The Lippis Report

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It´s official, the long anticipated rebound started last quarter. All you need to do is look at the quarterly reports from Dell, HP, Avaya and Cisco and you can see that growth has finally arrived in our industry. And while that growth is welcome news to a struggling industry, it is modest growth, at only two to three percentage points above GDP. But more important than just financial reporting, conversations are different and that´s creating a feeling of optimism that things are finally returning to some new level
of normal. You can hear it in CEO´s comments about the future, although they all admit visibility is cloudy. In particular when I talk with Chief Network Architects (CNAs), network design and planning has taken the place of economic efficiency-driven activities. The real shift in CNA thinking is an increased emphasis and focus on IP Telephony applications! What this means is that most companies are putting in place a new spending cycle, justified on PBX and Centrex displacement plus productivity benefits gained through IP Telephony applications.

This is not to say that the late 1990s are back, it´s more like 1995 and 1996 when companies were busy architecting and planning their enterprise network for Internet access and switched LANs. Now the planning is all about IP Telephony, the single largest change agent in our industry. IP Telephony is driving in new business applications and network designs of LANs, WANs and security. In a word, IP Telephony´s impact on corporate networks is nothing short of ?¢‚Ǩ?ìsystemic".

Closed to Open Converged Networks

Just as the IP Telephony market is healthy and growing, it´s entering a new ?¢‚Ǩ?ìopen" stage of development. In essence, enterprise voice networks have transitioned over the last four years from a host-based model to a client-server model. The host model is a traditional PBX that supports proprietary phones linked via a star wired configuration. This is very similar to the IBM SNA data
networks of old. The client-server model is based upon standards such as MegaCo, H.232, MGCP and even Cisco´s skinny protocol. While the former three protocols are standards, Cisco´s skinny protocol is proprietary, tightly linking Cisco IP phones to its call manager. In essence Cisco has been successful in creating the same type of proprietary architecture of the PBX model but they wrapped it around IP and called it standard. What is common to the skinny, MegaCo, H.232 and MGCP approach is that they all rely upon a server to provide services much like Novel´s Netware client-server computing did.

This client-server model, while only four years old, is now giving way to a truly open IP telephony peer-to-peer architecture based upon SIP. This last transition de-couples end points, phones, PDAs, etc., from a company´s call manager/proxy, totally opening up the enterprise voice market. SIP is a fundamental change agent in converged network architecture offering true peer-to-peer networking like IP does for computers. It is true that some companies will offer SIP phones with their own proprietary extensions making their IP-SIP voice network in essence proprietary. If you go down that road, just do it with open eyes and know that you are buying a closed network and will be paying more than your counterparts in other companies. My only advice: have a good reason for doing it. But with the availability of sub $50 SIP phones in 2004, most CNAs will accelerate their focus on wrapping IP
Telephony applications around corporate profit drivers rather than singularly analyzing ROI metrics to determine IP Telephony installs. In short the economic decision to deploy IP Telephony from a PBX and Centrex displacement point of view, will rapidly become a no brainier.

It´s A Market Share Game

Ok, so we have two important developments taking shape in converged networks. First is the return of top line revenue growth and second is open - meaning SIP based products and architecture - are gaining mind share. A new open - based architecture usually means it is open season to steal market share from those who continue to tree hug proprietary systems. And while we have growth, it is modest, meaning that to gain a dominant position in the IP Telephony market you have to steal market share. So both trends lead the vendor community toward market share gain objectives. The top tier IP telephony players will intensify their competition for a dominant position or a 40% + share of the market. In short, usually 80% of all revenues flow to the top two players in a market. Now market share usually follows mind share. The Yankee Groups´ Zeus Kerravala VP Enterprise Infrastructure recently reported that the highest IP Telephony mind share goes to Avaya, Cisco and 3Com. 3Com was ranked ahead of Nortel!

The Flat Triangle

The IP Telephony vendor mind share landscape is like a flat triangle. On top you have Avaya, Cisco and 3Com leading in mind and market share. This tier is followed by Mitel, Nortel, Siemens and Alcatel. The IP Telephony positions of Siemens and Alcatel, while visible in Germany and France respectively, are virtually invisible in the states. Mitel has a great product set plus a forward and backward migration path for customers, and its focus is nearly exclusively on the small to medium size enterprise. Nortel is mostly a network equipment supplier to the service provider market rather than the enterprise and struggles to communicate its IP Telephony position to the enterprise market.

Case in point: the IP Telephony market presents a wonderful opportunity to re-distribute the $30B + PBX market share that has been locked in place since the 1970s. For Avaya, Cisco or 3Com to gain dominant share they can either go after Nortel, which they are doing, or they can drive the lower end companies out of business with feature richness, applications and marketing. The top three mind share companies may very well go after the lower end players since Nortel seems to be giving Avaya, Cisco and 3Com its share already.

On the third tier of the flat triangle are a host of smaller IP telephony companies such as Shoreline, Vertical Networks, PingTel, VocalTec, Interactive Intelligence, etc. All of these firms have survived the last three years by serving relatively small niche markets. They are all feeling good, thinking that the worst is over and they will now be able to grow and prosper since growth has arrived and the shift toward open voice systems is taking place. The fact is, these companies are in more danger now then they were in the last 3 years. They found a safe harbor during the perfect storm within niche markets. But now as the enterprise market starts to deploy IP Telephony in mass, these companies risk disaster or entering the insolvency zone.

The main reason? As Bono of U2 sings, ?¢‚Ǩ?ìthey are stuck in a moment and can´t get out of it". The moment is part budget cycle of the last three years and part applications. Many of these IP Telephony companies have all but shut down marketing. But as the market rebound occurs they have not adapted. They are still stuck in budget thinking from 2001, 2002 and 2003. They will be out marketed and out-spent by the larger players who all realize that the time is right to get their message out and take market share. Also, many, if not all of these firms, do not have a channel that can build IP Telephony applications around their solutions. Many will point to Microsoft´s new CRM package, but Microsoft is spreading money all around the industry to push its CRM software. What is needed is customized application development in addition to off the shelf solutions.

As CNAs increasingly focus on IP Telephony applications, the industry needs to step up professional services, which wrap IP Telephony applications around business profit drivers. Some IP Telephony suppliers such as HP, Avaya and IBM, have a large services organization that can develop custom IP Telephony applications for clients. For businesses to extract the maximum value of their IP Telephony implementation, custom application development needs to be part of the channel´s value
proposition.

Fifteen years ago value added resellers or VARs used to develop custom application as part of their value proposition when selling minicomputers. As networking became popular, VARs shifted away from application development to selling ?¢‚Ǩ?ìboxes". This proved to be a disastrous strategy, as over the last three years the margins left resellers, forcing many out of business. To regain margins VARs can take the role of wrapping IP Telephony applications around business process. If VARs don´t or can´t build custom IP Telephony applications, then perhaps it´s a job for system integrators and consultants such as EDS, CA, IBM, Avaya etc. With CNAs focusing their enterprise network designs, questions and budgets on IP Telephony applications, it won´t be long before competition drives innovation and availability of a plethora of IP Telephony applications into market.

Why is this so important? One quick example. A university in Texas deployed a converged network, cost justified by displacing a Centrex service. After the converged network was up and running they discovered that it was now the platform in which to gain quantifiable efficiency in many departments. The financial aid office, staffed with 9 counselors supporting 8000 students, often had lines stretching out of the building and into the street as the average time a counselor spent with a student was 30 minutes. The situation was only going to get worse as the university was increasing the student body to 13,000. For this department to keep up it would have to hire 5 more counselors or spend an additional $200K/yr in salaries alone.

Enter the converged network. The IT staff, with help from their IP Telephony supplier, turned the financial aid department into a contact center, automated their process and gave students more electronic access to their financial loan status/data. This cut down the time a counselor spent per student from 30 minutes to below 10 minutes, if they had to talk at all. This was a major win for all involved. The students did not have to wait in long lines any longer, the university didn´t have to spend additional dollars in this department to expand the student body and the IT group were heroes. Best of all this was value added to their IP Telephony deployment proposition that was not factored into the original cost justification. Remember this is only one department.

In short, IP telephony may very well be our industry´s next organizing principal as CNAs use the technology to deliver a new level of efficient and productivity in business.