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But all that has changed dramatically with the last several years of telecom turmoil, a far tighter focus on cost reduction and avoidance, and the rapid rise of future IP-focused providers willing to spare users the pain of technology transitions.

As a result, the migration to hosted IP services is well underway, with VoIP largely responsible for the evolution of a market with sorely needed business brawn that offers more than just reduced communications costs.


The Migration to Hosted IP Services

With little exception, all businesses purchase some form of voice services. In this manner, VoIP represents not a new service but rather a replacement of an existing system. This is a key point in understanding not only the market potential but also the competitive landscape.

An early benefit of VoIP has been cost savings, and this remains a primary driver for VoIP adoption. If service providers are going to turn VoIP into a growth opportunity, it will require creating a migration path from trunking and integrated access solutions focused on cost savings toward feature rich platforms that provide a distinct advantage over current circuit-switched capabilities.

For most Tier 1/Tier 2 service providers, including RBOCs, IXCs and CLECs, VoIP services do not represent a new revenue stream but rather a replacement for circuit-switched local and/or long-distance voice. With the exception of service providers using VoIP to enter the voice market, and service providers serving enterprises (mostly SMEs via UNE-P), it is harder to justify the deployment of new services when a significant amount of resources have been used to deploy a circuit-switched architecture.

This represents a challenge for the industry to define and successfully market value-added VoIP applications for which customers are willing to pay. These applications might include worker mobility, wireless/wireline integration, unified messaging, number portability, collaboration and conferencing. (See figure 1).

Laggards and Leaders

Stratecast Partners recognizes that because of these factors a number of service providers have taken a conservative approach to the deployment of VoIP services, particularly network-based, hosted services. However, VoIP is the direction in which the market is heading, and those service providers that continue to drag their feet will be left behind.

Long term, the majority of businesses will utilize some form of IP-based equipment and/or services for their voice communications. Those service providers that have deployed or are currently deploying the necessary infrastructure to offer VoIP services will be best positioned for success long term, even if it results in the short-term cannibalization of existing, higher-revenue services.

There is no disputing the fact that the transition from circuit-switched to IP is happening within the business and residential markets. For businesses, there are a number of options to explore as they move down the migration path toward a converged IP environment.

While a number of service providers jumped into the market with fully hosted VoIP service offerings, we are now beginning to see providers developing a suite of offerings that provide businesses with a migration strategy. Having a migration plan that allows businesses to adopt different levels of IP voice capabilities takes into account a variety of factors including existing investments, quality and security concerns, site specifications, and number and location of offices within the business.

Migration Path to Hosted VoIP

While full VoIP solutions, hosted or customer premises, are ideally suited for greenfield sites, the value proposition becomes slightly more challenging for those businesses that have significant investment in existing PBXs or key systems, and corresponding handsets. In these instances, providing customers with an entry point through IP integrated access or trunking services is the first step toward full IP migration. This provides an entry point into a customer to help solve a key requirement: reduction of telecom expenses.

Integrated Access

IP integrated access, similar to a TDM-based integrated access solution, allows enterprises to carry voice and data traffic over the same connection. (See figure 2). Two key differences are the ability to offer lower overall costs through IP and to provide dynamically allocated bandwidth. IP integrated access represents basic circuit-switched line replacement, providing businesses with lower bills for local, long-distance, and toll-free phone service, while at the same time enabling them to continue utilizing an existing phone system and handsets. The service is implemented through an integrated access device or router placed at the customer premises.

To date IP integrated access services have been targeted primarily at SMEs and branch/remote offices of larger enterprises. The WAN transport of the voice traffic may be over the PSTN or a packet-based network after it hits the gateway or softswitch, depending on the service provider.

Customers can retain their PBX or key systems for internal call management and feature control. This allows businesses to gain the cost benefits of IP voice while retaining existing investments. VoIP access in this regard is being successfully marketed by CLECs such as Cbeyond, Covad, US LEC, and XO. In some cases the IP-based solution is an evolution from successful TDM-based integrated access businesses.

Those service providers that are not offering a basic IP trunking or integrated access services are missing an opportunity to build an installed base of customers in which to upsell value-added features and capabilities over time. Beyond basic local and long-distance voice and high-speed data offered with an integrated access solution, service providers can layer on enhanced features as a PBX overlay.

These features compliment a company's existing PBX and might include conference calling, integrated Web conferencing, auto attendant, find me/follow me, and call screening. These features allow businesses to gain access to capabilities that may be unavailable with an existing phone system but without having to completely migrate to IP.

Making the full migration to VoIP, a business can opt to implement an IP PBX or contract with a service provider for hosted voice services. Hosted IP voice is a network-based/Class 5 replacement solution that involves complete management of the system by a service provider.

Enhanced Application

Stratecast Partners considers hosted IP voice services as an enhanced application running over a packet network; these services are available with varying degrees of applications/calling features and place service providers in direct competition with the IP PBX manufacturers. This does not include the hosting of a customer-owned IP PBX in a service provider data center, which is an option some businesses have chosen to implement. Most services are available over a T-1 or higher-speed connection.

While a hosted voice solution must include all the standard Class 5 features such as call forwarding, call waiting, caller identification, voice mail, and three-way calling, there are also a number of enhanced capabilities which are becoming requirements. These enhanced features begin with a voice portal that allows users to manage their voice communications and options from any location.

As the core user component, the portal is key for productivity and integrated communications. Additional features offered through a hosted voice solution that have quickly become expected include click-to-dial, auto attendant, call logs, call screening, find me/follow me, and do not disturb.


The challenge for service providers is in developing a further set of capabilities off the hosted voice platform that businesses will be willing to pay for above and beyond the current feature set typically offered with IP voice. A number of solution providers are working on enhanced service capabilities that include integrated instant messaging, mobile wireless features, advanced security and encryption policies, and integrated video. The challenge will be in building a pricing model that offers a compelling value to businesses while at the same time providing an avenue for revenue growth for service providers.