Hosted IP PBX Knocks on Enterprise Door

IP telephony as a service, well established in the SMB sphere, seeks a broader playing field. One analyst is skeptical.

By Ed Sutherland | Posted Apr 9, 2009
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Can a California company better known for its residential and SMB VoIP products use the economic downturn to gain entry into the enterprise IP voice market? That’s the hope of hosted telephony provider 8x8, Inc., which has retooled its well-established Virtual Office service for larger corporate customers.

Unlike a traditional IP PBX, which requires companies to purchase and manage expensive infrastructure, a hosted alternative typically doesn’t require much in the way of capital expenditure. Instead, a VoIP company provides end-to-end call management for a fee.

Virtual Office Enterprise builds on the success of hosted IP PBX services sold by 8x8 and more than dozens of other companies targeting small and medium businesses. Virtual Office, launched in 2004, sought to address small companies on tight budgets by removing the costs of purchasing, managing, maintaining, and upgrading IP PBX systems. By contrast, most larger enterprises—with ample IT staff and bigger budgets—have opted to maintain their own on-site systems.

However, with the economy heading south, 8x8 saw an opening: hosted IP PBX tailored for the big guys. In a statement, the maker of Virtual Office and the Packet 8 residential VoIP service said VOE "brings the features, flexibilities, and economies of hosted VoIP to enterprise environments at a time when economic conditions are forcing CIOs and CFOs to seek new ways to reduce operating expenditures."

Eliminating costs
Specifically, Virtual Office Enterprise offers lower ownership costs by "eliminating the need to maintain on-premise hardware," Huw Rees, 8x8 Vice President of Business Development, told Enterprise VoIPplanet. Included in that cost saving is money spent on internal staff and external consultants required to maintain an IP PBX, according to the executive.

"We were seeing some demand from larger businesses for our hosted services that we hadn’t really seen before," according to Rees. Along with boosting scalability, redundancy, availability, and security of its equipment, the company has revamped its service and support to meet enterprise demands. The company recently signed a third-party to provide on-site installation and support, for instance.

Moreover, the company’s hosted IP PBX for enterprises (which 8x8 defines as a business with 500 or more employees) offers "highly competitive" call origination and termination rates, along with free calls to any other businesses that are 8x8 customers. The service is "infinitely scalable" but in practice will add a new virtual PBX for around every 1,000 extensions, Rees said.

Although 8x8 is reluctant to discuss pricing for Virtual Office Enterprise, due to customization of services on a site-by-site basis, the cost is in line with other enterprise services, according to the company.

"Based on our experiences so far, we are highly competitive compared to other enterprise solutions available today," Rees wrote in an e-mail to Enterprise VoIPplanet.

He said 8x8 has "a few enterprise customers" for the updated Virtual Office, the largest installation being about 400 extensions. While Rees admits that is below 8x8’s definition of an enterprise, he anticipates adding larger clients.

8x8, Inc. is second largest hosted VoIP provider, behind Golden, Col.-based New Global Telecom, which wholesales private label hosted IP PBX services, according to research firm Frost & Sullivan.

A fragmented market
In general, Frost describes the hosted IP PBX market as "fragmented" and expects it to grow slowly. While today just one million of more than 100 million business phone lines are hosted, hosted PBX services are expected to reach 3.6 million by 2016, Frost announced in March.

One major challenge for hosted IP PBX providers is the difficulty—thus far—of competing effectively with entrenched sales channels of large IP PBX players, such as Microsoft and Avaya, Frost’s Unified Communications Research director, Elka Popova told Enterprise VoIPplanet.

Compounding a "low awareness" factor in enterprise circles, there are some 50 hosted IP PBX vendors fighting over a relatively small pie—again, less than one million lines. The top hosted IP PBX provider, New Global Telecom, accounts for about 100,000 lines with the top three companies holding less than 30 percent of the market, Popova said.

To compete with better-known IP PBX vendors, the pool of hosted IP PBX suppliers must shrink to 20 companies with the top three players accounting for 90 percent of the market, Frost’s Popova suggested.

Although 90 percent of hosted IP PBX services are sold to SMBs with less than 100 employees, Popova foresees a change where more enterprise-grade versions are sold. The key: "more reliable and more feature-rich services," she said.

Today, however, while hosted IP PBX technology may be up to enterprise standards, companies "don’t have the sales and brand name recognition" needed to compete in the market, according to Popova. Even brand-recognition may not be enough to spur the growth of hosted IP PBX systems for enterprises.

"The reality is that (hosted IP PBX service providers) may never have a deployment much larger than 500 seats," said Popova.

Despite the challenges, Reese insists hosted IP PBX is ripe for growth. "I see this as a trend for all businesses," he said. The 8x8 executive sees "demand going up, not down" for his hosted product.

Whether hosted IP PBX on an enterprise scale can grow beyond a niche market may depend on whether the service can offer more than an inexpensive alternative. "Prospects are very bright," according to Rees.

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