IP Centrex Services Getting Traction

No one wants to call it that, but IP Centrex-or "hosted PBX" or "voice ASP" or "business IP voice'' or whatever you call it--appears to be gaining traction in enterprise markets. While it remains in many respects a boutique telephony service, at least this year, there have been developments that suggest it could be a much bigger deal in 2003.

The bombshell event of the week was Telia's decision to offer IP Centrex-they call it, in Swedish,"IP Switch." This is a big-time deployment by a major service provider whose networks stretch throughout Scandinavia. The company trialed a number of Centrex applications before choosing Sylantro Systems Corp., then tested that software and associated hardware for a year before making a deployment.

Now it appears Telia is putting a major sales effort behind the deployment, pushing the product to its VPN customers, medium-sized businesses generally and those that are geographically dispersed or opening new offices.

Small Service Providers Lead the Charge

While the Telia announcement was a commitment by a major carrier, the company stands practically alone among incumbent local-exchange carriers (ILECs) in its level of commitment to IP Centrex. "Telia tends to be the more adventurous among the carriers," points out Christine Hartman, senior analyst, Probe Research Inc. The champions of IP Centrex at this juncture are mostly smaller service providers targeting one or two regions.

"All of the incumbent providers are fairly heavily into trials of Centrex, but it is companies like GoBeam and TalkingNets that gotten things off the ground," says Julia Mermelstein, senior consulting analyst, Allied Business Intelligence, which recently published a report titled, "IP-PBX, Hosted Solutions and IP Telephone Sets." "These companies have been able to get to critical mass."

"They are getting the decisions made, getting trials made, getting up and running. ILECs are much more conservative in testing and putting things in their network. Their decision process is long and slow, and that has been an advantage to companies that willing to go forward like GoBeam."

Two other recent entrants to the field are Communications Xchange, a new operator in Tampa, Fla., and Appia Communications, an established CLEC in Michigan offering primarily T-1 services and now expanding into IP Centrex.

There are downsides, she warns, for ILECs sitting on the sidelines, and "Incumbents do need something like this to retain customers." For one thing, basic services have become commoditized, especially long distance, so incumbents may lose those customers, because there are alternatives that are less expensive. They need to be in competition to get more than just the minutes that go to a PBX. "If Cisco (Systems Inc.) continues to be successful in selling IP PBXs, it will route more minutes over private networks and those minutes will be lost to the carriers," says Mermelstein. With IP Centrex or messaging, "even if they lose minutes, there will still be on-net traffic that they can get. They don't want to lose that to someone else."

Priming the Channel

The smaller IP Centrex service providers face a number of challenges, most immediately the development of sales channels, wholesale and retail. Most are employing a mixed strategy there, working with resellers in certain areas, while selling directly, usually to larger customers.

For example, GoBeam struck a resale agreement in July with Verizon for the Chicago area, where Verizon is trialing strategies for offering services out of region. In fact, those actually selling are a mixture of Verizon's own sales staff as well as Verizon resellers. GoBeam also works with integrator-resellers, such as Sentient Group Inc. and VCOM Solutions. These companies typically serve a local area, in this case the San Francisco metropolitan area. GoBeam also sells directly through seminars, usually aimed at larger customers.

Appia has an ongoing relationship with Cisco, and is using Cisco resellers for its service. Most IP Centrex deployments require and router and Ethernet switch at the premises. Communications Xchange will sell directly and through DSL Internet service providers in its area.

"I think there are going to be lots of ways to get different customers,"says Hartman. "And there may be different conventions in different parts of the world. A provider may use different channel for metropolitan areas compared to rural areas, or a different one for smaller customers rather than large ones. There's lots of experimentation and lots of models, and I don't think they will converge on one."

As is evident, the channel relationships of these companies are at an early stage. Companies typically have two or three channel partners, plus their own direct sales. However, they will all have to expand those relationships significantly in order to increase sales.

Opening Their Eyes

Companies are also working against limited understanding of the products. Many, understandably, are resistant to use the term Centrex because of that service's limitations, but other terms, such as "PBX replacement" "virtual PBX" or "business IP voice" are simply not as descriptive.

And, though understanding of what the product means is spreading, the vast majority of large enterprise IT managers may have never heard the terms "IP Centrex" or "hosted voice services." For this reason some service providers offer seminars in the hopes of "turning on the lights" for corporate IT or telecom managers.

"The problem with a lot of features is that people can't imagine them," Hartman says. "I did research for years, and often it was hard to communicate the features. Until a customers uses a service, they don't understand it, and even then people find new ways to use it. With Caller ID many ways to use it. People will be imaginative once a service is put into their hands."

The most compelling argument for IP Centrex vendors in the current business climate is lower costs. Most can undercut the local telco by about 30 percent, while offering features that can't be done with circuit-switched systems, such as management from any browser.

Larger businesses in general are slower to move, no matter what the benefits, "For hosted systems, I have seen smaller businesses more ready to adopt IP technology than larger businesses, partially because they have an investment in circuit-switched equipment, an analogy to large telcos not taking it in. Also, a large firm would require a lot more testing than someone who does not have a system at all or has a limited system," says Mermelstein.

Sometimes a service provider will get an advocate within a large company who understands the value of the service, "The challenge is to get high enough in the company to over come [conservative] attitudes, and show the dollars and cents of the service," says Mermelstein.

She adds, "I have a suspicion that one reason incumbents have had a hard time getting these systems deployed is that they are accustomed to going after large business customers, where emerging carriers are more willing and have sales channels to go after small business."

Another barrier is that many companies spent significantly to upgrade PBXs for year 2000 issues, so there are many relatively new systems in deployment.