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IP Centrex: Too Much Hosted Boasting?

Light Reading
News Analysis
Light Reading
5/21/2004

There’s been a wave of IP Centrex announcements lately, but there are some reasons to doubt that these will translate into big profits for carriers. Up until now, it seems, carriers have been expecting to enter a wild goose chase and actually bring home a bird.

Here's why the IP Centrex story isn't as polished pearl pretty as some have said:

  • Not all of these announcements are genuine hosted IP Centrex. BellSouth Corp.'s (NYSE: BLS) new IP Centrex service, announced this week, is just an adaptation of its existing Centrex service, and it is actually behind schedule on rolling out a softswitch-based IP Centrex service (see BellSouth Launches IP Centrex Service).

    SBC Communications Inc., likewise, has been offering a Centrex service and is only now moving toward IP Centrex. This suggests that although the big boys are feeling the heat from alternative IP Centrex providers, they are only beginning to test the waters.

  • Market researchers say the wider VOIP market is much more a sure bet than the success of IP Centrex (see VOIP Expenditures Will Double).

    Infonetics Research Inc.'s next-gen voice analyst, Mattias Machowinksi, says the hosted IP service providers will face a tough test ahead. “It doesn’t look like the managed service market is going to grow too much. If it is to grow significantly, businesses will require a lot of education from service providers to relinquish control.”

    Enterprises are likely to deploy their own IP PBXs and possibly only use IP Centrex services for linking remote offices. If the IP Centrex market fails to win over PBX customers and relies on Centrex upgrades to IP, analysts say it will only account for roughly 3 percent of business lines in the U.S., and even less in Europe where it is more of a niche market.

    If the future of IP Centrex is so bleak, why is there so much interest in it? It's a turf war, really. IP Centrex is a way for alternative carriers to encroach on the RBOCs' Centrex customers, while, conversely, it enables RBOCs to defend their turf.

    There is also some financial attraction. Heavy Reading's latest report, SIP Hosted Services: A Heavy Reading Competitive Analysis, finds that service providers should either go big or go home. The report says that a carrier with an assumed 25 percent market share, and an existing IP network, can reach breakeven in the third year of deployment.

    For a provider with less than a quarter market share, however, the return on investment is not so rosy. Its success will be reliant on the widening of its addressable market to PBX replacement customers.

    — Daro Clark, Research Analyst, Light Reading Insider


    The latest Light Reading Insider -- “VOIP: the Enterprise Options” -- explores the available hosted VOIP services and their addressable market.

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    dljvjbsl
    dljvjbsl
    12/5/2012 | 1:44:40 AM
    re: IP Centrex: Too Much Hosted Boasting?

    There seems to be an inordinate number of companies who somehow think that enterprises are going to relinquich control of their communications infrastructure and purchase hosted telephony services. John Roth even supposed that all services would be hosted and cancelled PBX projects because they did not promise enough margin. Optical networks offered more margin but too late Roth discovered that this margin would only come if the network was purchased with Nortel's own money through vendor financing.

    To expect that enterprises will contract out strategically important services is not rational. To expect that enterprises will cede control of their connections to their customers is not rational.

    Hosted services are not rational.
    PO
    PO
    12/5/2012 | 1:44:35 AM
    re: IP Centrex: Too Much Hosted Boasting?
    To expect that enterprises will contract out strategically important services is not rational. To expect that enterprises will cede control of their connections to their customers is not rational.

    True, but the question remains: for how many enterprises is this strategically important? We should all have heard of Carr's work, IT Doesn't Matter, wherein it is argued that as technologies become commonplace they no longer serve strategic advantages.

    So the business managers have to ask themselves whether they should pay to train someone within their own staff to maintain their IP PBX and other IT infrastructure, or hire a specialist firm to do so on their behalf.

    And if they choose to outsource such work, whether to host the corresponding equipment onsite (and watch their investment rapidly depreciate), or offsite (and pay a premium for what may seem to be less under their own control).

    I believe that each is a valid and viable choice for some selection of companies, with their own advantages and disadvantages.

    On the other hand, I would suspect more comprehensive offerings to dominate: choosing differently for computing and telephony infrastructure makes less and less sense to me.
    PO
    PO
    12/5/2012 | 1:44:34 AM
    re: IP Centrex: Too Much Hosted Boasting?
    Hmm. Somehow the link doesn't render quite right in the article, although it does in the reference copy as I reply to it. Hmm.

    The article, IT Doesn't Matter can be found at www.nichoalsgcarr.com/articles/matter.html.
    lighten up!!
    lighten up!!
    12/5/2012 | 1:44:34 AM
    re: IP Centrex: Too Much Hosted Boasting?
    "Hosted services are not rational."

    One day it's outsource, next day it's insource. The fact of the matter is, that there is no one single solution that fits the bill for every enterprise. Some large enterprise customers want to maintain their own PBXs, while others want to focus on their core business. These days cost seems to be the primary driver and one can argue that equipment cost for in-house VOIP is probably cheaper than hosted IP Centrex. But then again, the same arguments were used for decades between PBX and CENTREX, and yet, the two have co-existed. The bottom line is that it all comes down to maintenance cost, provisioning speed, and QOS. If RBOCs can offer all of this at a reasonable price, then there is no clear cut argument to support non-hosted solutions.
    dwdm2
    dwdm2
    12/5/2012 | 1:44:32 AM
    re: IP Centrex: Too Much Hosted Boasting?
    Hi All, FYI, See John Hagel's weblog on "IT Does Matter." Cheers

    http://www.johnhagel.com/blog2...

    Perspectives

    John's Weblog - May 15, 2003

    IT Does Matter
    (written in Collaboration with John Seely Brown)

    For those of you who have not seen it, the latest (May 2003) issue of Harvard Business Review has an article that will have significant impact in the business world. The article, by Nicholas Carr, an Editor at Large for HBR, is provocatively, but somewhat inaccurately, titled "IT DoesnGăÍt Matter". Carr doesnGăÍt actually say that in the article G㢠instead, he argues that the opportunity for strategic differentiation through IT is rapidly diminishing. While he acknowledges that IT is essential for business operations, he makes the case that IT should be managed as a commodity input, squeezing cost out of IT budgets while at the same time ensuring that IT platforms deliver the necessary reliability and security to avoid business disruptions.

    We believe this is an important article because it very effectively captures the backlash sweeping through executive suites against IT spending. Certainly much of what Carr writes is spot on: companies have spent too much on IT in the past with only minimal (if any returns) and there is a need to focus on the increasing vulnerabilities we face as we become more dependent on automated operations. But CarrGăÍs article is also dangerous because it endorses the growing view that IT offers only limited potential for strategic differentiation.

    We ended up writing an extensive rebuttal to CarrGăÍs article that will be published in the July 2003 issue of Harvard Business Review. In the meantime, we thought we would briefly recap the three key points we made in this rebuttal, so that we could at least make our voices heard earlier in the debate that is sure to develop around this article:

    Extracting business value from IT requires innovations in business practices. In many respects, we believe Carr attacks a red herring G㢠few people would argue that IT alone provides any significant business value or strategic advantage.
    The economic impact from IT comes from incremental innovations, rather than "big bang" initiatives. A process of rapid incrementalism enhances learning potential and creates opportunities for further innovations.
    The strategic impact of IT investment comes from the cumulative effect of sustained initiatives to innovate business practices in the near-term. The strategic differentiation emerges over time, based less on any one specific innovation in business practice and much more on the capability to continuously innovate around the evolving capabilities of IT.
    Carr refers to previous technology innovations like the railroad and electricity to make the claim that rapid early investment in the technology is soon followed by commoditization. We argue that IT differs fundamentally from these other technology innovations in two key respects. First, performance improvements in the underlying technology components has proceeded at a faster and more sustained pace than any of these previous technologies. Second, the performance improvements in the technology components have enabled a series of architectural shifts from centralized mainframe architectures to client-server architectures and, more recently, to three tier architectures. Each of these shifts has amplified the power of the underlying technology components, in part by creating more flexibility in the deployment of these resources. In contrast, previous technology innovations began to stabilize and commoditize as a dominant architecture emerged (e.g., think about the standard railway gauges that helped to connect tracks and establish a national railway system). We have yet to see a dominant architecture for IT emerge. In fact, we believe we are on the cusp of another major shift toward a true distributed service architecture that will represent a qualitative breakthrough in terms of delivering more flexibility and fluidity to businesses.

    In other contexts, John Seely Brown has championed a perspective he describes as radical incrementalism. This perspective emphasizes the role of architecture in facilitating the ability to rapidly build and deploy radical new components. With an appropriate architecture, radical individual components can significantly amplify their impact. We believe that distributed service architectures will be exactly this kind of architecture in terms of amplifying the innovative potential of individual technology components. But it wonGăÍt stop there.

    Distributed service architectures have the potential to create a powerful virtuous cycle when coupled with the FAST strategy outlined below. By amplifying the potential of individual technology components, these technology architectures will expand the range of options available to business executives in terms of how they organize and run their companies. The FAST strategy approach helps business executives to innovate business practices in rapid increments, focused by a longer-term view of the opportunities and requirements for business success. Thus, the technology architecture will amplify options for business innovation and the FAST strategy approach will accelerate the innovation process G㢠giving businesses powerful tools to build and deepen strategic advantage.

    Bottom line, far from believing that the potential for strategic differentiation through IT is diminishing, we would maintain that the potential is increasing, given the growing gap between IT potential and realized business value. For the more detailed development of this position, you will unfortunately need to wait until the July issue to read the full letter.

    whyiswhy
    whyiswhy
    12/5/2012 | 1:44:27 AM
    re: IP Centrex: Too Much Hosted Boasting?
    The dilemma is: if you automate (hardware or IT) is it very difficult and costly to change the design, i.e. make incremental improvements. This has been proven time and time again in the hardware setting, and similar things happen in the software setting. The more a company embraces IT (automation) the more risk it takes in making changes, and the costlier it gets: checking, cost of errors, etc.

    There is a diminishing return on IT, just like automation; that process is called commoditization.

    In the "old" days, with humans in the loop, you could (and often would) have a smart production lead catch the stupid production planners or engineers mistake before it cost the company big bucks. With today's fully integrated IT suites, this rarely happens.

    Paper and pencil and a room full of people broke Enigma codes very efficiently in WWII.

    Under the current exchange rates, the answer is obviously to offshore IT and throw away the code and the hardware!

    Just my perspective....

    -Why
    PO
    PO
    12/5/2012 | 1:44:07 AM
    re: IP Centrex: Too Much Hosted Boasting?
    In many respects, we believe Carr attacks a red herring G㢠few people would argue that IT alone provides any significant business value or strategic advantage.

    And so after agreeing with the bulk of Carr's article, Hagel goes on to forward a misconstruction of Carr's arguments for him to attack.

    From Michael Porter, "Competitive Advantage", page 11: The fundamental basis of above-average performance in the long run is sustainable competitive advantage (footnote: Without a sustainable competitive advantage, above-average performance is usually a sign of harvesting). Though a firm can have a myriad of strengths and weaknesses vis-a-vis its competitors, there are two basic types of competitive advantage a firm can possess: low cost or differentiation.

    Choosing to not have a particular technology, or to implement it in a particular way, may provide a cost advantage in the short run, but because IT is a fluid investment, competitors can make the same selections at least as soon as their next buying cycle: you haven't committed your firm's survival on the choice of IP Centrex or an IP PBX.

    While it is possible to suggest that there is a difference between competitive advantage and sustainable competitive advantage, in practise one wants their advantages to be sustainable for at least an extended time, otherwise they are not generally worth discussing much.
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