Issue 80

WOW! VoIP Costs THAT much?

by William Flanagan, Publisher

Yes, it can be fairly expensive for a small/medium business to move from a legacy PBX to a completely new Voice over IP system. We found that out while planning a successor to a ten year old circuit-switched telephone system. Some of the quotes for VoIP were a big surprise.

The talk of saving money by operating your own servers for VoIP assumes certain conditions:

• A fairly large number of users, more than 1,000 makes the economics work better.

• Multiple sites, so there is significant current expense for long distance calling that can be eliminated.

• Frequent use of outside conference bridges, which can cost $3 to $10 per hour for each participant.

• Local and Wide Area Networks that can handle voice traffic without a huge upgrade.

Having many users implies a steady stream of moves, adds, and changes (MAC's) that require full-time staff or regular visits from an interconnect contractor. Many seats also reduce the unit cost, with the initial minimum expenses for servers, software licenses, and installation spread more thinly.

First, the base line: ten years ago our PBX cost just under $5,000. That included the switch, which powers 12 telephones and two "door boxes" that offer hands-free intercom service to outside doors, and installation. The CAT 5E wiring was in place then and is also used for the 100 Mbit/s LAN. It will work for VoIP as well.

Inflation at 4% per year for ten years adds 50% to the old price. It was no surprise then that one proposal came in at about $7,500 for a system of similar size. But that proposal didn't cover backup power or a new Ethernet switch or a Power over Ethernet (PoE) injector needed to power the phones. There was also the not-so-small matter of continuing support.

The old PBX just sits there and works. It has no moving parts. There are no upgrades or bug fixes to install. Our small business rarely requires MAC's. Change the internal batteries for backup power every four or five years and the PBX is fine.

On-premises VoIP operates from desktop PC's or servers, depending on the size of the installation. Their software needs regular updates, both operating systems and applications. You should scan for malware periodically. When some moving part breaks (expected life of a continuously run hard drive is about 3 years, right?), you need someone who can fix it fast. That's what the annual support contract does--for $700 to $1,000 per year in our case.

Total Cost of Ownership (TCO) includes foreseeable expenses as well as initial outlays. So we add maintenance for ten years at, say, $850, and the price of the new system more than doubles. Oh.

If you are not happy with no redundancy, consider a proposal from the reseller of a major-name vendor that offers a pair of servers, one operating and one on hot standby. This proposal does include a switch with PoE, and Wi-Fi on a router, but the price doubles--to $14,000 up front. Maintenance is $1,000/year.

So why consider migrating from TDM to VoIP? For the features.

The comparison with the PBX was fair only to the extent that both old and new systems were "basic" configurations with feature sets more or less standard for their times. But how the times have changed.

Following Moore's law, processor capacity increased by a factor of more than 30, perhaps 60. Disk and RAM prices dropped to a small fraction. Better hardware now supports more complex software which makes more solid features available in every system. Just two examples: voice mail and auto attendant were options with the PBX, too expensive to justify at the time. Both features are included in almost every VoIP system at little or no additional cost.

IP phones are coming down in price, like other hardware. You can spend $1,000 for a phone with a large, color, touch screen and integrated video camera. But you need spend less than $50 for a serviceable desk set. Either one uses the same voice mail, but the video calls and a growing number of other features do require a more expensive phone.

Features such as presence, unified messaging, and mobility favor VoIP. Used properly, and integrated into business processes, the new features generate savings and improve productivity in novel ways. Many organizations will want the benefits and accept the cost of running their own systems.

But there is another way: buy only the phones and rent the call processor from a hosted PBX service provider. More on that next time.

To learn more about VoIP and how it is displacing legacy PBX's for telephony, watch for my book from Wiley Interscience later this year. I'll let you know when it's out.