Interview with Polycom:A Perspective on the IP Desktop Phone Market

A Frost & Sullivan White Paper

As part of its ongoing review of the enterprise telephony endpoint market, Frost & Sullivaninterviewed Mr. Tim Yankey, Director of Product Marketing for Voice Products at Polycom,which is making significant inroads in the IP desktop phone space. In this interview, AlaaSaayed, Industry Analyst at Frost & Sullivan’s Unified Communications & Collaborationgroup, discusses key market trends, Polycom’s vision in the evolving endpoints marketplace,and its key areas of focus in the coming years.

Alaa: We have been tracking the evolution of Polycom’s IP desktop phone portfolio in theenterprise space over the past several years. However, for the benefit of our readers, could yougive us a snapshot of the key product/feature releases in your IP desktop phone portfolio?

Tim: Thank you, Alaa, for the opportunity. We are one of the biggest champions ofwideband codecs for high-definition (HD) communications in the industry today. One of thethings that we did in 2009 was to expand our line of IP desktop phones that incorporatewideband codecs. Our first HD voice-enabled phone was introduced in the fall of 2006, andwe started to gradually integrate this technology across our IP phone product line. In 2009,we added the SoundPoint IP 335 (retailing at U.S. $199), an entry-level IP phone that offersHD voice. Today, we have integrated the HD voice technology across our product line atevery price point and application levels, right from the executive desktop down to theentry-level phone. We now enjoy the unique distinction of being the first in the industry tosupport HD across the entire product line.

Another significant announcement we made was the expansion of our voice solutionsoptimized for Microsoft Office Communications Server (OCS). Polycom is one of the keypartners of Microsoft for manufacturing IP desktop phones that support their OCSarchitecture. In 2009, we identified a market need for a standard IP desktop phone thatcould be used with the OCS platform. At that time, Polycom had the CX100, which was thesmall Polycom speaker phone, and the CX200, a handset with minimal traditional phoneinterface features such as no display or dial-pad. Hence, we came out with the CX300, aUSB device incorporating a display and keypad that works with Microsoft OCS R2. It has amicrophone, a backlit display, a keypad and a duplex speakerphone. This product has doneextremely well in the market so far.

Also, we just announced three new CX models in support of Microsoft’s newCommunications Server 14 (Wave 14). These include the CX500, the CX600, and theCX3000. The CX500 is designed for use in public areas such as a lobby or a cafeteria. TheCX600 is a mid-range IP phone truly designed for the office worker, with full speakerphone,a full keypad, and dual Ethernet ports. We are also introducing the CX3000, the industry’sfirst speakerphone specifically built to work with OCS.

Another important advance in 2009 was new developments in our UC software. A keybenefit of our IP desktop phone portfolio is that all of our phones share the same software.We are constantly updating our software stack to support ease of configuration andmanagement of our IP endpoint products, and adding new feature sets to our call controlplatform. Our robust software platform outperforms all the other competing products inthe industry today.

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Alaa: What are your general observations on the traction of IP desktop phones globally? Do youthink IP desktop phones have reached the peak in 2008 and will start declining in the comingyears? Do you think Microsoft supports what some observers call “kill the phone campaign,” apotential mass replacement of desktop phones with mobile devices and soft clients?

Tim: Almost the opposite. We think that Microsoft realizes how critical the endpoint is tothe success of OCS. The success of our new products optimized for OCS really proves thispoint. Certainly, there is a group of people that will gravitate toward making the PC theircommunications device. This set of people would want all the communications elementsintegrated into a single laptop. However, I do not think this group will be a majority.The demand we see for the CX300 is a great case in point. There is a huge segment ofthe population that will continue to want a physical device that will be the hub of alltheir communications.

I see several challenges in having everything integrated into your PC. One, the audio andmicrophone quality on your PC is not designed to be optimal. Then there are a host ofother applications that may be running parallel, consuming processor power and impactingyour voice calls.

Alaa: What are your expectations in terms of sales for the new Microsoft devices?

Tim: All these devices will become available with the launch of Wave 14 in the market.While we cannot really predict their impact in 2010, we certainly foresee considerablemarket traction in 2011. This year, we believe that CX300 will have a bigger impact. This hasbeen a great product for us, and it is growing very quickly.

Alaa: What were the major trends you saw for IP desktop phones and the enterprise IP telephonymarket in general for 2009?

Tim: In 2009, we saw the level of competition increase in the IP desktop phone arena. Forexample, Cisco is now offering the Linksys products under the Cisco brand name in aneffort to refresh their Lynksis SIP phone business.

We have also seen HD voice move from being a niche, nice-to-have technology to themainstream. There is hardly a vendor out there that does not have an HD offering. We arevery excited to see the level of popularity for HD voice. This has been one of the moredramatic changes in 2009.

Another trend we observed is OCS interoperability. We have taken a strategy of developingunique products, Microsoft Certified if you will, to work with OCS. This is the CX line thatwe have been talking about. We see that people are looking to use their regular IP phonewith OCS and other similar environments. This is another interesting trend we saw in 2009.

Another area of development in 2009 has been the applications.The ability to bring Internetcontent or applications is going to be a key area of differentiation for IP phone vendors.

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Alaa: In terms of IP desktop phone shipment, we saw different vendors struggling to growor even maintain the sales levels they experienced prior to the economic downturn. Whatactions did Polycom take to counter the economic conditions in 2009?

Tim: I think we took some great steps in 2009 to fight the economic downturn. One of thethings we did is related to the hosted space. We thought that due to the economy, thehosted market will really take off. So, we invested heavily in hosted VoIP. We increased oursales force. We now have a dedicated group of people who reach out to the Internettelephony service providers that offer hosted VoIP services. Secondly, we increased ourmarketing investments in order to expand the resources available to these partners. Weworked very closely with some of these providers by supporting them through marketing,training and other tools. We also broadened our interoperability ecosystem. Polycom hasthe largest ecosystem of partners in the industry today. We have an open standards-basedSIP call control platform that has proven interoperability with other IP platforms. Ourpartner base has expanded from 12 to over 50 and includes familiar names such as Fujitsu,ShoreTel, Genesys and Toshiba.

We continue to invest in Microsoft and OCS. In late 2009, we launched the Polycom OpenCollaboration Network for rallying a set of strategic IP phone partners for leveragingopen interoperability standards and providing customers with choice and flexibility intheir solutions.

These strategic initiatives saw some great success. Our IP desktop phone shipments sawsingle-digit growth year on year in 2009 when the overall market had a double-digit decline.This certainly is a great achievement given the economic circumstances.

Alaa: Have the prices of IP desktop phones in general declined?

Tim: We did see a very slight decrease in our average selling price (ASP) primarily becausecustomers were purchasing the lower-end phone models. So tying in with the previousquestion about actions taken in 2009, we did some promotions during the year to offsetthis. For instance, we ran a promotion to upgrade customers that were using older Polycommodels to the newer Polycom HD devices. We also offered IP desktop phone promotionsto help our service provider partners target companies that have older TDM and KTSproducts for migrating them to a hosted environment. The good news is that even in thiseconomy, we managed to retain our ASPs at basically the same level between 2008 and2009, which is a significant accomplishment in itself.

Alaa: What can we expect in 2010 in terms of new IP desktop phone characteristicsand features?

I hate to come back again to it, but it is near to my heart; I think we are going to see HDvoice continue to increase its share. I think we will start seeing all the major carrierssupport wideband codecs, leading to explosive adoption.

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Although we have not talked about our business media phone product, I think we are goingto see increasing integration of telephony, videoconferencing and applications rolled intothese single multi-purpose devices in 2010 and 2011. We absolutely see this as a trend andsomething that is going to continue to evolve in the coming two to three years. Polycomhas taken some key steps in making the user interfaces (UIs) simpler. We expect to see theUI evolve and get simpler, especially with the new touch-screen technology.

We are also going to see continued integration of communications devices with businessapplications, such as Outlook. On the video side, we have announced Polycom Conferencingfor Outlook, which allows you to schedule a videoconferencing call through Outlook. Youare going to see more such integration with the desktop device in 2010 and 2011.Obviously, there will be an ongoing trend of color and larger displays across the productlines of IP vendors.

Another interesting trend that we see is the increased demand for SIP with IMS and 3GPPfeatures on desktop phones. We are starting to work with the more traditional wirelesscarriers who want to carry VoIP-leveraging technologies such as IMS and 3GPP. Finally,we are continuously improving the simplification, deployment and management of IPdesktop phones.

Alaa: Since you have touched upon the subject of IP media phones, could you share your thoughtsaround the advancements of multimedia phones in the IP desktop phone market?

Tim: It is not uncommon for a new technology to be on the expensive side. It starts outas niche, and then over a period of time, as adoption starts to increase, the costs comedown. This is when you start to see these technologies rolled out into the more horizontaltypes of applications in the market. I think we are just going to see the same curve here.Polycom is incredibly optimistic about our VVX product line. With a street price of underU.S. $1,000, it may seem expensive from the perspective of a regular IP desktop phone.However, if you look at it as a business-grade phone, a videoconferencing device and anintegrated application platform all rolled into one, the ROI is really there. Although the VVXline is not currently designed for mass deployment, it is a great product that combines allthe three capabilities I have mentioned before. In specific environments where these typesof solutions are a necessity, it is absolutely easy to justify its cost. For example, it wouldmake sense for a company director or manager to have the higher-end IP desktop phoneand some sort of a videoconferencing system on his desk. In such a scenario, an IP mediaphone would totally make sense.

Alaa: Can we compare or draw the line between media phones such as yours andvideoconferencing phones such as the E20 of Tandberg?

Tim: Very good question. When we came out with the VVX 1500 phone, we had a lot ofdiscussion around the product category that it would go into. One of the categories, if youwill, was video phone. The E20, as you pointed out, is called a video phone. The reason whywe chose not to name our VVX phone a video phone is because video phones had

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traditionally been video devices that had very basic telephony capabilities. Generallyspeaking, the challenge with a video phone is that it does not have all the capabilities of abusiness-grade phone. For example, it cannot do call transfer, does not have the messagewaiting indicator, and cannot do the busy-line signal, etc. Therefore, if you were to deploy adevice such as the E20, you will still need your business telephone, since the device was notmeant to replace the business telephone.

Polycom actually took just the opposite approach when we started working on the VVXseries. We took our IP phones and integrated with them the videoconferencing capabilities.This is why we chose not to call it a video phone. What you have is a device that is a full-fledged business telephone (with all the business features and capabilities) combined with abusiness-grade videoconferencing capability. Then, when you add the open APIs thatdevelopers are using to create more applications for the device, and the touch-screeninterface, it becomes a solid media phone solution.

Alaa: Do you see these IP desktop phones with video capabilities becoming cheaper and moreaccessible to the masses over a period of time?

Tim: I do not have a specific answer, but we are already bringing this multi-mode device tothe market. We are already seeing some developments that will bring price points down.Over the next two to three years, we are going to see these devices being deployed moreextensively. When does it reach the tipping point? We truly do not know at this time.However, we will certainly come closer to that point within the next two years.

Alaa: Thank you very much Tim for this conversation and your time today.

Tim: Thank you Alaa. It has been a pleasure.

SOME FROST & SULLIVAN THOUGHTS

Polycom is the leading Session Initiation Protocol (SIP)-based enterprise desk phoneprovider and one of the leading vendors in the voiceover wireless LAN (VoWLAN) space.It is the undisputed leader in the tabletop audio conferencing endpoints market. Polycomhas been able to transform into a true one-stop provider of IP endpoint devices throughgrowth-focused strategies.

In terms of endpoints, Polycom has one of the most diverse portfolios of IP communicationdevices that meet the needs of different organizations. Its products include the SoundPointfamily of IP desk phones, the Polycom VVX family of Business Media Phones, auto attendantconsoles and expansion modules, the CX family of Microsoft-optimized devices, theSoundStation family of IP conference phones, the DECT KIRK wireless series, and theSpectraLink 8000 series of VoWLAN devices.

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The company’s IP desk phone portfolio features multiple devices that range from high-quality, entry-level phones to advanced, state-of-the-art devices with large displays.Deployed on premises as well as in hosted telephony environments, Polycom’s products areinteroperable with most SIP telephony platforms, including those of a large set ofincumbent IP telephony vendors, and the major softswitch and application server vendors.

This interview with Tim Yankey demonstrates Polycom’s clear sense of direction androadmap, combined with a keen awareness of the various trends shaping the IP desktopphone marketplace. The company’s continuous research and development in cutting-edgeareas such as HD voice, media phones and application enablement show its commitment toproduct evolution and innovation. Today, Polycom has the leadership position in theindependent SIP phone marketplace, with 28.4 percent share of total units shipped in 2009.

A STATUS REPORT ON THE IP DESKTOP MARKET

Although the IP desktop phone market was significantly impacted by macro-economicpressures in 2009, this did not prevent many telephony and endpoint vendors fromlaunching new IP phone models. New products ranged from low-end IP phone models tohigh-end devices with advanced features such as large color displays, Web-basedapplications, HD voice and video-calling capabilities.

While some might argue that IP desktop phones will never again reach the volumes theyhad prior to the economic downturn, Frost & Sullivan believes IP desktop phones willcontinue to be the preferred telephony endpoint for the majority of business users, at leastin the next four to five years. Although these devices will be increasingly complemented andeven replaced by mobile phones and soft clients, quality and functionality concerns will limitthe degree of desktop phone replacement by alternative endpoints. In fact, Frost & Sullivanexpects the enterprise IP desktop phone market to gradually recover and grow at anestimated seven-year compound annual growth rate (CAGR) of 10 percent in terms of unitsshipped and 2.1 percent in terms of total revenues.

The penetration of SIP-based phones has increased dramatically in the past two to threeyears with the introduction of competitively priced phone models, which are much lessexpensive compared to those based on proprietary protocols, and high-end models that areequal to or superior in performance than their proprietary counterparts. This, in turn, hasincreased the degree of competitiveness in the market, lowered IP desktop phone prices,and increased customer options. Standard SIP phone devices accounted for about 15percent of the IP desktop phones shipped in 2009. This figure is likely to double within thenext three to four years.

Polycom’s leadership position in the SIP phone market presents an immense opportunityfor the vendor to define the future directions of the industry. With the company placinggreat emphasis on becoming a complete solutions provider for both video and voice, it iswell-positioned to leverage the convergence of voice, video and Web in the future tomaintain its market leadership.

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ENTERPRISE TELEPHONY PLATFORM MARKET: COMPANY MARKET SHAREOF INDEPENDENT SIP DESKTOP PHONE VENDORS BY LINE SHIPMENTS(WORLD), 2009

Note: Others include companies such as snom, Grandstream, Aastra, Cisco (Lynksis),AudioCodes and other independent SIP desktop phone vendors. Frost & Sullivan definesindependent SIP desktop phone vendors as vendors that mostly focus on selling IP phonesthat interoperate with the majority of the PBXs in the market. Although the line betweenproprietary versus open standards is gray, these SIP phones are standard-based devices(with little or no proprietary enhancements) that should naturally offer integration with themajority of telephony platforms available on the market. All figures are rounded; the baseyear is 2009.

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Polycom28.4%

Others71.6%

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Based in Mountain View, California, Frost & Sullivan is a global leader in strategic growthconsulting. This white paper is part of Frost & Sullivan’s ongoing strategic research into theInformation Technology industries. Frost & Sullivan regularly publishes strategic analyses of themajor markets for products that encompass storage, management, and security of data. Frost &Sullivan also provides custom growth consulting to a variety of national and internationalcompanies.

The information presented in this publication is based on research and interviews conductedsolely by Frost & Sullivan and, therefore, is subject to fluctuation. Frost & Sullivan takes noresponsibility for any incorrect information supplied to us by manufacturers or end-users. Allcopyright and other proprietary notices must be retained. No license to publish, communicate,modify, commercialize or alter this document is granted.

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