SMB VoIP Hits Inflection Point

In retrospect, it always is possible to point to the moment when an important trend hits the inflection point, the time when adoption grows rapidly. Some will call this “crossing the chasm.” Others will say it is the steep portion of the “S” curve for any new product or service. It appears that SMB (small and medium-sized business) adoption of business grade VoIP, in virtually all of its forms—premises, hosted, managed—has hit an inflection point. If so, sales should grow much more rapidly than anything we have seen to date. That, after all, is what happens when the inflection point is reached. “What we are seeing is a big inflection point for us in 2007,” says Jeff Silbert, M5 Networks vice president. “We are doing more business this year than in the last five all together.” “We’re displacing 12,000 of our competitors’ phones every business day,” says Barry O’Sullivan, Cisco Systems vice president. “We’ve shipped 7.5 million IP phones. It took us 3 years to ship the first million and just three months to ship the most recent million.” According to the latest study by AMI Partners Inc., the North America SMB segment for hosted business VoIP is set to reach $416 million this year from about $165 million in 2005. Between 2005 and 2010, the cumulative growth rate will cross 56.9 percent. “In particular, the small business (companies with up to 99 employees) segment is forecasted to grow at a spectacular 69 percent on a cumulative basis for the next five years,” says Sanjeev Aggarwal, vice president, SMB infrastructure solutions, AMI. “The concept of hosted VoIP is analogous to software-as-a-service (SaaS) where upstarts like Salesforce.com and NetSuite are gaining rapid adoption,” says Aggarwal. “Similarly, the concept of voice communications as a service is becoming very appealing as these [small businesses] have almost no IT/voice communications expertise and resources.” North American SMB hosted VoIP market spending will cross $1.56 billion by 2010, AMI estimates. Hosted VoIP installed seats in the North American SMB market are projected to rise from 393,967 in 2006 to about 3 million seats by year 2010. That’s an order of magnitude (10 times) in four years, a growth rate consistent with a market that has reached its inflection point. The market penetration of hosted VoIP seats will increase from less than 2 percent in 2006 to more than 7 percent by 2010, with a cumulative average growth rate of 65 percent, according to AMI. We would guess that the adoption of hosted VoIP will be particularly high in companies with 10 to 50 employees, for logical reasons. Small businesses tend to be extremely conscious of their cash flow. On the other hand, if they don’t have to spend lots of money on equipment but can get “enterprise” style features for a predictable “flat fee per seat per month” basis, they can figure out why it makes sense. On the other hand, business-focused industry offerings have begun to stabilize, most notably in the area of consistency. There is better understanding of how to package and support SMB IP voice, as well as better and standardized mechanisms for controlling and protecting quality, which has been an issue in the early going. Smoothstone, Covad Communications, XO Communications, Packet8, Cbeyond and M5 Networks are some of the firms that should benefit from the trend, as the larger tier one providers are preoccupied with other weightier matters. Tier one providers also can play the numbers and figure out their margins and gross revenues might be at risk if they move too quickly into the SMB hosted and SMB managed IP voice segment. Even given the appetite for doing so, the dominant providers simply don’t have the internal channel and cost structure that make it easy for them to succeed in the SMB segment. None of which means SMB resellers, value added resellers, agencies and phone system dealers have it easy. AMI says VARs and system integrators are “struggling” to adapt to the changing market demands and the evolving business models of IT vendors. In fact, says AMI, “channel partners will need to invest in building integration and business consulting skills to maintain market advantage.” They might even need to become service providers themselves, says AMI. Similarly software-as-a-service will play a key role in the SMB market, AMI claims. SaaS spending will increase by 19 percent during the next five years. Managed services also will become more prevalent in the SMB segment as smaller firms look to offload cumbersome IT chores to outside experts. As the SMB market segment becomes more lucrative, larger players will turn attention toward smaller entities. That will include firms as large as IBM and HP, AMI analysts suggest. During 2007 SMBs also will become more mobile. Smartphone shipments will grow 18 percent, AMI says. Public wireless Internet usage will grow by more than 30 percent this year, the company says. AMI projects that VoIP and hosted VoIP adoption by SMBs will increase among the five-to-20 employee segment as the solutions become more reliable, secure and scalable. The company forecasts that IP PBX (private branch exchange) penetration among SMBs will grow by 67 percent in 2007 and penetration in hosted VoIP-based systems will grow by 75 percent, for example. And while it might be considered in the “hype” category until recently, Web-based applications and Web-based operating systems will see greater adoption as more application providers open up access to their technology platform infrastructures, tools and knowledge bases.