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Can You Hear Me Now?

Tracking the progress of VoIP in the enterprise.

Internet-based telephony, otherwise known as VoIP or broadband phone, has been in the news recently as companies like eBay and Microsoft compete to snap up key players in this market segment. When eBay buys a company like Skype for $2.6 billion, or Microsoft purchases Teleo for a reported $100 million, what exactly are they buying? More to the point, what should IT managers and users understand about this new technology so they can be prepared to benefit from it as it matures and multiplies?

What are you talking about?

First, a quick primer in VoIP: It describes many different forms of Internet-based communication, with the common factor that calls are routed over the existing IP-based Internet, as just another type of packetized data, rather than separately through an independent, voice-only network such as those owned by the major telecom carriers like AT&T and Sprint.

In some VoIP scenarios, callers are limited to computer-to-computer calling in which users of headset-equipped PCs, via software like Skype, find their call recipient in a directory and connect directly from their desktops. Many early business implementations required IP phones, small, desktop IP devices that looked like telephones but were actually special-use computers, addressable as IP-based voice devices. But many of the most recent implementations are designed to bridge the gap between the old telephone network and VoIP, and require less of this type of specialized equipment and allow both residential and business users to repurpose existing handsets for IP telephone.

Of course, in this fragmented market segment, in which many players are jockeying for position and competitive advantage (there are currently around 1,100 VoIP providers in the United States alone), there are many permutations and combinations of these usage models. Some players, like Skype, are building on the peer-to-peer technologies that made Napster and Kazaa so popular, (the Skype team is also the team that developed Kazaa), while others, like Vonage, are targeting the residential customer and focusing on replicating the “dial tone experience” that AT&T customers are familiar with.

A language everyone can understand

The key business effect of the VoIP revolution is that it deconstructs the traditional telecom pricing model and competitive advantage. The model of pricing calls based on distance and length of call falls apart when the carrier is the Internet, which doesn’t care about distance and doesn’t keep dedicated circuits “open,” as is done in traditional dial-phoning.

The competitive advantage of having the only telecom line into each home and business likewise loses its power once broadband has penetrated most homes (many analysts predict that broadband penetration will reach 50 percent in the U.S. by 2009). Therefore, VoIP is a serious, life-and-death challenge to the traditional telecom carriers, and a spectacular opportunity for those, either new entrants or traditional players, who can position themselves well for the coming shake-ups.

VoIP becomes big business

Which brings us back to the mega-purchases by eBay and Microsoft. eBay, by purchasing Skype, likely has a few strategic plays in mind. First of all, they’ve acquired Skype’s 54 million existing customers, giving them a distinct advantage in the battle for mindshare, familiarity with the product, and learning curve.

They’ve also acquired an attractive new feature to enhance their core business: how cool would it be to be able to chat real-time with the seller of an item, negotiate price and terms, and close the deal all while online at eBay?

Finally, the future ability to sell telecom services to loyal eBay clients, thus extending their brand and gaining even more customer penetration and “stickiness” is another potential strategic advantage. The same calculus applies to other online players like Yahoo and Google, both of which are known to be developing voice-based offerings to augment their Web presences.

None of these advantages are automatic, however. Many analysts believe that eBay has grossly overpaid for Skype, citing the fact that switching from one VoIP provider to another is relatively easy and painless, that loyalty in the online world is notoriously lacking (especially when other providers offer sexy new features or price-points), and that the valuation of Skype’s customers (about $48 each according to the current deal) is far more than the $2 apiece in revenue these customers currently generate.

In the next six to 12 months, when offerings from all the major online players are matched by offerings from traditional telecoms such as AT&T and British Telecom, consumers and businesses will have a much better view of the playing field and will be able to determine which blends of features, functions, and pricing appeal to them.

Some packages will be targeted at the bare-bones user who simply wants to replace existing dial-tone service with a cheaper alternative, while other providers will be developing sophisticated bundles of services that target mobile business people, with find-me, follow-me, and single international phone number services. Some cable providers are already pitching diverse packages that include Internet access, cable programming, pay-per-view, and residential telephone service.

As players in these market segments sharpen their sights on their target market segments and get a clearer idea of what customers want and are willing to pay for it, we’ll see more focused offerings and, likely, very competitive pricing, as traditional carriers struggle to retain their clients while upstarts chip away at the existing telecom base.

What’s in it for me?

What do these developments mean to the IT department? Many IT departments are already considering migrating their current circuit-switched “dial-tone-style” phone exchanges to new IP-based products. Unfortunately, there’s still a large divide in many companies between “the voice guys” and “the data guys” based on a history of divergent technical infrastructures and very different customer needs and expectations. While convergence of voice and data networks can mean tremendous increases in efficiency and cost-effectiveness, savvy CIOs and IT managers need to keep some guidelines in mind:

— The IT team should retain its traditional responsibility of designing, maintaining, and upgrading the network and of delivering the quality of service and reliability that both IT and voice users expect today.

— The telecom team doesn’t go away; only “voice pros” with experience dealing with the special needs of telecom customers are prepared to do the telephone application management, exchange and handset configuration, billing, and call accounting functions that converged voice networks require.

— Training and support in converged networks are more important than ever. It’s one thing for an application like Word or Excel to be unavailable; it’s a completely different business impact when staffers can’t get a dial tone. Robust training on the functionality of new, converged telecom devices, even if they “look just like phones,” is a key factor in the success or failure of VoIP adoption, as is a support staff that understands the importance of voice communications and uptime to the business.

The sound of tomorrow?

So, for both residential users and business customers, the migration to VoIP will be complex and challenging. Over the next few years, everyone from the major telecom players like AT&T and Sprint to the international giants like British Telecom and Deutsche Telecom, and the Web giants like Google, Yahoo, and eBay, to the software players like Microsoft and small entrepreneurial entrants, will be searching for the magic blend of services, features, and prices that will attract their target market segments.

Whether you’re looking to save a few bucks on your home phone service or to throw out the old PBX and handsets in your business, you’ll be courted by these players, and others, as they try to convince you to abandon the comfort of your old dial-up telephone and move into the new world of Internet telephony.

By keeping an eye on the developments in this market segment, and having the patience to let the marketplace shake out some of the weaker business models and services concepts, and by thinking through the operational implications of the migration, you can make the right choice and potentially save your business significant money, reduce network complexity, and gain valuable new voice-based services that just might change your business model.

Rick Freedman is worldwide project management practice leader at Intel Solution Services, a division of Intel Corp.

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