Dell Thinks Small Biz is Big Biz for VoIP

Dell begins bundling Fonality’s open-source software with its enterprise servers today, its latest gambit to compete in the already-crowded VoIP market — this time targeting companies with 125 employees or fewer.

This is fertile ground: Analyst Alan Weckel of research firm Dell ‘Oro Group estimates annual PBX revenues, including those from VoIP phone systems, will exceed $7.5 billion by 2011. Much of this growth could come from small- to medium-sized businesses. Weckel told The Wall Street Journal in August that he thinks 35 million small businesses will adopt IP phone service before 2010 (about 11 million currently use it), a number that’s likely to ramp up if the economic situation worsens.

Granted, this is a market that has never fulfilled its promise. Few of the many hosted-PBX service providers are even making money. Yet Dell (DELL) still sees opportunity in hawking VoIP to businesses. Why? They buy more gear than cost-conscious housewives. If there is one thing Dell knows, it is that empires can be built on the incremental profits inside lots of gray boxes and the software that runs on them.

Dell is a relatively late entrant here. Cisco, Avaya, Nortel and Alcatel-Lucent, to name a few, are established players in the VoIP space, though their products also target larger customers. In the small business space, Digium and Microsoft, which released its Microsoft Office Communication Server in 2007, will be the chief competitors. (Microsoft has claimed a working relationship with Dell in the past.)

Late or not, Dell lives to put the squeeze on the margins of its peers. The Fonality VoIP Phone System will be priced at about $750 per employee for a five-employee system, or $9,999 for a system that will serve 25. This is far less than Cisco-class proprietary system, which can cost as much as $2,000 per employee. Being open source, Dell-Fonality boxes are simpler than most too, and capable of self-installation — an additional savings worth thousands of dollars.

“The big five phone systems-vendors are going to wake up today and see Dell as a competitor and it’s going to be a watershed event — the end of the phone system-oligolopy,” Fonality founder Chris Lyman said.

It certainly is a watershed event for four-year-old Fonality (as Lyman tells Found|READ), which has been selling its own branded VoIP boxes since 2003. Fonality now has 5,000 business customers (and 130 employees). It could sure use Dell’s sales channel to scale. Dell has between 6 million and 7 million small business customers, according to IDC.

Fonality will get a standard revenue share: hardware proceeds go to Dell, software revenues flow to Fonality (Dell won’t disclose the exact breakdown). Users will get their bill from Dell. Tech support will be handled by Fonality for at least the first year, Lyman says. Dell’s service is available for purchase today, via phone. Customers can order systems at by February.