VoIP2.biz, Inc.: Deciding on the Next Steps for a VoIP Supplier Lawrence R. Milkowski, President and CEO of VoIP2.biz, Inc., an Indianapolis- based start-up supplier of Voice over Internet Protocol (VoIP) telephony to the small and midsize business market, knew he had a difficult job ahead of him. It was Friday, June 23, 2006, and he had to prepare his rec- ommendations on the next steps for his fledgling company to the board of directors at its meeting on Tuesday, June 27, 2006. While Larry was a firm believer in the direction of the company, he knew that the board was anxious to resolve the future of the firm given the slower-than-hoped-for progress in getting the company’s cash flow to break even. The Company In 2006, VoIP2.biz considered itself a systems integrator that worked with business customers to help them move their voice communications from legacy technology to VoIP technology. Through these activities, VoIP2.biz would become its clients’ telephone company, thus earning a recurring revenue stream. Management’s plan was to continue to gain dominance in the Indianapolis market, expand the company’s business activities throughout Indiana, and then open additional sales offices throughout the Midwest, gaining a first mover posi- tion in the marketplaces they served. Management believed that success in this strategy would make them an attractive acquisition target in the 2009 to 2010 timeframe. Management thought that VoIP2.biz’s business opportunity came from the recognition of five basic mar- ketplace facts experienced by business customers with less than 400 voice telephone lines: 1. These businesses had often invested in separate voice networks, data networks, and Internet access technolo- gy whereby they had two distinct and separate monthly cost streams—a network for voice and one for data. Moreover, the voice network was often overconfigured and underutilized. In addition, specialized circuits for transporting voice calls often cost more, sometimes twice as much as the equivalent data circuit cost. ��� 2. Most voice communication systems, called private branch exchanges (PBXs) or key telephone systems ���Copyright © 2010 by Stephen R. Nelson and Daniel W. DeHayes. ��� This case was prepared to support classroom instruction. Some names and figures are disguised. 128 (KTSs), were special purpose machines with both proprietary hardware and software. As a result, they were expensive to buy, in the $1,000 to $2,000 per user range; expensive to maintain; and lacked the flexibility to easily adapt to specific user needs. They generally required specialized skills for moving, adding, or changing end-user stations—and therefore had a significant maintenance expense once installed. 3. Business customers understood that customer rela- tionship management can be enhanced and addition- al sales can be made by the effective handling of their customer communication. For many busi ...

1. VoIP2.biz, Inc.: Deciding on the Next
Steps for a VoIP Supplier
Lawrence R. Milkowski, President and CEO of VoIP2.biz, Inc.,
an Indianapolis-
based start-up supplier of Voice over Internet Protocol (VoIP)
telephony to the
small and midsize business market, knew he had a difficult job
ahead of him. It
was Friday, June 23, 2006, and he had to prepare his rec-
ommendations on the
next steps for his fledgling company to the board of directors at
its meeting on
Tuesday, June 27, 2006. While Larry was a firm believer in the
direction of the
company, he knew that the board was anxious to resolve the
future of the firm
given the slower-than-hoped-for progress in getting the
company’s cash flow to
break even.
The Company
In 2006, VoIP2.biz considered itself a systems integrator that
worked with
business customers to help them move their voice
communications from legacy
technology to VoIP technology. Through these activities,
VoIP2.biz would
become its clients’ telephone company, thus earning a recurring
revenue stream.

2. Management’s plan was to continue to gain dominance in the
Indianapolis market,
expand the company’s business activities throughout Indiana,
and then open
additional sales offices throughout the Midwest, gaining a first
mover posi- tion in
the marketplaces they served. Management believed that success
in this strategy
would make them an attractive acquisition target in the 2009 to
2010 timeframe.
Management thought that VoIP2.biz’s business opportunity
came from the
recognition of five basic mar- ketplace facts experienced by
business customers
with less than 400 voice telephone lines:
1. These businesses had often invested in separate voice
networks, data
networks, and Internet access technolo- gy whereby they had
two
distinct and separate monthly cost streams—a network for voice
and
one for data. Moreover, the voice network was often
overconfigured
and underutilized. In addition, specialized circuits for
transporting
voice calls often cost more, sometimes twice as much as the
equivalent
data circuit cost. ���
2. Most voice communication systems, called private branch
exchanges
(PBXs) or key telephone systems ���Copyright © 2010 by
Stephen R. Nelson and
Daniel W. DeHayes. ���

3. This case was prepared to support classroom instruction. Some
names and figures are disguised.
128
(KTSs), were special purpose machines with both proprietary
hardware and
software. As a result, they were expensive to buy, in the $1,000
to $2,000 per user
range; expensive to maintain; and lacked the flexibility to easily
adapt to specific
user needs. They generally required specialized skills for
moving, adding, or
changing end-user stations—and therefore had a significant
maintenance expense
once installed.
3. Business customers understood that customer rela- tionship
management can be
enhanced and addition- al sales can be made by the effective
handling of their
customer communication. For many business- es, the cost to
purchase and
implement the automat- ed call distributors (ACDs) and the
interactive voice
response (IVR) applications required were just too expensive to
be practical.
4. Business customers, particularly those with one to a hundred
employees, or
several hundred spread over several facilities, received very
poor service from the
traditional phone companies. They were often served by under-

4. trained account
managers with little tech- nology experience or business
knowledge, so it was
difficult for the customer to get his or her questions answered
or specific needs
addressed.
5. Many customers lacked experienced networking people to
help them make
telephony decisions, and they often lacked a strong data
processing staff with any
experience in voice processing.
In order to meet these market needs, VoIP2.biz sold systems
that:
1. Provided the economic benefits of collapsing the voice and
data networks
together into a consolidated network— one network instead of
two, ���
2. Included the call origination and termination services in lieu
of traditional
phone company services, includ- ing low-cost long distance,
E911, and
all of the advanced features available through any traditional
telephone carrier, ���
3. Utilized an open-source call processing platform that
operated on
commodity hardware in place of propri- etary telephone
systems,
which was 10 percent to 20 percent of the cost of a competing
technology, and ���
CASE STUDY I-2

5. 4. Were sold, engineered, installed, and supported by an
experienced team of data
and voice networking professionals.
Progress to Date
The concept behind VoIP2.biz came from some experimen-
tation in early 2004
by personnel working for the Harley Services Corporation
(HSC). HSC began
business in 1995, providing outsourced engineering,
installation, and market- ing
services to telecommunications carriers throughout the United
States. By utilizing
HSC’s services, carriers were able to speed implementation of
new customer
services, such as DSL, and reduce costs by outsourcing central
office engineering
and equipment assembly. As a service provider to the carriers,
HSC was in a
unique position to understand and review new
telecommunications technology
prior to its general availability. In 2003, engineers at HSC
started to investigate
broadband applications, including video and voice over internet
protocol (VoIP)
applications.
During 2004, Milkowski and other personnel in HSC explored
the market for
VoIP and evaluated several then- current VoIP service
providers. As a result of

6. these investi- gations, the HSC project team designed a system
to deliver a cost
competitive IP PBX solution for implementing VoIP via an open
source software
platform. They selected an open source solution because it had
the advantages of:
(1) implementation on a commercially available commodity PC
server, (2) high
quality application code due to the ongo- ing review of a large
user community,
and (3) no licensing fees. Milkowski believed that the open
source approach pro-
vided the best technological platform for smaller business
customers due to its
advanced call processing capability and significantly lower
monthly
telecommunications expense.
Beginning in October 2005, VoIP2.biz was spun out of HSC as
a separate
corporation, owned by several outside investors, Milkowski, and
HSC. HSC
retained 70 percent of the stock in VoIP2.biz. Milkowski then
developed what was
called internally the “Phase I Plan.” In this plan, the infra-
structure and staffing of
the business had to be completed and some presence in the
market had to be
accomplished. During late 2005 and the first half of 2006,
employees at VoIP2.biz
added to the functionality of the open-source IP PBX and
entered into several
reseller relationships with equipment manufacturers and
carriers. These actions
gave VoIP2.biz the ability to offer a complete end-to-end VoIP
solution for

7. business customers. Milkowski and his team of five engineers
and sales
professionals also sold the VoIP2.biz solution to several
customers. VoIP2.biz
signed agreements with four authorized distributors in Central
Indiana to help sell
the service to the business market. The team also developed a
set of features for
their product via internal work and relations with outside
providers. Through
its business activities to date, management was convinced that
the open source
solution offered by VoIP2.biz provided a small to midsize
business customer a
complete telephone system solution for 10 to 30 percent of the
cost of a new
proprietary solution from traditional vendors. For a detailed
description of
VoIP2.biz’s services, see Exhibit 1.
By June 2006, VoIP2.biz was well on its way to completing the
Phase I Plan. The
company had sold sever- al customers (the current count was
22), resolved several
knotty technical issues, and completed hiring a small team of
engineers (three) and
sales/customer service people. However, the company was yet
to break even
financially from either a profit or cash flow standpoint.
Revenue for October
through December of 2005 totaled only $88,000 but resulted in
a net loss of

8. $86,000. Financial results for January through June 2006 were
expected to be
somewhat better with revenue expected to be nearly $150,000,
but earnings before
taxes were expected to be a negative $66,000. Several members
of the board of
directors thought that the company should be generating a profit
or at least be at
breakeven by June 30, 2006.
The Changing Telecommunications Landscape
By June 2006, many experts believed that the Internet would
change business
communication. However, while the impacts were dramatically
changing data
communications in a small or midsize business, voice
communication often
remained on the Plain Old Telephone Service (POTS). In the
business market,
voice communications was still important to business, and
remained 10 to 20
times the size of Internet communication. Business still spent
significant dollars
every month on legacy telephony technology.
While the Internet had not yet had a major impact on business
voice
communication, several studies foresaw that business was at the
beginning of the
next phase in uti- lizing the Internet to further reduce costs.
VoIP was seen as the
next major breakthrough in voice communications.
In late 2005, several industry analysts predicted that much, if
not most, of the

9. voice traffic generated by busi- nesses would be delivered over
Internet
technologies. This change would happen for two key reasons:
• Businesses could consolidate voice and Internet con- nectivity
into a single
converged network that would carry voice, data, and video,
reducing monthly
commu- nications expense and increasing Internet network
capacity. By
combining all communications over the Internet, the
underutilized voice network
capacity could be used to increase data network capacity.
Because VoIP used less
than half the network capacity of a tradi- tional POTS phone
call, customers would
use less of their network capacity for voice.
Delivering dial tone to the desktop and process- ing voice calls
would become a
commoditized application that would operate on standard PC
hard- ware—
eliminating the need for expensive, special use machines like
traditional PBXs and
KTSs, which require proprietary hardware and software.

10. Some experts argued that VoIP would also allow for inte-
grating an
organization’s many locations, including remote workers, into a
single
communications network. VoIP would also reduce
communications cost and
expand func- tionality by combining voice and data onto one
network and by
bringing advanced features not currently available to most small
and midsize
business customers.
In order for businesses to take advantage of these cost savings
and functional
enhancements, they would need to enhance or replace their
existing
telecommunications equipment, and replace their existing POTS
telephone cir-
cuits with Internet connections. Utilizing open source voice
applications and
commodity Internet circuits, management at VoIP2.biz
estimated that a business
could achieve a four to six month payback on the required
investment.
The Market for VoIP Services
As the telephone system in the United States was deregulated,
technology vendors
offered PBX systems for
managing voice communication and optimizing the utiliza- tion

11. of carrier services,
reducing a company’s monthly expense. Smaller versions of
these systems, KTSs,
were introduced next, making these savings available to smaller
enterprises. Each
manufacturer of PBXs and KTSs differ- entiated its products by
integrating call
processing features, like automated attendants and voice mail,
into their sys- tems.
Eventually each manufacturer created a proprietary architecture
of hardware,
software, and telephone handsets for the market. Therefore,
choosing Avaya as a
business telephone system ruled out using components from
Nortel, for example,
to meet a future telecommunications need.
Over time, as the Internet expanded and became a business
necessity, businesses
deployed additional network services for Internet connectivity,
and extended e-
mail and Internet access to each desktop. Generally, these
deploy- ments were
made totally independent of the existing voice communication
infrastructure,
including separate cabling systems and face plates.
The development of “open systems” standards, funda- mentally
meaning a defined
interface for exchanging data between proprietary systems,
created protocols like
TCP/IP and made the Internet possible. In addition to speeding
the development of
application software and relational data- bases, these open
systems standards made
it possible for applications to be accessed from a standard

12. browser, like
132 Part I • Information Technology
Internet Explorer, dramatically reducing the cost to deploy and
support Internet-
based information services.
In time, engineers familiar with Internet technology began to
reengineer traditional
voice communication. Carriers began using Internet Protocol
(IP) communication
for voice traffic within their own networks, thus achieving
significant savings. The
broad acceptance of the need to adopt “open” standards drove
traditional PBX
manufacturers to accept Internet-based standard protocols for
communicating
within a network, making it possible for commodity priced
components to be used
with previously closed systems.
By 2006, many of the proprietary PBX and KTS manufacturers
were
reengineering their systems to include IP technology. However,
they generally
continued to deploy a proprietary system that limited the
functionality available to
their customer, and did not offer much cost savings. In order to
take advantage of
the cost savings available through IP networks, the customer
had to go beyond the
VoIP equip- ment sold to them, and reengineer their network.

13. To see a savings, the
POTS network needed to be replaced with an IP network. Then
either the installed
PBXs had to be replaced, or the customer would have to
purchase expensive
gateways that turned the new IP communication network back
into POTS
communication that the old PBXs could support. In short,
achieving significant
cost savings from network inte- gration using the altered PBX
or KTS systems
was consid- ered difficult by many smaller businesses.
Alternatively, organizations such as Digium, the authors of
Asterisk, and Pingtel,
developed application soft- ware that functioned just like a
PBX, yet ran on
commodity PC hardware under Linux. These systems, available
for free and
distributed as “open source” applications, provided vir- tually
all of the features of
a proprietary PBX, plus directly support IP trunking, and at a
cost of as little as 10
percent of the cost of a traditional vendor’s PBX.
In summary, as of June 2006, suppliers of voice
communications systems for the
small and midsize busi- ness market were selling:
3. Hosted VoIP solutions as replacements for long dis- tance
service, to both
residential and commercial customers; ���
4. Proprietary telephone systems that utilized IP tech- nologies
for their internal
workings; and ���

14. 5. System integration solutions, such as VoIP2.biz’s, which
applied IP technology
to address the entire business communications infrastructure
and thereby
deliver substantial enhancements in call processing and lower
monthly
costs. ���The alternatives for the small and midsize business
���
customer are summarized in the table on page 133. Hosted VoIP
providers
provided an additional phone number, sold
long distance service, and linked to the existing Public
Switched Telephone
Network (PSTN) for delivering calls. Either the supplier or
provider could provide
the telephone handsets. The provider didn’t integrate with the
rest of the
business’s telecommunications services and equipment, leaving
that effort to the
customer. System VoIP providers left even more functions to
the customer.
Management considered VoIP2.biz’s solutions unique in
offering the customer a
single point of service and accountability for the entire
telecommunications
infrastructure.
The market for VoIP was typically measured in terms of how
many POTS lines
were available to be switched to VoIP service. In 2005, nearly

15. 50 million POTS
lines that could be switched to VoIP were installed in small
enter- prises in the
United States. (The small enterprise market was defined as 100
telephone lines or
less.) In Indiana, this market was estimated at 1 million POTS
lines, and across the
Midwest, it was estimated at 8.8 million POTS lines. Through
2005, it was
estimated that less than 2 percent of these POTS lines had been
converted to VoIP.
Management at VoIP2.biz summarized the small and midsize
business market for
their services as:
• These customers represented a large business opportunity;
• Currently, the customers were not appropriately served by the
traditional
telephone companies or car- riers and were frustrated in their
inability to work
with these companies to get their business needs addressed;
• Most customers lacked the internal IT and telecommunications
staff to manage
their growth and required changes;
• A customer could dramatically decrease their monthly
communications cost by
moving to VoIP; • In order to take advantage of IP networking
cost savings and
enhanced features, a customer had to
replace its existing PBX;���• Less than 10 percent of the
PBXs on the market had

16. some type of IP capability; ���• The forecasted spending on
IP PBXs was estimated
to grow from $1 billion worldwide annually (2002)
to $8 billion worldwide annually by 2008; ���• Open source
IP PBXs, such as
Asterisk, could be implemented for 10 to 30 percent of the cost
of a
traditional vendor’s IP PBX; ���• To reach its objectives, the
company would have to
secure only 2 percent of the business market with
100 lines or less; and ���• Expanding the target market to
businesses with
400 lines or less would increase the market size an estimated 40
percent, and
VoIP2.biz would need to only secure 1.4 percent of this
expanded market.
VoIP2.biz’s Differential Advantage
In a May 2006 presentation to a local venture capital com-

17. pany, Milkowski listed
the following reasons why VoIP2.biz would be successful in the
market:
“VoIP2.biz sells only to the business market. The big
competitors (such as
Vonage) are primarily targeting the residential market;
“VoIP2.biz focuses on the small and midsize business market
where most of the
competitors are not playing. We focus on the 20 to 100 line
market primarily but
will go up to 400 lines when an opportunity arises;
“We understand that delivering VoIP for business customers is
not about saving
money on long dis- tance. Their long distance expense is
typically only 5 to 10
percent of their telecommunications budget. VoIP for business
customers is all
about consolidat- ing their networks and utilizing commodity-
based technology to
dramatically reduce their overall telecommunications costs.
“We believe we are the first company to offer an open-source
VoIP IP PBX
solution in the greater Indianapolis marketplace. We expect to
be the best
throughout the Midwest. The only competitors with a solution
close to ours
operate in New York, Atlanta, and California.
“VoIP2.biz’s offerings are unique in that the company addresses
the entire
communications systems needs of its clients—from handsets
through network

18. connections.
“We believe our use of an open source platform instead of
reselling a proprietary
PBX manufacturer’s product results in the customer realizing a
savings in both the
technology acquisition costs and in the ongoing operating costs
of an IP PBX.
“Finally, our cost structure allows us to deliver a new PBX
solution (the most
popular alternative for these customers) cheaper than our
competition as this chart
indicates (see page 134). If you review the chart for several
competitors, it is clear
that VoIP2.biz offers a strong product in our target market. For
both small sys-
tems (25 users) and for larger systems (200 users), our total cost
of operation
(TCO) per user at list price is substantially below all the known
competitors . . .
and the same is true for just the initial investment and for the
ongoing cost with
maintenance.”
The Competition
In early 2006, management conducted an analysis of com-
peting voice
communication solutions offered to business customers. The
results of this study
were summarized in a report to the board of directors in April
2006:

19. • National Hosted VoIP
Solution
Providers: Starting with organizations like
Vonage, these business entities use a national IP transport
network to offer
business customers low-cost long-distance service. Analogous
to cellular phone
service, these implementations are not integrated into the
business’s existing
telecommunica- tions environment. Through data gained by
manage- ment, these
providers are experiencing problems with the lack of data
experience in their
channel partners and are having difficulty in dealing with
customer concerns.
Representative companies in this group include www.
vonage.com;
www.packet8.com; www.broadband.com; and
www.broadvoice.com. Generally,
these systems are priced from $29.95 to $40.00 per line per
month, plus
installation fees. Some market participants provide Internet

20. access and sell
telephone handsets.
• Incumbent Local Exchange Carriers (ILECs): The ILECs,
principally AT&T
and Verizon in
Indiana, have long dominated the traditional market for voice
communication.
They sell network services through a variety of channels, based
on business size.
ILECs sell IP-enabled PBXs from manufacturers such as Nortel,
Avaya and Cisco.
Generally, the ILECs sell equipment, referred to as customer
prem- ise equipment
(CPE), in order to enable their network sales and maintain an
account presence.
The systems they sell are generally proprietary implementations
of VoIP and

21. generally cost $1,500 to $2,000 a station, with “right-to-use”
fees for additional
software appli- cations. ILECs offer better pricing for Internet
access T1s than for
T1s used for voice communication.
• Competitive Local Exchange Carriers (CLECs): These firms
offer
competitive data connectivity for businesses to access the
Internet or buy
dedicated point-to-point data connectivity in fractional as well
as full T1s. Some
CLECs implement a hosted VoIP solution using a Cisco
platform, though none in
the Indianapolis marketplace. Others are reselling the services
offered by the
national providers described previously. Generally, the
infrastructure required to
implement a VoIP solution using Cisco is reported to be too
expensive to be
profitable for most CLECs, and we have learned that the margin
available for
reselling the national hosted offerings was also not attractive. In
addition, most
CLECs are not comfort- able with selling and servicing voice

22. solutions—they are
data providers. Both eGix (www.egix.com) and Ultimate
Medium
(www.ultimatemedium.com) have attempted to sell hosted VoIP
solutions in the
greater Indianapolis marketplace. Management understands that
Ultimate Medium
has withdrawn these services. Management believes Ultimate
Medium represents
an attractive partnering opportunity for VoIP2.biz rather than an
effective direct
competitor.
• Cable Companies: The companies are preparing to enter the
VoIP marketplace,
beginning with residen- tial service. BrightHouse launched a
residential offering at
year-end 2005. They plan to offer a busi- ness service in the
future, but as most
businesses are not cabled and linked to the existing cable
network, a significant
capital expense would have to be incurred by the cable company

23. or the customer
in order for cable to be an effective alternative.
• Internet Service Providers (ISPs): ISPs see VoIP services as
an attractive
service extension, particularly for residential customers.
Clearly, AOL, MSN, and
other national ISPs should soon be rolling out residen- tial VoIP
services. ISPs that
service business customers have long searched for an additional
value-added serv-
ice they could offer in addition to Internet access. With VoIP,
an ISP could add a
profitable service. To date, few local business-oriented ISPs
have implemented a
VoIP business strategy. Management expects wireless ISPs
would also be
interested in adding VoIP services.
• Interconnects and PBX VARs: VARs and intercon- nects have
traditionally
provided a competitive alterna- tive to the ILECs for smaller
firms, usually at a
lower cost point. Many of these firms sell systems from existing
PBX

24. manufacturers, such as Nortel, Avaya, and Siemens. Rarely have
they had the data
expertise
to sell and install a Cisco solution. In marketplace dis- cussions,
several firms have
started selling lower-cost PBXs, including Mitel, NEC, Toshiba,
and ShoreTel.
These enterprises may prove to be good channel part- ners for
VoIP2.biz. In the
Indianapolis marketplace, these competitors included
VanAusdell & Farrar
(www.vanausdell.com) and MVD Communications
(www.mvdcommunications.com).
• Data Networking