Indirect vs. Retail: Which Will Win SMB Telephony Sales?

Recently, Microsoft announced its Response Point IP PBX would be for sale at Costco.com. Now that the country’s biggest software company has teamed with one of its top five retailers to sell an IP PBX, the obvious question is how will retail competition impact indirect sales channels for converged voice and data gear?

Response Point is a software-based IP PBX packaged as an appliance by three OEMs – Aastra Technologies Ltd., D-Link Corp. and Quanta Computer Inc. Its biggest selling point is that Mom and Pop can install the system themselves, and therein lies the rub for the channel – both traditional PBX dealers and emerging VoIP VARs.

The Response Point IP PBX sold through Costco.com is coupled with hardware designed and built by Quanta’s Syspine division. The system undeniably is appealing. It’s pretty, for one thing. Plus, it contains voice-recognition software that links with a company’s phone directory as well as each employee’s Outlook address book. Businesses can add up to 50 of Syspine’s IP310 phones without incurring additional license fees, too. Microsoft and Syspine tout Response Point as being so easy to install that no special IT or IP telephony skills are required.

Out-of-the-box operation enables distribution through a big box retailer, but does it make indirect channels obsolete for serving the sub-50 employee company? Industry executives — including execs from Quanta Syspine and Microsoft — think not. In fact, they see products like Response Point as creating more business for the indirect channel.

As IP technologies continue to evolve, “I believe there’s going to be an increasing need for the IT specialist or the resellers that can go in there and do the managed services,” said Bob Gordon, director of sales and marketing for Quanta Computer.

Besides, noted Richard Sprague, senior director of marketing for Microsoft, few resellers make their money off the hardware margin. “Many of our IT specialists are comfortable letting their customers buy the Response Point hardware however it’s most convenient for them,” Sprague said. “The specialists will make their money from additional integration and other services.”

Sprague and Gordon expect that to become even more true upon the introduction of Service Pack 1 for Response Point, slated for release this summer. The major feature is a set of partnerships with Cbeyond and New Global Telecom. Channel partners will sign with either one of those companies and earn commissions by helping SMBs turn their Response Point all-VoIP. Another expected change to Service Pack 1 is the addition of direct inward dialing, which routes callers to an extension, or several extensions, to make sure someone picks up the phone.

So even though Microsoft bills Response Point as self-installable, experts — from suppliers to dealers to analysts — predict SMBs will continue to look to VARs and integrators for IT help. Indirect channel partners agree, claiming small businesses are clamoring for someone else to manage their networks and applications.

D&H Distributing sells Response Point through VARs and retailers. “We haven’t heard any rumblings in the channel” about Response Point being sold through Costco.com or similar outlets, said Rob Eby, vice president of purchasing at D&H. “VARs feel that their value-add outweighs simply being able to sell the product. Many retailers aren’t as comfortable with the technology as VARs. In that case, retailers aren’t really a threat to VARs and integrators; they would need to figure out how to both sell and service the system. These kinds of products are still not completely off-the-shelf solutions.”

Dale Stein, co-founder and director of strategic planning and business development for TAG National, polled several of TAG’s dealer members about Response Point sold through retailers. “We don’t see it as a threat,” Stein said. He explained TAG members have found most companies want a third-party expert to do their IT work for them so they can focus on making money. That’s also when a dealer can maximize the sale, getting the data, infrastructure, connectivity, phone and server business, he said. “If it’s the phone system only, or data only, it isn’t worth it,” he said.

Overall, Stein added, “We’re not too concerned about the Microsoft product; it’s still not very feature-rich, not a lot of applications to it. It still comes down to feet on the street and the relationships you have with your customer base.”

That fits with analysts’ observations as well. “Retail appeals to a different kind of customer,” said Jane Waxman, vice president of hardware channels research for IDC. “It’s a much better sale for a smaller business; I don’t see the Global 2000 running to Costco to buy phone systems. Costco selling telephones is no different than retailers selling printers.”

Steve Hilton, vice president of enterprise and SMB research for Yankee Group, concurred. “I don’t think the typical agent and VAR today need to worry about Microsoft selling this through Costco because that’s much more of a mass-SMB play and that’s not where VARs go,” he said. A greater cause for concern would be a Microsoft IP PBX that’s as easy to implement as Response Point for a 100-person firm, he said. “I haven’t seen that done; that solution doesn’t exist in the market, so the jury’s out on whether Microsoft can make a voice-over-IP solution that easy. … I’m not sure it’s feasible to expect 100-plus do-it-yourself solutions for the majority of the SMB marketplace.”

Even if Microsoft accomplished such a feat, TAG’s Stein is skeptical that businesses would go for it. Microsoft will just “jam you with another software upgrade” every 14 months, he said, noting customers would start to realize there’s a difference between price and cost.

There’s also evidence that a multichannel approach to distribution isn’t hurting VARs and agents. Take Speakeasy, for example. Big-box store Best Buy bought Speakeasy last year and the broadband provider continues to roll out new services for sale through its partners, even as its products are offered through Best Buy for Business.

“The number of customers who come through Best Buy for Business is still very low,” said Jennifer Huaracha, marketing communications program manager for Speakeasy. “We get more referrals through Geek Squad (also a Best Buy brand), when they are providing IT services. Our channel still accounts for much more business than Best Buy for Business or Geek Squad.” Speakeasy declined to provide specific metrics on sales through its various channels.

Other retailers sell VoIP equipment and hosted services, too, but mainly to SOHOs and consumers. That’s not a steadfast rule, however. 8×8 Inc., for instance, now sells its Virtual Office products through OfficeMax and Office Depot. Costco competitor Sam’s Club, owned by Wal-Mart, sells Linksys adapters for Vonage Holdings Corp. service. Sam’s Club sells fewer phone systems than Costco and its major brand names belong to AT&T Inc. and Panasonic. Fry’s Electronics sells IPEVO’s VoIP devices for Skype, but those are targeted at home users, as are most of its IP telephony offerings.

Why Costco?

Warehouse giant Costco claims 5.5 million business members. That’s a lot of potential customers for various office gear like the Quanta Syspine Response Point phone system.

In fact, the retailer has tried selling traditional PBX systems in the past, but with little luck. Problems included the complexity of those systems and that some suppliers were fly-by-night operations that went under. Still, there’s a lot of SMB interest in PBXs, said Jesper Chou, consumer electronics buyer for Costco.com. And with the Microsoft name on Response Point, Costco “can pretty much guarantee they’re going to be there in a couple of years,” he joked.

Chou said Costco.com fields three to four Response Point sales per day, with the average buyer requesting additional handsets beyond the four already bundled.

“I think the concept of voice-over-IP is really interesting to [SMBs] but they may not know a lot about it,” said Chou. “Installing the system was very easy; I didn’t have any problem at all. I think as long as you have an average understanding of technology, it’s not [difficult].”

Nonetheless, Costco applies its satisfaction guarantee to the Response Point product so if a user really is unhappy with the system, the retailer will take it back, Chou said.

Syspine inventories the Response Point system and drop-ships it for Costco. The starter bundle costs $1,799; two additional phones cost $279.99.

Microsoft and Costco.com both are advertising the product. Microsoft is taking out ads on various Web sites while Costco is sending e-mail blasts to its members, adding Response Point to its catalog for SMBs and running a full-page ad in the August edition of Costco Connection, the company’s magazine.

Costco.com also sells several analog desk phone systems, a couple of Polycom conferencing products and numerous headsets.

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