THE STATE OF VOIP – DECEMBER 2015 1

THE STATE OF VOIP

A brief overview of the Voice over IP Market in 2015

Olivier Benny Olivier.benny@yahoo.com

Benny@dialexia.com

THE STATE OF VOIP – DECEMBER 2015 2

Contents

I. Description of Industry ........................................................................................ 3

Industry Context .............................................................................................................................. 3

Industry Trends ................................................................................................................................ 4

Industry Forecast ............................................................................................................................. 5

Cloud Technology Forecast ............................................................................................................... 6

II. Marketing ........................................................................................................... 7

Market Analysis ................................................................................................................................ 7

Market Segmentation ...................................................................................................................... 7

Hosted PBX segment ......................................................................................................................... 8

Hospitality PBX Segment ................................................................................................................... 9

IP-PBX (CPE) Segment ..................................................................................................................... 11

Softswitch Segment ........................................................................................................................ 11

THE STATE OF VOIP – DECEMBER 2015 3

Description of Industry

Industry Context

VoIP (voice over IP) is a next-generation telecommunications technology that is radically changing the

way telephony services are bought and sold worldwide. One of the most sought-after benefits of this

relatively young, albeit mature technology is the low calling costs it provides, both locally and

internationally. By carrying both voice & data on a single internet network, companies can eliminate the

need for dedicated phone lines, dramatically reducing their recurring telephony expenses in the process.

VoIP can deliver professional ‘corporate’ calling features (e.g. call transfers & monitoring, call waiting,

voice mail, conference calling) at a much lower cost than traditional phone services. It can also generate

significant savings for businesses that feature multiple office locations or points of service, firstly by

allowing geographically distant systems to be seamlessly managed by a central location, and secondly,

by providing exceptionally low rates on long-distance calls. Other benefits of VoIP technology include

reductions in wiring costs, staffing levels and maintenance & management requirements. Unlike

traditional telephone lines, VoIP lines can be accessed from a wide range of devices including

smartphones, personal computers, Internet access devices, IP phones and analog phones.

When VoIP technology first arrived on the market in the late 1990s, its adoption by both developers and

corporations was initially slow. In 2001, less than 5% of business calls in North America were being

conducted using IP-based lines. By 2008, however, 80% of all new corporate lines being installed were

VoIP lines.1 In the mid-2010s, VoIP technology began experiencing an explosive new phase of growth, as

applications aimed at specific niches like hospitality, health & education began to emerge.2

The most important contributors to increased VoIP adoption in recent years have been the enterprise &

SME segments. Small- and mid-sized businesses, which comprise an estimated 99% of all businesses in

the United States and 98.2%3, had largely steered clear of early VoIP offerings due to the technical &

cost implications of installing an IP-based phone system. It was not until the emergence of hosted PBX

service in the 2010s that VoIP became highly suitable for SMEs, as well as other sectors like Hospitality,

offering cost savings of up to 70% and far greater flexibility when compared to traditional telephony. As

of 2015, VoIP technology is far from ubiquitous among SMEs. On the other hand, the rate of growth in

this segment is unparalleled, far exceeding the VoIP adoption rates among corporations in the early

2000’s. This presents long-time industry actors with a number of exciting business opportunities for

many years to come.

1 Michael Dosch & Steve Church, "VoIP in the Broadcast Studio". Axia Audio/Telos Systems. Retrieved 2015-07-19 2 Diane Myers, ‘’VoIP services market nears $50 billion mark’’ Infonetics Research. Retrieved 2015-07-19 3 Aseem Grover & Kati Suominen, ‘’State of SME Finance in the United States’’ TradeUP. Retrieved 2015-07-19

THE STATE OF VOIP – DECEMBER 2015 4

Industry Trends

The lure of decreased costs and increased flexibility has led to a marked uptick in the number of

businesses that are abandoning on-premise PBX systems for hosted PBX platforms. Cloud-based

business solutions are the way of the future, spurred by innovations in technology and accessibility that

make the switch from on-premises systems to hosted solutions easier and more affordable than ever

imaginable in the past. A recent market report noted that hosted service seats grew globally by 20

percent in 2013, and are predicted to have gained another 13 percent by the end of 2014.4 In contrast,

growth in traditional on-premise PBX systems has remained stagnant for the last several years, and is

showing signs of gradual decline.

The rise in demand creates a major opportunity for VoIP developers who specialize in both on-site &

hosted solutions. While on-premise VoIP PBX systems still have their place in 2014, more and more

businesses of all sizes are turning to cloud-based solutions in order to cut costs and increase flexibility.

The need for hybrid solutions, particularly for businesses that operate at multiple sites, is driving the

market towards VoIP solutions at an increasing pace. Likewise, the cost-cutting benefits to smaller

businesses who no longer have to host on-premise PBX systems once they switch to cloud-based

solutions are more significant than ever before. Companies like Canadian VoIP provider Dialexia, with an

ability to account for the need for both hybrid communication options and cost-cutting solutions, are

ideally positioned to help decision-makers move their businesses forward towards cloud-based unified

communications approaches.

4 Diane Myers, ‘’Cloud PBX and unified communication services a $12 billion market by 2018’’ Infonetics Research. Retrieved 2015-07-19

THE STATE OF VOIP – DECEMBER 2015 5

Industry Forecast

The VoIP services market is expected to see continuous growth in the coming years due to cost

effectiveness, improving network infrastructure across the globe and rising demand for smart devices

and mobility among the corporate and individual consumers. Additionally, the rising competition among

the telecommunication service providers and internet service providers across the industry is fueling the

growth of the market in terms of product and service differentiation. While the enterprise VoIP market

has been witnessing a shift from traditional telephony using CDMA or GSM to VoIP services using

cellular networks such as 3G and 4G for over a decade now, many analysts believe the transition is now

in the midst of a rapid acceleration phase. Infonetics expects strong worldwide growth in global VoIP

services revenue through 2019, when it will reach $82.5 billion, largely due to expansion of the

enterprise VoIP segment.

THE STATE OF VOIP – DECEMBER 2015 6

Cloud Technology Forecast

The rise in popularity of hosted (cloud-based) telephony solutions within the VoIP sector is part of a

much larger multi-sectorial trend that is seeing businesses migrate towards a cloud-based service

delivery model. In some cases, companies are doing away with offering non-cloud options altogether.

For example, in 2013 software giant Adobe began offering its ‘creative suite’ product roster exclusively

through a web-based monthly subscription. The ‘software as a service’ (SaaS) delivery model, as it is

called, is expected to see its market share make dramatic gains in the coming years.

According to market research firm Forrester Research, in 2008 the SaaS market was valued at $5.6

billion. Currently valued at $63 billion, it is estimated that the SaaS market will reach a value of 132.6

billion by 2020.

Legend:

BPaaS = Business process as a service (e.g. eBay, Paypal)

SaaS = Software as a service (e.g. HERO Hosted PBX, Constant Contact)

PaaS = Platform as a service (e.g. Windows Azure, Google App Engine)

IaaS =Infrastructure as a service (e.g. Amazon Web Services)

THE STATE OF VOIP – DECEMBER 2015 7

Market Summary

Market Analysis

As a whole, the Voice over Internet Protocol (VoIP) market experienced massive growth at the start of

the past five-year period, though residential customer growth has since flattened out. Regulations and

the dominance of companies, such as Google, threaten the industry, but the expansion of mobile

broadband networks and the emergence of hosted telephony will open up new avenues for growth.

Barriers to entry in this industry are currently medium; however they are increasing as VoIP services

increase in prominence and reliability. As VoIP continues to become increasingly competitive in

comparison to traditional phone services, larger companies are acquiring or integrating these services

into their portfolio (e.g. Microsoft's $8.5 billion Skype purchase). Opportunities still exist for new

entrants, but they are disappearing fast. VoIP providers are classified as information service providers.

As such, they fall outside the heavily regulatory Telecommunications Act of 1996. The lack of regulation,

compared with telecommunications providers, makes it much easier for new entrants to compete.

Customers within then ‘Enterprise VoIP’ branch of include telecommunications-industry actors (service

providers, value-added resellers, integrators, operators, etc.), corporations and SMEs from around the

world. Unlike the ‘Residential VoIP’ branch, the enterprise VoIP branch continues to grow as of 2015.5

Market Segmentation

Different VoIP platform types are aimed at different market segments within the telecommunications

industry. The target markets for four of these types are explored in greater detail in the pages that

follow.

5 Diane Myers, ‘’ In VoIP Services Market, Business Segment Offsets Residential Slowdown’’ Infonetics Research. Retrieved 2015-07-19

VoIP

Telephony

IP-PBX (CPE)

Direct to SMEsThrough VARs

& Interconnects

SMEs

Softswitch & Billing

To ITSPs

Hosted PBX

Direct to SMEs To ITSPs/VARs

SMEs

Hospitality PBX

Direct to HotelsThrough official

distributor

Hotels

THE STATE OF VOIP – DECEMBER 2015 8

Hosted PBX segment

Originally aimed at large-scale operators and service providers, cloud-based PBX services are becoming

increasingly popular with SMEs due to the added cost-savings & management flexibility they provide

compared to on-site solutions.

Today, the hosted PBX segment is by and large the fastest-growing segment of the rapidly growing VoIP

market. “While sales of premises-based PBX systems have been stagnant to declining over the past few

years, the market for cloud services continues to expand with businesses worldwide seeking out hosted

alternatives,” notes Diane Myers, principal analyst at Infonetics Research. The firm expects continued

strong worldwide growth for the cloud PBX and UC market over the next 5 years, projecting it will grow

from $8.5 billion (2014) to $12 billion in 2018 with 62.6 million seats in service.

THE STATE OF VOIP – DECEMBER 2015 9

Hospitality PBX Segment

With over 5,000,0006 hotel rooms in the United States alone, the hospitality sector is a major consumer

of telecommunications worldwide and a highly-sought after VoIP market segment. The Hospitality sector

today remains largely untapped, as many hotels continue to use landline-based ‘hospitality PBX’ systems.

Cloud technology has transformed the business enterprise environment by replacing high-cost on-site PBX

deployments with practical, profit-oriented hosted solutions. The most commonly cited reasons for

switching to hosted PBX service include reduced costs, lower maintenance requirements and software-

enabled features. Cloud adoption rates have been limited in the hospitality sector, in part due to a wide-

spread reliance on PMS (property management system) platforms, which until recently could only

integrate with traditional PBX systems.

While house phones are becoming increasingly viewed as unnecessary by consumers, hotel room

phones - used to deliver a number of important services to guests – are just as essential today as they

were a few decades ago. In addition to providing a means of communicating with hotel staff, hotel room

phones offer a common list of services that many guests have come to depend on, including external

calling, messaging & voicemail, 911 calling and various notification services. Recent studies suggest hotel

guests are increasingly likely to favor establishments with newer technology offerings that add value and

convenience, like lower calling costs, smartphone integration and self-check-out.7 Such features are far

easier to integrate into a hotel property when using an integrated hosted unified communications

solution.

6 ‘’Number of hotel rooms (supply) by chain scale segment in 2012’’, Statista, Retrieved 2015-07-19 7 Taylor Short, ‘’Guest preference for technology use in hotels’’, Technology Advice, Retrieved 2015-07-19

THE STATE OF VOIP – DECEMBER 2015 10

Hospitality PBX Segment (Continued)

While technology investments tend to comprise a higher percentage of the overall budget for Hotels &

Resorts than for other sectors (see graphic below), the difficulties surrounding PMS integration had,

until very recently, prevented cloud-based PBX solution providers from entering the lucrative hospitality

market.

ABOVE: Research by US-based market research firm Frost & Sullivan indicates that the hospitality industry is the

most likely of all industries to spend between 11-50% of its annual communications budget on new technologies

and the least likely to spend below 10%.

THE STATE OF VOIP – DECEMBER 2015 11

IP-PBX (CPE) Segment

The IP-PBX segment has traditionally been centered on the enterprise telephony market, which largely

consists of small- and mid-sized businesses. The number of IP-PBX lines being shipped increased from

4.9 million in 2004 to 18 million in 2010, representing a 25% compound annual increase. Revenue

growth was somewhat slower, 20.7% on a compound annual basis, as prices fell throughout the period.

By 2010, revenue from IP-PBX lines was estimated at $7.6 billion US, up from $2.7 billion US in 2004.

Prospects for IP-PBXs started to improve dramatically by 2004 (a year following the release of Dial-

Office). Prices had come down significantly while quality and reliability were substantially enhanced.

Most major PBX vendors began to actively promote IP-PBX systems for the SME segment around this

time, due to the fact they are easily scalable, and can be used for instant messaging, follow-me services,

unified messaging, and Web system management. SIP-based IP-PBXs are ideal but not limited to trade-

ups for companies with key systems. By the 2010s, IP-PBX line shipments had reached approximately 15

million.

Softswitch Segment

With major service providers around the world carrying out plans to deliver local and/or long distance

voice services (to business and/or residential customers), based on Softswitch technology, the

Softswitch market segment experienced consistent growth when it first arose.

North America accounted for the largest percentage of worldwide Softswitch revenues in 2008. The

total Softswitch market in 2008 grew by 42.4%. Service providers spent a larger percentage of their

budgets on IP gear, including softswitches, as a result, 2008 was a big year for softswitches in the U.S.

and Canada, according to Infonetics, with revenues that grew by 50%. Softswitch revenues reached

approximately $10.27 billion in 2010, a CAGR (Compound Annual Growth Rate) of 47 percent.

Today, the Softswitch architecture market is mature, which limits vendors' scope for differentiation. At

the same time, mergers and acquisitions continue to shrink the number of suppliers that

communications service providers can choose from.