will reach $416 million in revenues in North America in 2007.
Question: Your study says that hosted VoIP services will proliferate among SMBs.
Aggarwal: Yes, especially in the smaller companies with less than 50 employees. The five-to-50 employee segment is growing rapidly. I think all the things necessary are falling into place: the bandwidth of the network and the willingness of small businesses to buy hosted solutions because they don't have internal IT people. Those with less than 50 people are especially likely not to have an internal IT person that understands voice. If they do have that IT person, he's acting in a very reactive mode.
Question: Is this a surprise?
Aggarwal: No, because there are very compelling reasons that these companies are willing to move. Some of the key drivers are the increased need for support for increased mobility and the need for improved communications between the customer, partners, employees and suppliers. This also lends itself to more predictable monthly voice spending without capital expense. You can pay by the number of seats per month.
Question: Is there a special value proposition attracting SMBs to hosted solutions?
Aggarwal: What these small businesses want is to never miss a phone call. They want "find me, follow me"-type services. … [Hosted providers] are adding a different value proposition, a more compelling value proposition in increased efficiency beyond pure voice. They are supporting things like "click to call." The whole concept of voice as a service is becoming very compelling. On the software side you hear about Salesforce.com and others. In a hosted VoIP solution, you have a phone in your home and it rings like in the office. You have a single mailbox, can look at email and have voicemail delivered to that mailbox. You can look at it from the airport or anywhere else. Like unified communications, it improves the productivity of employees.
Question: There also is value from the management point of view.
Aggarwal: In an on-premise system, you have to plan for expansion a year in advance. That's difficult for small business. You don't have to give up the traditional solution. You can start using hosted voice and see how it works out before cutting off these traditional solutions. In traditional voice solutions, as you add or move employees, you incur a very big expense. Now it's like moving a PC from one place to another. It becomes very easy. It can even be done by the office manager.
Question: This is a service-intensive sector. Could these companies be getting too much business, and potentially hurting their ability to serve their customers well?
Aggarwal: One of the companies I particularly like is M5 Networks, which is probably the market share leader in the New York area for hosted solutions. A company like M5 is taking a measured strategy of growth. They are not covering all of the U.S. They picked metro New York, Chicago and Boston, and are working with customers to provide all their support and services. They have a very high customer satisfaction index. The biggest growth for them comes from just word of mouth.
Question: Where do the existing telcos fit in the mix?
Aggarwal: They all have products but are not promoting themselves actively because in some cases these services cannibalize their local and long-distance revenues from these customers.
Question: What do you see going forward?
Aggarwal: My prediction is that as this market reaches the inflection point and takes off significantly, telcos and major carriers are going to change their stance. This will be in the next year or so. A lot of companies … are active on the enterprise and consumer side, but are not very active on the small business side yet. Verizon, as an example, has not put that kind of marketing push and sales push behind SMBs that they put on the enterprise and consumer side in terms of creating awareness.
Question: These are powerful players, however. Once they go after the hosted SMB market, they should be successful.
Aggarwal: They have existing relations with SMB companies because they provide their PSTN service today. So they have the touch with the customer base. They can ramp up pretty rapidly if they decide to do so. There will be a point where the economics work out. They can either lose [the business] to other companies or lose it to themselves.
Question: Just how quickly do you see the market growing?
Aggarwal: In 2006, there were about 400,000 seats. In 2007, we are predicting 625,000 seats, $375 million in revenue. In 2008, it's about 1 million seats and $584 million in revenue.
Question: What about the longer term?
Aggarwal: In 10 years, there will be no traditional voice communications systems in the majority of cases. When the number of users sinks so low in traditional service, maintaining the networks for those customers will go up in price. And the cost of hosted IP voice will go down. The good part is that you only have to worry about a single network carrying voice and data and video. Maintaining a single network that increases in bandwidth and capacity on a regular basis is a very compelling proposition.
This Executive Briefing originally appeared in a weekly report from IT Business Edge.
This was first published in June 2007