Businesses Move To Voice-Over-IP

Skype and Vonage have made most of us aware of Voice over Internet Protocol (VoIP) phone services. Now VoIP solutions aimed at businesses have evolved into "unified communications" services that treat all communications--phone calls, faxes, voice mail, e-mail, Web conferences and more--as discrete units that can all be delivered via any means and to any handset, including cellphones. Two main sets of competitors are fighting it out-- one set is focused on VoIP for medium to large enterprises, while another is targeting the small-to-medium business (SMB) market.

In the latter group, Microsoft introduced its Unified Communications line of Office Communicator servers and software in October 2007, and among other competitors is fighting with Cisco over whether VoIP will be based on a set of software applications or based on a specific network. Meanwhile, good-enough services for SMBs have become quite good, with RingCentral's Digital Line service leading this pack. We wonder--is tiny start-up RingCentral better positioned for growth in the enterprise than Microsoft, which historically has owned the enterprise?

Winner: RingCentral Digital Line Microsoft's Unified Communications offers the ability to integrate a lot of features into existing Office software, including Web conferencing. Microsoft's positioning seems a little murky--they offer VoIP servers and software that will be interoperable with a company's existing PBX system to customers who don't want to replace robust hardware-based PBX services but want to extend those systems' capabilities. Microsoft also offers VoIP-only solutions that require the installation of Communicator servers.

Part of the murk around Microsoft's positioning is caused by the number of features offered--in addition to the basic call-handling and routing functions, Communicator also offers instant messaging with visual enhancements, e-mail, and audio- or videoconferencing. This desire to be all things to all enterprises can be partially attributed to the fact that Microsoft is fiercely competing to own this space. It's most fierce competition is with Cisco, described in a 2007 article: "[Cisco and Microsoft] agree on a future vision of networked software that will help users access information with the device of their choosing and share it in ever more useful ways. Cisco thinks the key is to build most of these smarts into the network. Microsoft executives believe the priority is still the programs people use to actually get things done."

In contrast, what makes RingCentral so potentially disruptive is that it offers an inexpensive ($99 per month for four users), Web-only solution with no hardware to be installed at all, except for handsets which the customer supplies. Reportedly, with the right handset and a good enough Internet connection, RingCentral offers excellent quality. RingCentral enables small and midsize businesses to have what might otherwise be unaffordable smart-PBX features, including call control, extensions, Outlook integration for dialing and faxing, hold music, call logs, and rules-based call routing and answering.

RingCentral has actually seen its business grow in the recession--a Nov. 3 article reported record sales in October for the company. A company survey indicated many of the sales were from SMBs cutting costs due to the economic downturn--either getting rid of physical office space and thus needing a unified phone system not dependent on physical space, or SMBs discontinuing landline service and using RingCentral to send some calls to cellphones.

If RingCentral is able to get enough of a toehold into the SMB market for VoIP, it's possible the company could end up growing into the midsize enterprise market as businesses that use it grow and decide not to change. At that point, it would potentially be a threat to Microsoft, which runs a risk of overshooting the market, by producing features that add complexity and cost without really mattering to many companies.

Written by Renee Hopkins Callahan, editor of Strategy & Innovation. This article was excerpted from a recent online issue of Strategy & Innovation by Innosight, a consulting firm co-founded by Clayton Christensen and Mark Johnson specializing in innovation and disruptive strategy.

For more articles on innovation and disruption based on Clayton Christensen's research, please click here.