Telecom equipment suppliers say they're seeing a belated Y2K windfall as companies such as Bank of America and Ford move ahead with plans to replace outdated gear with new Internet phone systems.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 cosy supplier relationships.
"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 $728m 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, California, 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 $367m. 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 centres and corporate locations in 29 American states and the District of Columbia. In July, Cisco announced a similar contract with defence 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 cancelled contracts with their systems integrators.
Last year, Merrill Lynch and the state of Alaska both cancelled 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 equipment from Cisco and Avaya.
Avaya has also 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.
