accton www.accton.com which offer network infrastructure products at drastically lower prices than their US competition thanks to a lower cost basis. Remember Amdahl, Hitachi and Fujitsu sold mainframes at 30 to 40% below
IBM´s S390s. This caused a precipitous dive in IBM mainframe sales from $13B in ´90 to $6B in ´93. While these Asian firms have not gained traction yet in the US, they have started to do so in South America, Asia and Europe. All it will take is a US partner for sales and distribution for these Asian concerns to kick-off a deflationary cycle of networking product pricing. CIOs feel that they have over paid and over built their network infrastructure.

Even today Cisco demands a huge premium over its competitor´s products seemingly for the Cisco brand. In short, the industry understands that it has paid too much for networking hardware in the past. In the IP Telephony future, service companies that visualize, design, build and manage total integrated solutions for IP Telephony projects and take responsibility for quality will influence the hardware/network infrastructure required for that solution. If network infrastructure is provided at a lower cost then today´s pricing and is backed by a reputable brand, then all the better for the CIO.

IP Telephony Firms: Wither Extreme, Foundry, Entrasys & Nortel?

So which companies are best positioned to deliver IP Telephony services? Well you can count out the usual suspects of enterprise networking hardware out such as Extreme Networks, Foundry Networks and Entrasys unless they get smart about IP Telephony in a hurry. And they can smarten up pretty quickly with a relationship with Shoreline www.shoretel.com or Pingtel
www.pingtel.com for starters. Nortel has re-organized its IP Telephony products under its Succession brand as it attempts to focus on this market. But Nortel is still unable to get out from under its financial mess, distracting it from the business of
networking. In short, you can only assess Nortel´s ability to compete after it solves its financial problems. Until that happens Nortel is in a holding pattern.

Cisco Enjoyed the Appetizers, What About the Entr??⬨¬©e?

Cisco www.cisco.com clearly has been driving the IP Telephony market from the beginning and is a long-term player. But its IP Telephony program called AVVID is troubled. The company is organized and employees compensated around product development, sales, marketing, etc to sell networking hardware. The biggest difficulty Cisco has in the IP Telephony space is that it views it as a means to sell hardware, i.e., Catalyst Switches and routers. This is much like Digital Equipment´s thinking in the mid to late 80s when it sold networking equipment only so it could sell a VAX computer. To be a total IP Telephony solutions service provider, Cisco would have to turn its business model around from high growth and margins through hardware sales to services. But Cisco doesn´t feel the need to make such a transformation. It would have to realize further revenue and earnings
pressures. On the earnings side, it would have to reach the bottom of squeezing suppliers to increase earnings. On the revenue side, it would have to start loosing share in the Ethernet switch market. It owns the router market period. If the Asian firms are successful in entering the US market by cutting network infrastructure product prices by 30 to 40%, Cisco may find itself in
the same position IBM did in 1993. When and if that occurs Cisco will feel the pressure to change its business model.

The question then is will it be too late? Its AVVID architecture is expensive from both an acquisition and operational perspective. AVVID, at times, requires a large spend in Catalyst products to deliver Cisco´s IP Telephony functionality increasing acquisition cost. Based on work with clients, AVVID is complex to manage requiring more operational resources than some of Cisco´s competitors. Cisco has also been on the defensive attempting to clear its position on open IP Telephony standards as the industry, including Gartner, questions its commitment to open standards. It apparently has security vulnerabilities on its IP Phone 7960 and supporting IP Telephony environment, according to Ofir Arkin of The Sys-Security Group (www.sys-security.com). With all of the above, it´s no surprise that Cisco has been losing market share in the IP Telephony space, according to the Dell´Oro Group. They report that Cisco has dropped from 54% to 44% share from ´00 to the first half of ´02, as Mitel and Avaya have entered the market and surged.

Avaya To Lead With Services

After meetings with Avaya www.avaya.com executives including chairman and CEO Donald Peterson, it´s clear that Avaya has a strategy and vision for the high-end enterprise IP Telephony space. Avaya more than any other player can be the IBM of the networking industry and take a page from Gerstner´s new book ?¬¢‚Äö?ᬮ??¨Who Says Elephants Can´t Dance??¬¢‚Äö?ᬮ¬¨?? Its service revenue is $2.5B as is its converged systems business. It understands customized solutions to meet business needs earned through decades of
enterprise networking experience. During its recent analyst conference it stressed a business model that leads with total solution services, which is unique in the IP Telephony space today. Avaya services will support a multivendor network infrastructure and IP Telephony application environment. In short, Avaya intents to be the architect and general contractor for IP Telephony projects to large enterprises.

The challenge for Avaya is all execution. It recently reorganized all of its applications, Ethernet switching, WLANs and PBX businesses under the converged systems group. The question is whether this group can develop differentiated converged infrastructure products and collaborative applications that deliver on Avaya´s IP Telephony service promise. Also Avaya will have to make a choice if being either a hardware or software and services company. The differences between these two choices are
enormous. Cultures, compensation, sales and marketing internal structures are very different. It´s not clear if Avaya is truly ready to make the shift to a services and software concern.

3Com Goes For The Middle Market

I recently spent time discussing 3Com´s www.3com.com strategy with its CEO Bruce Claflin. 3Com has an opportunity to lead the industry in simplified network infrastructure and take the middle enterprise market. We are fast approaching the days when networking companies that sell products surrounded with techno babble, fatten features and high prices are a thing of the past. 3Com has all the right products for today, WLAN, VPNs, IP Telephony and Ethernet switching that link together to create practical
networking solutions. It has a solid financial picture with $1.25B in cash and equivalents and positive earnings. Its´ customer service and support is excellent too and it has loyal and profitable channel partners as well. The 3Com brand is still widely known and respected. What 3Com needs to do is deliver an enterprise-wide infrastructure value proposition to the industry rather than sell point products. It also needs to focus on leading with IP Telephony services to its market segments.

Mitel Targets Small Business And Offices

Mitel www.mitel.com has burst onto the IP Telephony scene over the past few quarters with great success. I met with Mitel’s Chairman Dr. Terence Matthews, who purchased Mitel in February of ‘01. He and his team are responsible for the renewed Mitel vigor and focus on IP Telephony. Dell’Oro reports that Mitel has gone from 0% to 8.2% IP Telephony market share from ‘00 to first half of ‘02.

When talking with Terence and other Mitel executives, they lead with the user experience, ROI, IP Telephony applications and features rather than the products themselves. For IP Telephony, Mitel is delivering solutions to the hot integrated communications platform or ICP market segment. They are focused on the small business solutions market or small offices of large enterprises. They provide IP and soft phone end points. Their new 3300 ICP boast the support of 30 to 30,000 users. It comes bundled with embedded voice mail, auto attendant, ACD, automatic route selection, IP trunking, least cost routing and multiple vertical-specific features. It also has an embedded 802.11 wireless gateway. Mitel enjoys relationships with Foundry Networks, Hewlett-Packard, and Extreme Networks for network infrastructure fulfillment The question for Mitel is can it compete without an infrastructure solution of its own. I do believe that when the industry is at the height of the IP Telephony spend cycle, network infrastructure will take a back seat to applications. What’s not clear is when that will happen and if you need to provide network infrastructure now as admission or if you can skip this step by partnering?

CxOs: IP Telephony Gatekeepers

IP Telephony will change enterprise networking on multiple levels. Companies will lead with services, upsetting the current set of vendors. Distribution channels to market and customer relationships will shift too. Not having CxO level customer relationships now will hurt IP Telephony vendors in the future as CxOs become the important gatekeeper to solution sales. There is a new basis of competition emerging that will require a new set of metrics to measure the industry´s success. Gone may be the days of
measuring networking companies on the number of ports or boxes shipped. What will be important is how fast a company can customize a total worldwide IP Telephony solution, its implementation and management. It may turn out that the above equipment vendors simply supply large integrators such as IBM, EDS, et al as they become the main business partner to enterprises implementing IP Telephony solutions. It´s too early to tell if the equipment suppliers can become services driven. So when you think IP Telephony, think total solution service.

Posted 2 November 2002 at 6:49 pm under Lippis Report, Enterprise Mobility. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.