Change in PBX Marketplace Forces Users and Vendors to Alter Plans

A year after AT&T's divestiture of the Bell operating companies (BOCs), the telecommunications industry is still going through a shakeup, but not entirely due to the breakup of the telecommunications giant. The emergence of digital technology (the integration of voice/data and the birth of the fourth generation PBX), the shift by vendors to better address the small to medium-size market, and more professional telecommunications managers have all had just as big an impact on the telecommunications industry as the AT&T divestiture. Although AT&T's breakup is certainly a milestone in the annals of telecommunications, these other on-going changes may prove to be the true forces that will bring about all that has been promised for users of telecommunications products and services.

Few would argue that the private branch exchange (PBX) has, and will continue to have, a prominent role in this new world of telecommunications. Unlike its electromechanical predecessor (used in telephone company offices) the PBX of the future will be so different from today's switching systems to be almost unrecognizable to those users of "first generation" PBXs.

For now, the emerging "fourth generation" PBXs have stolen the limelight, and continue to be the hit of telecom trade shows. But the reason fourth generation PBX sales haven't taken off yet is due to its ill-defined nature in the minds of many users. In a report on future telecommunications technology prepared for the US Department of Commerce by Arthur D. Little, fourth generation switches are said to be those that embody the blending of data front-end processors and controllers with digitized voice. These switches may be thought of as digital PBXs with voice-handling capability. The report notes though, "There is considerable uncertainty as to exactly what form or forms of fourth-generation systems will be dominant."

But, according to the report, this situation won't last for very long. Arthur D. Little says that by 1989 the fourth-generation PBX will become ubiquitous, acquiring increasing features for both voice and data. From 1989 through 1994, users will begin turning to fifth generation PBXs, the report says. This PBX will consist of distributed, universally modular blocks of hardware and software working together to provide all possible combinations of voice and data needs. "The use of these systems for building management, security and even manufacturing process control will become commonplace," the report states.

To become the central controller in the office of the future, the PBX will need to control its two rivals--local-area networks (LANs) and computers. In its report "Fourth Generation PBXs," International Resource Development (IRD) notes fourth generation PBXs can be linked to terminals using one or two pairs of twisted wire, less wiring than would be required by a LAN. "While PBXs and LANs compete with each other for office automation dollars, it is expected that the technologies will eventually merge, and the end result being a single network that will handle voice and data from low bit rates to transmissions at megabits per second," according to the Norwalk, Connecticut-based firm.

As telecommunications technology changes from analog to digital, users will demand more and more from their communications systems, causing what some industry observers believe will be a greater impact on telecommunications in the US than the divestiture of the BOCs by AT&T. In a report on the change to digital technology, Frost && Sullivan notes that even though the large installed base of equipment, particularly in public networks, limits the speed of conversion, "The stage is set for the ultimate digitization of both network and subscriber equipment."

The New York City-based research firm says in its report "The Digital Telecommunications Market," the conversion will not necessarily be peaceful, as traditional suppliers in each equipment area will be challenged for market share by new entrants, often leaders in related fields applying computer expertise to telecommunications equipment.

This dramatic change is underscored by another report put out by Mountain View, California-based Input. According to the report, in 1981 some 90 percent of PBXs made were analog. By 1990, the firm predicts, this figure will be less than five percent. The study also finds that with the emergence of LAN networks, PBX vendors have begun sophisticated LAN-type capabilities as an integral part of their PBX products. These include data communications and office automation capabilities ranging from electronic mail to wideband data communications interfaces to mainframe computers.

It's not only the PBX itself catching the attention of users, but equipment that works with and behind the PBX, such as automatic call distributors (ACDs) and key systems. In a recent report, Arthur D. Little Decision Resources projects a $3.1 billion US market in 1988 for PBX enhancements such as programmable telephone sets, workstations, electronic mail and energy and security systems. In 1982 such enhancements accounted for $80 billion in revenues. By contrast, the report says, the market for new PBX lines, which was $2 billion in 1982, is expected to grow to only $2.9 billion in 1988.

Key systems offering many PBX-type features are also having an affect on the PBX market. In fact, Venture Development Corporation (VDC) has released a report that predicts key system shipments will top $1.7 billion by 1990. VDC expects that the installed base of key systems will grow at an annual rate of just under four percent through 1990 as the recent trend toward more small business employment and higher growth among small businesses continues.

In a nationwide survey of small businesses, the Natick, Massachusetts, firm found the penetration level for most advanced telephone features was very low. While this suggests an opportunity for manufacturers introducing advanced feature systems, VDC also noted a predisposition among potential users of advanced features for simplified service. VDC found significantly different patterns of usage and relative value amond different features suggesting that users may be more responsive to particular feature configurations, and that the technological sophistication of many systems available today exceeds the actual needs of users.

Industry observers report that the under 200-line user market is being targeted by PBX manufacturers. (See article beginning on next page.) Companies with fewer than 100 employees constitute a significant market for communications equipment and services, with good growth ahead in hybrid key telephone systems, low-speed modems and alternative long-distance services, according to another Frost & Sullivan market study.

"The Small Business Communications Market" states that these customers perceive their needs differently from large corporations, emphasizing cost and avoiding large capital expenditures wherever possible.

Key telephone systems are reported to be the most widespread type of small business communications equipment, while the PBX is still relatively rare in small business, particularly in facilities with fewer than 30 workstations.

But the use of PBX systems by smaller users is rising somewhat faster than key systems. Frost & Sullivan reports. From 181,000 in 1984, the number of installed is forecast to rise to 209,000 in 1988. This translates into a more dramatic increase in annual sales volume from $860 million in 1984 to $1.6 billion in 1990.

All indications are AT&T plans to take a big share of this market. After a slow start following divestiture, the reorganized company is back. According to Northern Business Information (NBI), AT&T Information Systems (AT&T-IS) finished 1984 with the largest order book for new digital PBX systems in the industry, with a customer base reported to be almost four times larger than its nearest competitor.

But all is not rosy for AT&T-IS. In its report entitled "AT&T PBX Strategy," NBI says that manufacturing restraints kept AT&T-IS from shipping in volume last year. A problem that resulted in stagnant market share for AT&T and continued gains for AT&T competitors.

These production problems had nothing to do with lack of capacity. The New York City-based company notes that AT&T has more production capacity than all the other PBX manufacturers combined, but is plagued by sub-assembly and component shortages.

Overcoming the problems posed by last year's sudden recovery could mean tough times ahead in the PBX market for all of AT&T's competitors, according to NBI. The market-research firm believes that AT&T's well planned migration strategy for the market will make it difficult for any competitor to pry loose AT&T's embedded base, forcing PBX vendors, who had hoped to convert AT&T analog equipment customers to digital, to look elsewhere.

And what about the seven BOCs divested by AT&T? It appears these new companies will not only be strong competitors--selling customer-premises equipment inside and outside their geographic areas--but have their own strong base of customers in Centrex users. Most of the BOCs are enhancing their Centrex offerings in order to offer many, if not all, the same features as digital PBXs.

Pacific Bell is a good example, offering what it calls Cenpac. The BOC reports that its Centrex management system's major components are the software that runs on an IBM PC/XT on the customer's premises, and the Master Control Unit, which runs on another PC/XT at the telephone company central office.

In its report prepared for the US Commerce Department, Arthur D. Little notes some of the forces driving the PBX market. One of these forces is the large number of competitors. More than the market will ultimately sustain.

Another of the forces is the proliferation of personal computers and the demand these devices place on voice/data communications. Also driving the market is the demand for features such as electronic mail and store-and-forward messaging. According to Arthur D. Little, technology will drive the real cost down, making PBXs with these features more attractive.

The report concludes, "One barrier that has existed within many types of end-user organizations has been the organizational conflicts between telecommunications, data processing, and office management functions. As they recognize these conflicts, more organizations are taking steps to integrate the three functions."

Just as the PBX is changing, so is the job of the telecommunications manager. Both have competitors that need to be conquered. One way to do that is by staying up-to-date on what is happening in the industry. On the following pages telecom managers will find the latest information on PBXs, including feature articles, a directory of PBX manufacturers, information on PBXs and related products, and literature available to readers.

COPYRIGHT 1985 Nelson Publishing
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