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Y2K windfall for Net phones?

The millennial computer glitch is belatedly pushing companies to dump outdated gear for new VoIP systems.

Telecom equipment suppliers say they're seeing a belated Y2K windfall as companies such as Bank of America and Ford Motor move ahead with plans to replace outdated gear with new Internet phone systems.

The infamous Year 2000 computer bug forced companies to upgrade core telephone equipment known as private branch exchanges (PBXs) in the mid- to late 1990s. Now these hulking, million-dollar switches are nearing the end of their service life en masse, portending the end of a 4-year-old corporate spending drought, some analysts predict.

Companies like BofA and Ford are not only swapping out old equipment--they're upgrading to new voice over Internet Protocol (VoIP) systems, accelerating a trend that promises to transform the phone industry and shake up cozy supplier relationships.

News.context

What's new:
Analysts say the infamous Year 2000 computer bug is behind a recent surge in corporate IP phone sales.

Bottom line:
Companies like BofA and Ford are not only swapping out old equipment--they're upgrading to new VoIP systems, accelerating a trend that promises to transform the phone industry.

More stories on this topic

"Y2K is definitely helping," said Wendy Bohling, director of enterprise branch solutions for IP phone supplier Avaya, one of the biggest beneficiaries of the trend, along with rival Cisco Systems. "It's begun a brand-new buying cycle, and corporations are getting an opportunity to convert to IP phone systems."

Turn-of-the-century glitch fears are long gone, but the benefits for telecommunications suppliers keep piling up. VoIP phone equipment sales have surged in the last three months, and analysts attribute much of the growth to a buying cycle set years ago, when companies spent billions of dollars on information technology upgrades to offset the notorious programming glitch. Since then, VoIP technology has worked out most of the kinks, and it's at the top of many buyers' lists, now that it's time to replace older gear.

Synergy Research Group said sales of IP telephone equipment was up 14 percent from the first quarter, generating about $728 million in revenues.

The first half of 2004 saw a 61 percent increase in revenue, compared with the same period last year. According to the Dell'Oro Group in Redwood City, Calif., nearly a third of the phone switches purchased in the last three months were Internet-based, up from 17 percent a year earlier, generating revenue of $367 million. Meanwhile, 34 percent of all telephone switches shipped in the last three months were IP-based, up from 16 percent year over year.

"A lot of chief financial officers of companies were very gung-ho for the new technology in the years before Y2K, but upgrading to VoIP at that time would have brought a company to its knees very quickly, because these systems were laughably bad," said Frank Dzubeck, chief executive officer of Communications Network Architects, a consultancy in Washington, D.C. "Historically speaking, where we are right now is at the beginning of the up cycle of the hockey stick" for VoIP gear.

The shift to VoIP in corporations is already having a major impact on the phone equipment supply market. Once dominated by Nortel Networks, Lucent Technologies and other traditional circuit-switched phone equipment suppliers, the list of top-10 vendors now counts newcomers hawking IP-based equipment.

There's no more dramatic example of this change than Cisco. In just five years of selling Net-based phone equipment, the company has risen from relative obscurity in the phone market to being the seventh-largest supplier of business phone switches in the world, according to Dell'Oro.

Among Net phone equipment suppliers, Cisco is running neck and neck with Avaya. According to analysts at Synergy, Avaya ranked No. 1 in IP telephony equipment sales last quarter, with 23.9 percent of the market. Cisco ranked No. 2, with 23.3 percent market share.

Cisco last month announced a deal with Bank of America to begin installing 180,000 Cisco IP telephones throughout 5,800 banking centers and corporate locations in 29 states and the District of Columbia. In July, Cisco announced a similar contract with defense contractor and airplane manufacturer Boeing. Earlier this month, Ford announced that it plans to install 50,000 Cisco IP phones in 110 offices throughout Michigan.

To be sure, not every launch has gone smoothly. In the past few years, several Cisco customers have canceled contracts with their systems integrators.

Last year, Merrill Lynch and the state of Alaska both canceled their contracts with systems integrators that had recommended Cisco gear to be used in their VoIP networks. Merrill Lynch is now using a mix of gear from Cisco and Avaya.

Avaya also has won major contracts with hybrid technology that allows customers to keep some of its older gear while folding in some of the technological advantages of IP-based systems. Recent customer wins include Kyobo Life Insurance and Air Products and Chemicals in Korea; The Australian National University and Swan Hill City Rural Council in Australia; United Overseas Bank in Singapore; and TOT in Thailand.

Spending on IP phone systems isn't limited to large companies. Small and midsize companies were equally affected by the Year 2000 bug, and many of them are also beginning to change out old phone equipment purchased during the late 1990s.

"Medium-size business is definitely picking up the IP telephony banner," said Richard De Soto, vice president of Altigen Communications, which sells VoIP equipment almost exclusively to smaller businesses.

From bug to boom
Y2K was the result of a short-sighted decision by early computer makers to create systems with internal clocks that didn't recognize the year 2000. Without the proper fixes, networks used to deliver Internet and phone services would come to a halt at the start of the 21st century.

The result was a frenzy of spending, as corporations replaced nearly every nook and cranny of their local and wide-area networks that supplied Internet access and telephone service.

The biggest casualty were PBXs, which are essentially huge routers that ensure that phone calls reach their right destinations. They had to be completely replaced, because their software was so old that it couldn't be upgraded to fix the problem, Dzubeck said.

VoIP equipment was still in its nascent phases at the time. Voice quality was horrible, and reliability was even worse. But perhaps the biggest drawback was that Internet connections were way too slow to make the whole experience palatable.

So the telephone gear of choice remained what it has been for decades--switches and phones based on TDM, or time division multiplexing, which is a method of putting multiple data streams in a single signal by separating the signal into many segments, each with a short duration, then reassembling them on the other end. The signals follow a series of switches dedicated to that call that can't be used for anything else.

VoIP calls are much less constrained. They can follow any number of pathways, either over the public Internet or on closed corporate networks based on the Internet Protocol.

Jeff Pulver, an early VoIP user and the founder of Free World Dialup, said the original VoIP devotees were a small circle of mainly amateur radio operators who wanted to play with a new technology.

But as broadband spread into more and more homes and offices, so did the number of companies seeking the opportunity to sell unlimited local and long-distance VoIP plans.

"Y2K was the last time many of these corporations replaced their equipment, and VoIP really wasn't available at that time," said Terry White, an analyst with InfoTech. "Now many of those systems are at the point where they need to be replaced. And enterprises are seeing how these VoIP systems can give them an advantage."