VideoAbout four years ago, Dave Thompson was looking for ways to cut his then-employer's telecom bills. There was some buzz around a new technology called Voice over Internet Protocol, or VoIP, a method of using the Internet, private data networks, or both in lieu of conventional telephone networks. In theory, VoIP calls were free, so Thompson gave it a try. He wasn't impressed.
"There was so much jitter you'd sound like you were in a helicopter," he says, launching into an imitation of a typical chopped-up conversation: "...-lo? Do...hear me?...Is any-...there?" So he abandoned the idea of replacing or supplementing the company's traditional phone service with VoIP.
But Thompson has since changed his tune. Now director of IT at Muzak LLC, the (in)famous purveyor of background music, he realized last year that the company's existing public branch exchange (PBX) system couldn't support its fast-growing workforce much longer. So he faced a tough call: should he upgrade to a new PBX or look for a different approach?
He decided to try Internet-based calling again. This time, thanks to vast technological improvements, the calls sounded just fine.
So in August 2002, he began switching the company's 2,000 workers to a VoIP system from Shoreline Communications Inc., in Sunnyvale, California. Now employees at Muzak's Fort Mill, South Carolina, headquarters and about half of its 40 U.S. branch offices can call one another online by dialing four digits. They run up no toll charges, nor do they need any special equipment. "You can use an $8 phone from Wal-Mart," Thompson says. And they usually notice no difference in audio quality.
So far, the system isn't saving that much money on long-distance calls—only about 5 percent on the usual bills in each office where it's been deployed, says Mark Williams, Muzak's chief controller. That's primarily because people with VoIP can only call other people with VoIP. If they call anyone else, they're switched to a standard phone line that takes advantage of least-cost routing.
But Muzak executives say lower phone bills aren't the only benefit of the Internet-based system. When it finishes switching the remaining offices, the company will be on a single platform for all data and telecommunications, instead of the previous mixture of different PBXs in different offices. "Doing that saves money right off the top," says Thompson. Adding, dropping, or moving a phone anywhere in the VoIP network is a snap. Previously, individual offices had to contact local phone vendors to make such changes, usually paying a service charge each time. Now, says Thompson, "if someone in California wants to switch desks, we can change their phone from here in about 35 seconds" at no cost. Finally, because the VoIP system uses standard phones and a computer network that requires no special training, Thompson can upgrade each office himself rather than paying a phone or VoIP vendor to do the work. He estimates that this saves the company an average of $11,000 per site.
Down to Business
Nearly 84 percent of businesses surveyed earlier this year by Nemertes Research said they're using or testing VoIP technology at an average cost of $636,000. "If IP telephony...isn't high on your priority list, it should be," the firm's principal research officer, Robin Gareiss, concluded in a report based on a survey of 42 companies, 70 percent of which have annual revenues of $1 billion or more. "The technology is approaching critical mass.... We see IP telephony as an inevitable change in corporate networks."
The Yankee Group says manufacturers will ship 7.6 million IP-based phones annually by 2004, up from 490,000 in 2000. And worldwide revenues for Internet voice technologies—$13 billion last year—should reach $197 million by 2007, according to Insight Research Corp. Traditional services still hold the lion's share of the market, but they're growing more slowly—from $820 billion in annual revenues today to an estimated $915 billion in 2007.
Vendors and analysts say the trend appears to be taking off first in banks, insurance companies, local governments, and colleges and school systems, and, increasingly, in health-care organizations. Even companies with just a few long-distance locations can cut costs significantly. For example, Bay Federal Credit Union in Santa Cruz, California, began saving $1,500 a month on calls between its seven sites after switching to a VoIP system from Shoreline Communications in 2002. The organization also eliminated about $25,000 annually in vendor service charges.
VoIP systems can also cut maintenance costs because the same IT staff can handle a single system for telecom and data. There's far less wiring: remote locations need access just to the main network rather than their own voice systems. And thanks to the highly competitive marketplace, VoIP vendors offer a smorgasbord of features, such as voice mail, call forwarding, conferencing, and integration with common workplace software such as Microsoft Outlook. In some cases, companies can use their Web browsers to manage voice mail or make phone calls by clicking on their electronic phonebooks. However, says Gareiss, the features still lag behind those of traditional PBXs, and that's a problem for many IT executives who want all of the features they're used to in a traditional voice system.
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