Cisco, others aim to ignite Net phone craze

School administrators at the University of Arkansas' Pine Bluff campus recently needed to upgrade the college's antiquated phone system so the school's 3,700 teachers, staff and students could get voice mail, hold conference calls, and have access to other advanced phone features.

"The phone system was pretty bad. We had no voice mail or special conference-calling capabilities, and it was costing us a lot of money, about $400,000 on maintenance a year," said Ficklin, the college's technical services manager.

So he switched to a Net-based phone system--and gives the technology rave reviews. The phones and back-end equipment--built by Cisco Systems--have Web browsers, for example, so people can surf the Web and look up phone numbers on an online school directory.

Stories such as these are cropping up more often, as corporations and campuses increasingly turn to new technologies to satisfy their telecommunications needs. Though Net-based systems have been hyped for some time as a "disruptive" technology and have gathered steam among telecommunications network operators, businesses and universities--two markets thought to be ripe for an upgrade to such equipment--have been slow to embrace the systems.

An uptick in sales of Net-based phone equipment to businesses could come at just the right time for companies such as Cisco, Nortel Networks and Alcatel, among others, which are feeling the pinch of slowing sales to Internet service providers and other network operators. Cisco plans an event at its San Jose, Calif., campus later this month to disclose the latest advances in its voice strategy for corporations, campuses and telecommunications companies.

In the case of the Pine Bluffs campus, the new phone system will generate revenue, Ficklin said. Later this year, he will offer subscription-based services, such as unified messaging and advertisements aimed at students. For example, local pizza parlors could advertise on the Web browsers installed on Cisco's phones. "It's like night and day," Ficklin said.

Cisco, 3Com and other networking companies have long touted Net-based phone systems as a cheaper alternative to traditional phone systems. With the new technology, employees can make Net-based phone calls within a corporate network or to a traditional phone system if the calls are outside the company.

But the market has been slow to get off the ground, mostly because businesses have been wary of the concept of "convergence," in which all network data and voice traffic stream through a single connection based on Internet Protocol (IP). In the telecommunications market, start-ups have welcomed the technology as a means of undercutting traditional carriers of voice traffic, but corporations have been much slower to come around.

Hints of growth
The market, while still small, is beginning to take off, however. A recent study shows the market grew from $34.1 million in revenue in 1999 to $192.8 million in 2000, but it was still just a tiny piece of the $20 billion traditional phone system market, according to technology consultants Synergy Research Group.

But the Net-based phone market will eat into the traditional voice equipment market within five years, growing to $548 million this year and $3.9 billion by 2005, according to the Synergy report.

"We show strong, steady, moderate growth, but not a tremendous surge in growth for at least another year, perhaps two years," said analyst Paul Strauss of IDC.

Cisco and 3Com, which entered the market in 1998 by acquiring start-up companies, have captured most of the revenue, with Cisco leading the way with 62 percent, followed by 3Com with 32 percent.

With rapid growth expected in the market, telecommunications equipment makers that have built the traditional phone systems, called PBXs, can't ignore the Net-based phone systems, analysts say. Lucent Technologies' spinoff Avaya, Nortel Networks, Alcatel and others initially entered the market by creating hybrid technologies that combined Internet technology with traditional voice products.

Now they are in various stages of releasing Net-based phone systems, analysts say. For example, Avaya began selling its Net phone system in late November.

"Clearly, this is something Alcatel, Nortel and Siemens (and others) have to pay attention to because phone systems are the cash cow for their businesses," said Synergy analyst Jeremy Duke. "It's taking a chunk out of their business."

Reasons to switch?
Analysts and executives from networking companies say the market is beginning to gain steam because the technology has been proven to work, and the software that sits on top of the Net-based phone systems is giving businesses a reason to switch.

"Two years ago, the technology was in an immature state. There was no reliability," said Marthin DeBeer, a Cisco vice president and general manager. "This stuff is now ready for prime time, and companies are going ahead and deploying it."

Cisco says it ships about 2,000 Internet phones per day and thus far has shipped well over 100,000 phones total. Of the company's 500 largest customers, more than half have made so-called Internet telephony purchases, with more than 800 new voice customers and nearly 600 Internet phone customers in the company's second quarter alone.

Not only are the Net-based phone systems cheaper to manage, but businesses and schools can offer new phone features, such as unified messaging, which offers the ability to check e-mail, voice mail and faxes on a single device, whether it's a PC or cell phone, said Ed Wadbrook, 3Com's director of strategy.

Cisco, for its part, will announce new software, including speech-recognition software, later this month, according to DeBeer. So in the future, commuters cruising down the highway could check their work voice mail by speaking on their cell phones instead of pressing numbers to skip messages and fast forward, he said.

Those types of features are increasingly making for a compelling argument in favor of the technology, according to analysts.