A New Angle on VoIP

Article from Channelpro magazine by Carol Hildebrand

Published for July/August 2007

Channel partners considering a move into IP telephony, otherwise known as Voice over Internet Protocol (VoIP), may be tempted to go after the pure hardware play, as SMB customers switch out their phones to IP models and exchange their legacy PBXes for IP versions.

But doing so could represent a missed opportunity. Channel partners in the VoIP market do agree that there’s a good revenue stream in IP hardware such as phones, IP PBXes, and peripherals such as Quality of Service (QoS) cards and Power over Ethernet (PoE) technology. However, that’s just the beginning.

“If you’re selling Cisco CallManager, your client also needs to buy data access and a calling plan,” says John Marcario, president of Savatar, a strategy and technology consultancy in Boston. “SMBs are not just buying a PBX, they’re buying the voice and data infrastructure. If I’m a VAR and I’m just selling a PBX, I just left a whole lot of money sitting on the table.”

“The hardware is a nice sale with decent margin, but it’s a one-time thing,” agrees Adam L. Eiseman, president and CEO of Lloyd Group, a channel partner in New York City that offers hosted IP services with M5 Networks. “[VoIP] is not really a product business—the real money for us is maintaining long-term relationships and locking up monthly fees. I don’t think anybody except maybe a large Cisco gold partner is in the VoIP market for the hardware angle.”

There’s no doubt that this is a market worth exploring. According to the research firm Telecom Intelligence Group, the U.S. revenue for Converged Communications (IP hardware, applications, and services) in the SMB market will rocket from $2.9 billion in 2006 to $5.4 billion in 2008.

Those numbers reflect partners’ real-world experience. “In the past, we haven’t had a lot of demand from people, but that’s starting to change significantly,” says Nick Pegley, vice president of marketing for All Covered Inc., a partner in Redwood City, Calif. “I think VoIP is becoming more of a mainstream technology.”

JUMPING IN

Moreover, SMBs increasingly view the channel as a viable source for VoIP technology. Savatar’s research from a recent survey on VoIP for the SMB market shows that 51 percent had purchased their systems from VARs. Although VoIP is a promising market, it’s not without challenges. For one thing, VARs should expect to prospect. “It’s a demand creation market,” says Marcario. “Our research shows that SMBs will buy VoIP if the economics are right, but if a VAR gets into the game thinking that that all they need to do is sign up with somebody to resell a product and expect customers knocking on the door, wrong. If you want to generate demand, you need to actively go out and create it.”

This means that VARS must look for vendors that are willing to put time and effort into priming the pump with lead-generation help. “You want programs from providers that work with you on lead generation and provide marketing funds,” says Marcario.

“Choosing partners is hugely important,” agrees Benjamin Irvine, CEO of Octopus Networking, an International consulting firm based in New York City. “For me, that means choosing best of breed.”

It’s also not a cheap market to enter. VARs that know data must learn telecom technology, and VARs that know telecom must learn the data side. “People underestimate the work necessary to get into the market,” says All Covered’s Pegley. “It’s not like adding another firewall or router or piece of software. It’s really a whole new business.”

CT Networks, for example, a Hauppauge, N.Y., telecom solution provider, has invested close to $1 million in training and certification for IP telephony. “It’s really our whole opportunity—for us it’s a do-or-die situation,” says Barry Goldstein, president and CEO of the company. The move is paying off, as he estimates his IP telephony business at around $20 million annually.

THE HARDWARE OPPORTUNITY

While partners remain excited about the long-term revenue possibilities of regular service fees and ongoing maintenance contracts, they agree that VoIP hardware and peripherals represent a great entry point.

The obvious sells are IP phones, which SMBs covet for their ability to provide unified messaging, sending voicemail to the email in-box, for example. “It can be a big chunk of the project, as everybody needs
one,” says Pegley. SMBs generally prefer entry-level models that provide basic functionality, according to Pegley.

Then there’s the PBX itself. SMBs tend to go for the simplicity of hosted solutions or trunking VoIP, but partners can also do well with IP PBXes, says Goldstein.

Finally, there’s money to be made in network upgrades. At the very least, clients will need a QoS card to manage traffic on the network, as well as PoE to serve as an adapter for IP phones. But as data and voice traffic move onto one network, most companies must upgrade the network itself, installing beefier routers and switches. “Phones are the obvious piece, but the network upgrade is not so obvious to clients that need it,” says Pegley.

Ongoing network maintenance is also a good source of income. “The old revenue stream from moving and adding phones is now a revenue stream based on supporting the network,” says Goldstein.

In the final analysis, many partners view a move toward IP telephony as inevitable. “Anybody in the data business now needs to be looking at voice as an application, because the lines between the two are blurring,” according to Pegley.

And the benefits can be huge. “The payoff is generous margins in a market segment that is growing and largely being ignored by the big carriers,” says Marcario. “VARs can be tremendously successful here.”