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Explain VoIP technology when delivered to the business marketplace.

To demonstrate the difficulties encountered in the acceptance of a new technology in the business marketplace.
To explain VoIP technology when delivered to the business marketplace.
To determine the best next step for this fledgling technology company.
To explore the use of open source applications software in a firm.

Overview

Lawrence R. Milkowski, President and CEO of VoIP2.biz, Inc., an Indianapolis-based startup supplier of Voice over Internet Protocol (VoIP) telephony to the small and mid-size business market, is faced with a major decision for his fledgling company. It was Friday, June 23, 2006 and he had to prepare his recommendations on the next steps for the company to present 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 cash flow to breakeven.

The concept behind VoIP2.biz came from some experimentation in early 2004 by personnel working for Harley Services Corporation (HSC). Milkowski and other personnel in HSC explored the market for VoIP services and evaluated several then current VoIP service providers. As a result of these investigations, the HSC project team designed a system they believed could deliver a cost competitive IP PBX solution for implementing VoIP via an open-source software platform.

Beginning in October 2005, VoIP2.biz was spun out of HSC as a separate corporation. HSC retained 70% of the stock in VoIP2.biz. The first steps were to complete the infrastructure and staffing of the business and create some presence in the market. 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 manufactures and carriers. These actions gave VoIP2.biz the ability to offer a complete end-to-end VoIP solution for business customers. Milkowski and his team of 5 engineers and sales professionals also sold the VoIP2.biz solution to 22 customers.

Through its business activities to date, management was convinced that the open-source solution offered by VoIP2.biz provided a small to mid-size business customer a complete telephone system solution for ten to 30% of the cost of a new proprietary solution from traditional vendors. For a detailed description of VoIP2.biz’s services, see Exhibit 1 below.

By June 2006, VoIP2.biz was well on its way to completing its initial efforts. 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 $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.

Beginning in July 2006, management planned to implement the next phase of VoIP2.biz’s plan. This plan was divided into two segments. The first segment of the plan, from June 2006 through June 2007, called for entry into five markets in the Midwest (in addition to Indianapolis) with these characteristics:

a population of at least 500,000 and the presence of approximately 200,000 business telephone lines
no other competitor selling an open-source IP PBX platform
an effective reseller relationship with a CLEC (competitive local exchange carrier) operating in the marketplace
the availability of suitable authorized distributors; and
the availability of local staffing with the appropriate experience, skills, and prospect network.

The second segment of the Phase II plan would start in July 2007 and last until June 2010. During this time period, the company would enter an additional two markets per quarter for six quarters, bringing VoIP2.biz’s Midwest presence to 18 markets by late 2008 and achieving a revenue exceeding $60 million by the end of 2009. The plan called for selling the company to a larger provider sometime during 2010.

In order to carry this out, management planned to raise an additional investment of $3 million. Milkowski believed that his plan was an excellent investment because the company had successfully sold and implemented the VoIP2 system to several customers in the greater Indianapolis marketplace, and the firm was poised to enter several additional Midwestern markets. A detailed breakdown of anticipated cash flows from the implementation of the plan is included in Exhibit 3 of the case.

Milkowski knew that in order for the Board of Directors to accept the option of moving forward, he would have to explain how he and his team were going to increase acceptance of the technology at a much faster pace without spending huge amounts of money. But he would have to consider other options for the future of the company.

Epilogue

At the meeting, the Board of Directors decided to sell the company to another firm. Milkowski negotiated the deal and it was closed in September 2006.
Exhibit 1
Detailed Description of VoIP2.biz’s Services

VoIP2.biz offerings

The VoIP2.biz V2B System 1 IP PBXSM, which provides the customer a VoIP solution for their enterprise
The VoIP2.biz V2B Network ServicesSM, which provides the customer connectivity to the telephone network for origination and termination of calls, and Internet access
The VoIP2.biz Hosted Voice Services, which provides the customer a Centrex-like telephone system capability, including network services

VoIP2.biz V2B System 1 IP PBXSM

The V2B System 1 IP PBX is an Internet Protocol (IP)–based telephone system capable of originating, routing, delivering and managing voice communication for a customer enterprise. The IP PBX is implemented on an HP or IBM server running Linux and is installed by VoIP2.biz personnel on the customer’s premises. VoIP2.biz integrates the system into the client’s data network.

The V2B System 1 IP PBX includes most of the commonly available communications features, including:

Automated Attendant Conference Calling “Meet Me” Capability
Call Forward Do Not Disturb Music on Hold
Call Park External Line Access Remote Users
Caller Log Flexible Numbering Plan Voice mail
Calling Name Display Hunt Groups Voice mail to E-Mail
Calling Number Display Interactive Voice Response

Through VoIP2.biz’s implementation process, the company defines the customer’s specific call handling requirements and implements them in the V2B System 1 IP PBX. In most cases, these requirements include setting up specialized call handling, and applications such as voice mail, auto attendants, interactive voice response (IVR) and an automated call distributor (ACD). These applications are included in the V2B System 1 IP PBX.

VoIP2.biz sells and installs, as an option, a graphical user interface (GUI) that runs on top of the Asterisk application and dramatically simplifies the administrative interface.

As part of the system implementation, VoIP2.biz personnel interface the V2B System 1 IP PBX to the client’s existing PBX or KTS so that the current analog phones can still be used; sells and installs new digital telephone sets; or does a combination of both.

VoIP2.biz personnel often propose a migration plan to its customers. This plan calls for installing the V2B System 1 IP PBX first; then moving the voice network over to it, substituting IP trunking for POTS circuits; then moving the voice mail and call processing to the V2B System 1 IP PBX; and finally moving over all of the handsets and decommissioning the current system and voice network. This migration strategy reduces the perceived risk to the client and gets the network savings started as soon as possible.

VoIP2.biz V2B Network ServicesSM

While the V2B System 1 IP PBX can be installed and operate with an existing POTS telephone network, the operational savings of VoIP, beyond the cost savings of the IP PBX itself, is best realized through consolidating the customer’s voice and data network spending onto one network. Replacing voice telephone lines or trucks from the ILEC with data circuits from VoIP2.biz can generate a significant monthly savings for the customer. These new data circuits, combined with call origination and termination services, allow the V2B System 1 IP PBX to place and complete calls over the IP network. In summary, through VoIP2.biz’s V2B Network Services, the company is providing:

High-speed call trunking and Internet access
Call origination and termination, including long distance and E911
Local and toll-free number portability

The V2B Network Services Schedule includes:

Internet Access—In order to assure quality of service, VoIP2.biz provides high-speed data circuits that also include Internet access. These circuits can augment or replace the customer’s existing Internet access.
Dial Tone—VoIP2.biz delivers dial tone to the desktop via the V2B System 1 IP PBX or remote user via VoIP2.biz provided facility.
Phone Number Porting—At the customer’s option, VoIP2.biz personnel can, in most cases, move the customer’s existing direct inbound dial (DID) phone numbers into the VoIP2.biz service, and the customer will receive inbound phone calls on these numbers just as they have done in the past.
Call Origination—Users of the VoIP2.biz service can originate or place phone calls, both local and long distance.
Call Delivery—Calls will be delivered via the VoIP2.biz network to (1) other callers on the network, (2) local destinations, (3) long distance destinations, or (4) to other carrier facilities, as directed by the customer.
Additional Services—including 911; E911; Directory Assistance or 411; and operator services.
VoIP2.biz V2B Hosted Voice Services

V2B Hosted Voice Services is a hosted Internet Protocol (IP)-based voice service that delivers the same feature functionality that is available in the V2B System 1 IP PBX bundled with the communications features of the V2B Network Services Schedule described above. This packaged offering allows the customer to utilize VoIP2.biz’s capabilities and realize the savings of VoIP while paying a small start-up fee and a fixed monthly fee per user per month. This service bundles V2B System 1 IP PBX capabilities with the necessary network services into an easy to buy package.

The V2B Hosted Voice Services Schedule includes:

Internet Access—In order to assure quality of service, VoIP2.biz provides high-speed data circuits that also include Internet access. These circuits can augment or replace the customer’s existing Internet access.
Dial Tone—VoIP2.biz delivers dial tone to the desktop or remote user via VoIP2.biz provided facility.
Phone Number Porting—At the customer’s option, VoIP2.biz can, in most cases, move the customer’s existing direct inbound dial (DID) phone numbers into the VoIP2.biz service, and the customer will receive inbound phone calls on these numbers just as they have done in the past.
Call Origination—Users of the VoIP2.biz service can originate or place phone calls, both local and long distance.
Call Delivery—Calls will be delivered via the VoIP2.biz network to (1) other callers on the network, (2) local destinations, (3) long distance destinations, or (4) to other carrier facilities, as directed by the customer.
Voice Mail—VoIP2.biz’s Voice Services includes an integrated voice mail system, with voice mail to e-mail conversion.
Additional Services—Including 911; E911; Directory Assistance or 411; and operator services.

Questions for Discussion

1. At the time of the case, what had Milkowski and the VoIP2.biz team accomplished?

By June 23, 2006 (the time of the case), VoIP2.biz has developed:

vendor relationships for the network services and equipment they are bundling and reselling
the infrastructure to process voice calls and Internet connectivity over the service offerings
the business processes for acquiring new customers as well as billing, customer service, and help desk
a sales strategy, marketing materials, and a Web site
more than 20 initial customers who are paying for service
a stable technology platform

2. At the time of the case, what had Milkowski and the VoIP2.biz team not accomplished that several of the Board members felt should have been accomplished?

Several of the members of the Board of Directors expected the company to generate enough operating income to be at breakeven by the end of June 2006. The company would not have achieved that goal. Revenue was still falling short of operating expense. While few businesses that have been approached to buy the service have declined, the sales cycle is several months long.

3. Why does Milkowski believe that VoIP2.biz should proceed with the next phase of the business plan at that time?

The VoIP market for businesses represents a very large opportunity—over a million telephone lines for small enterprises in Indiana alone.
The market is underserved by traditional vendors.
Significant savings are possible by implementing the VoIP2.biz solution.
The technology already exists; nothing new has to be invented.
Recurring revenue is substantial.
VoIP2.biz has a first-mover advantage in the market.

4. What options for future activities should Milkowski present to the Board?

Milkowski should identify the following options for presentation to the Board:

Proceed with the plan as laid out in the case. The company has the chance of making it “big time.” The potential is huge. While the sales cycle is long, the acceptance rate to date is very high. The plan for expansion is solid with markets to be identified and a proven marketing plan already in place. Milkowski could seek outside investors to take the company to the next level, perhaps cashing out the existing investors.

Close down the company now. This step would leave customers without a telephone company and perhaps create significant liability for the owners unless a substitute could be found. And,the service seems to be working for existing customers.

Sell the company to another firm. There are likely other firms interested in this market as a supplement to their existing business. The providers of bandwidth to VoIP2.biz could possibly be interested. Current customers have contracts which nearly guarantee revenue for the length of the contract period.

Slow down the rate of growth in the plan which would require less funding in the short term. Based on the assumptions made, this alternative could allow the company to reach cash flow breakeven faster than the current business plan.

Ask the Board for another 90 days to come to cash flow breakeven. There is a large contract mentioned at the end of the case which could provide sufficient cash flow to make the company reach its goal of cash flow breakeven.

Significantly reduce expenses. The only major expenses that do not directly affect quality of the sales effort or customer service are salaries of the top people. Larry and his direct reports could take a substantial pay cut in trade for stock options or other types of deferred compensation. Cutting salaries of the top people in half could quickly make the company at the breakeven level on an operating basis.


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