Sunday, November 02, 2003

Telirati Newsletter #17

While some of the past I commented on recedes quickly - like the memory of Digital Equipment Corporation - other things, like the matter of when IP telephony will expose some function or value directly to the user, remain fresh. This is of course another illustration of the glacial speed of telephony, especially wireline CPE telephony. My company's next PBX will probably be an IP PBX, but we will still qualify as an "early adopter," and, when asked, we will be hard pressed to answer what specific benefit we derive from owning an IP PBX.

Newsletter #17: How to Lie With IP Telephony Statistics

In earlier newsletters I discussed some of the technical challenges to IP telephony, particularly IP telephony to the desktop. But when you look at IP telephony in the real world, many of the challenges do not come from the technical aspects of implementing IP telephony or formulating IP telephony products. Instead, the economics of IP telephony and the process of creating IP telephony companies often means more to the success, and more often the failure, of IP telephony ventures. Treating these aspects of IP telephony in light of their relatively greater importance also brings into relief the technical aspects that can, in fact, mean the difference between success and failure.

One of my favorite books on statistics is called “How to Lie With Statistics, “ a book that humorously (as humorously as math gets) looks at ways to distort reality with numbers, charts, and graphs. Let us examine the reality distortion field surrounding IP telephony.

Lie #1: IP telephony is cheaper to develop.

Look along the roadside at the twisted wreckage of un-PBX startups. Their mangled business plans are a gruesome sight. Try as you might to avert your eyes, the venture capital oozing onto the pavement only draws your attention. What was in those business plans that caused the drunken swerve into the ditch? What was the fatal flaw? It was the proposition that IP telephony, or LAN telephony of any type, represents a uniquely efficient opportunity to break into the PBX business. When telephony is reduced to software, software people are tempted to propose, and investors are tempted to buy the proposition, that a telephony startup is no more costly than a software startup. Temperance!

In fact, IP LAN telephony is no less costly to develop than conventional telephony. And here is an argument that it is more costly: If you set out to develop a PBX for small and middle-sized businesses, you would find vendors of ICs for your project ready with application notes to assist your design. You would find experienced consultants who have designed telephone switches. You would find manufacturers in Asia experienced in building cheap telephone sets. You would find the fundamental design choices, such as whether to have pure digital or digital/analog hybrid station sets, to be well-worn paths. You would find among your competitors dozens of examples of how to configure and manage a telephone switch more or less well. You would find correspondingly as many examples of how to document those systems and train operators. If you are building an un-PBX, you are bereft of all this experience and communal expertise.

When you add it up, the startup capital requirements of an un-PBX company look like this:
The cost of developing a conventional PBX (Including the handsets!), plus…
The cost of unexpected technical challenges associated with a novel approach, plus…
The cost of developing new, novel, yet valuable features that take advantage of IP telephony, plus…
The cost of breaking in to an established market, plus…
The cost of convincing customers your novel approach doesn’t add risk to their purchase decision.

So why invest in Un-PBX companies? Why pull the wrecks from the ditch and put them back on the road? The reason is that, one day, all PBXs will be un-PBXs. Not only that, but a large number of second-tier PBX makers will not make it past that change, and the slice of the market they own will be up for grabs. Don’t ask me when that will happen. The reason we are discussing the wreckage in the un-PBX sector is that a number of venture capitalists who thought they knew were wrong. I’m no smarter. But I can say that if you run an un-PBX company as if it were a conventional PBX company, you stand a better chance of living to see that day in a condition that lets you take advantage of it.

Lie #2: IP telephony long distance networks are cheaper to build and operate.

People are building and operating IP-based long distance networks. This is an important development. It adds experience to an industry that is adolescent at this point. It paves the way for the convergence of communications networks. And it further establishes IP as the basis of advanced telephony services. You won’t however, read about these prosaic virtues in press releases about IP-based long distance networks. You will read they have cheaper rates than the established large players do in long distance.

Well hooray! IP telephony has bottom line impact! Wait, wait, maybe not… There are some other factors to look at. New telephone networks are cheaper to build and operate than old telephone networks, no matter the underlying technology. The fiber is cheaper and carries more calls. The transmission equipment is cheaper and has a higher capacity. The computers, software, and other IT infrastructure for operating a telephone network are vastly cheaper. All the technology, hardware, and software of a brand new long distance network can be operated by a far smaller staff than it takes to operate an older network. Anyone who has experience building and operating a long distance network, and many IP long distance companies are an encore performance, carries in his head dozens of ideas on how to do everything better faster cheaper, few of which have anything to do with IP.

So why are they building IP telephony networks? Why take the risk? The answer lies in the maxim that if you use the same recipe, you get the same bread. The only chance these new long distance networks have to be anything other than another cog in the economic machine that will continue to grind down profit margin in long distance is to be ready to offer telephony convergence. And to properly take advantage of telephony convergence, the un-PBXs have to be ready to supply the converged customer premises systems that bring the advantages of IP telephony to the users’ desktops. Unlike the un-PBX startups, however, the IP long distance startups have their intermediate strategy in place: offer cheaper rates, build out as quickly and efficiently as possible, and keep an ear to the ground for the change that surely is coming.

Copyright 1998 Zigurd Mednieks. May be reproduced and redistributed with attribution and this notice intact.