For 8x8, a battle over unified communications at the fringe

With tens of thousands of customers -- many of them small- and medium-sized businesses -- you'd think it would be easy for voice-over-IP provider 8x8 to obtain a few more.

But the 25-year-old company (it started as a semiconductor vendor) finds itself engaged in a skirmish in the U.S. state of Utah over its unified communications offerings, which the public service commission there believes should be regulated just like land lines should.

At stake? Progress. Businesses like unified communications technology both for its flexibility (answer a call anywhere) and its ability to convert a capital expenditure into an operating expenditure. But in many areas, existing legislation doesn't accommodate for it.

If the situation feels familiar, it's because we've seen this film before -- in 2003, with Vonage in Minnesota. From a legal standpoint, is your conversation information or telecommunications? That's the issue at hand.

As the old idiom goes, you can lead a horse to water but you can't make it drink. We spoke with Bryan Martin, 8x8's chief executive, as he stood waiting patiently by the proverbial source.

ZD: This Utah standoff is interesting in that it cuts to the very core of your business and its value proposition.

BM: It's an ongoing cost of doing business. We have to fight these kinds of fights on behalf of customers. I've got to look at how many customers I have in Price, [Carbon] County -- not a whole lot -- and what is the potential legal cost of fighting this battle. Do I just tell these customers, "By the way, because of your local regulators, we're not going to give you service?" Or do we do the right thing but lose money on it?

I'm not the only strong proponent of doing the right thing. Vonage, MagicJack -- them too.

ZD: That's a lot of trouble for very few customers. Is there an upside to this battle?

BM: We're pioneers. It's more from a purist viewpoint. The data flowing in and out of this medical office in Price, [Carbon] County, Utah is no different than the data and web traffic going out of there. We're getting -- our customers are getting -- taxed left and right. These services aren't just interstate by nature; they're global by nature. It is Internet data.

The network is only as valuable as the number of endpoints out there. Our business model is riding on top of the public Internet most of the time. If we allow this type of thing to shut us down, it really stifles innovation.

At the end of the day, I'm an engineer and I think the Internet should be free.

ZD: Unified communications: it's a buzzy term, but I have yet to really use a single channel to communicate in the workplace. At ZDNet, it's a hodgepodge of ShoreTel, Google, Skype, and so forth. What's the UC ideal, versus the reality on the ground?

BM: At the core, every one of our 30,000 business customers is buying from us their office PBX. We start already on your desk, in your office, taking your voicemails, recording your calls, taking your meetings -- all of that data is in the cloud.

We are allowing, from any point on the Internet -- your phone in your pocket, your phone on your desk, your web browser, all of these things -- you to access that data. Then we throw in hooks like video and video recording to the mix.

From a media perspective, it's a cluttered world. Our customers value us for organizing that in one place.

Unified comms used to mean aggregating your e-mails, your faxes and your voicemails in one inbox. Now you've got a smartphone in your pocket, a tablet in your meeting...the challenge out there is, with Viber or Polycom, they're bringing the device. If you're not the core PBX in the office, with access to all of that stuff, it becomes difficult for them to do more than just create more volume.

Whether Cisco or MYtel or Avaya, the data is locked in that box, or in a T1 circuit coming into that box. If I want to pull out a fax or recording that came in last week, our cloud solution makes it easy to get to it, especially securely.

We're in an information-rich society. Search engine companies are proliferating because of the volume of noise that sifts through our business lives.

ZD: Speaking of noise, some of these communications platforms -- many of them consumer -- are free. I'm thinking about my use of Skype, or Google's Hangout, to conduct editorial meetings. Are they driving down prices in the enterprise segment?

BM: Our base pricing on our flagship product has been at the $25 per extension per month model for quite awhile. Our average business is 10 lines -- the extremely small end of the market. That business is paying us $250 per month recurring. Just a long distance bill for that company from a Bell [Operating Company] is $2,000 per month. That's why I don't think we have pricing pressure.

The spectrum for pricing is quite wide, though. A lot of providers are bundling data, like Comcast. The spectrum we see out there is a $20 to $80 per month recurring cost for a business phone extension. Until the Googles and Skypes of the world offer more than a conference bridge...they just started offering music on hold, web conferencing, full-feature business replacement [features] -- I don't think we're going to see price erosion.

A 100-, 150-extension deal for us will get down to the mid-teens for pricing. We've been having discussions here about raising prices to our customers, because we think we're actually below market value for getting these services separately. We think there's elasticity in the upwards direction.

The other reason is that all of our vendors are raising prices -- [in reaction to higher prices for] power, fuel. At some point we'll have to pass that on to our customers. And, in some cases, they're paying, too; they're getting taxed. Pre-2006, it was only the FET ["Federal Excise Tax" for telephone services -- Ed.]. Now we're providing 9-1-1 [emergency service] and all these other costs, and those entities wanted their share. And localities have rewritten their laws to cover voice over IP.

ZD: Is regulation a long-term threat for unified communications?

BM: There's certainly the long term threat for regulation. The difference is that there's no hard infrastructure -- it ends at the datacenter. It's not the same as trenching down the street and installing the line.

But now you can't buy something from Amazon.com without sales tax. It shows that the technology has evolved into the mainsteam to the point where it becomes an important revenue source for public [agencies]. I don't think it's a bad thing; I think it's kind of cool that a bunch of computer geeks who wanted computers to talk to each other are now [providing] essential business tools.

ZD: What are customers saying to you? Do they get UC?

BM: Customers are really valuing in these services the flexibility. You don't need to wait 30 days to set up a new phone line. These services can be widely distributed across employees in many locations or for employees who are highly mobile. There's a medical services company here in San Francisco that has 1,400 sales people all over. He told us he wanted one bill for all of them. He used to get 1,400 expense reports.

The other thing is that they wanted to forward an existing sales phone number to a new person when the first person leaves the company. A doctor's office doesn't want to learn a new phone number [to call a healthcare provider]. That's another thing.

For employees in the field, like airline [employees that must file incident reports], it's being connected to the home office on the tarmac.

It's also a disaster continuity and recovery thing. If a fault goes off here [at 8x8 headquarters in San Jose, Calif.], companies can fail over to our cloud. When we had the '89 earthquake, the payphones stopped working because all the handsets fell off the hook.

ZD: So what are your challenges, then?

BM: The challenge we face is turning new customers onto these technologies. We go into a 10-person business, and they may not have even have a router. Or it's one of those old blue-top Netgear models that can't carry five or six lines.

LANs are the weak link. Three or four years ago, the basic rate DSL that served these customers were the choke point. There were terrible circuits out there. More and more small business customers are on cable or fiber connections. Now their last mile connection is state-of-the-art, but their LAN...our network is only as good as the service you hook us into. The 3G connections in downtown San Francisco or Manhattan are not capable of [reliable] voice connections. So we're out there pitching UC, but if the data connection's not there, you're not going to be able to do that. Even with 4G and next-generation networks, we're seeing a lot of variability.

ZD: Has that affected sales?

BM: It has affected how we sell services. We used to say, "Plug it in and it works." Now our sales people are equipped with a two-minute simulation, or we can set up software to log and isolate problems to set up customer expectations. Sixty to 80 percent of customers can work without changes to their network. The rest will have to spend some money to upgrade their network. Worst case scenario, we recommend changing providers, but we don't like doing that because it brings back that 30-day truck delay.

There's a new codec that's much more resilient to packet loss: ILBC. We've started using it in our mobile apps on the Apple and Google platforms, but none of the carriers support it yet. So we're transcoding it back to a standard format. But it's made a dramatic improvement.

At the end of the day, you've got to have a lossless connection. The technology will get there. We're miles ahead of where we were a few years ago.