Hanging on the Telephone

image of 45 record: Blondie's "Hanging on the Telephone"

It’s a fact: you run a business, you need a phone.

And once you grow to the point where it’s more than just you, you need a phone system.

It’s no secret that all the original telcos (Ma Bell and all the Baby Bells) have largely merged together again, and are seeking to get out of the copper line business as fast as possible. It’s expensive to provision powered, circuit-switched voice service from the CO (Central Office, in Bellspeak) to your home. I KNOW it works when your power is out and you have no Internet at home — but they don’t care. They’re a business after all, and the government-tariffed subsidies that used to provide “last mile” phone service for Grandma on the farm are gone — consumers and the industry have voted, and those dollars have shifted to Cox, Verizon, Comcast, etc. etc. That’s why your cable modem has both an RJ11 jack and a battery in it: if you want “landline” phone service at home (over the copper wires in your wall) it’s only copper service until it gets to that cable modem — then it’s an all-digital service between you and their network. As we learned during the 2007 Tulsa Ice Storm, this will only work as long as your battery lasts, and the batteries in the big green metal boxes up the street…

Similarly, businesses have largely been given heavy pricing disincentives to replace their old internal switched-signal phone systems with the replacement: Voice Over IP phones, commonly called VOIP.

A bit of history: VOIP is not really new, but the implementation has changed and grown up over the years. Cisco’s CallXPress 3 product blazed this trail back in the early Aughts. It used cool $500 phone sets and ran over Ethernet, but the trunk service was still largely copper once it left your premises. It gave businesses a nasty taste in their mouths, and it didn’t leap off the launchpad. Having to contract with expensive engineers to tweak and smooth out the jitter (VOIP jargon for “the sound is crappy due to not enough bandwidth”) looked like a cash hemorrhage to the finance folks. Early implementations tried to cut corners by using the same data network that went to the PCs and servers which meant that every time something new was added and used a lot of data bandwidth, there was a potential to break or degrade the phone side.

Nowadays, VOIP phone installations have separate Ethernet drops and switches as a best practice, which increases the cost but makes for a more stable product. The phones themselves, being little dedicated-function computers, now cost between $125 — $200.

Now that we’ve moved to an all-digital environment with sufficient Internet bandwidth, the shift in VOIP is now towards Cloud-hosted VOIP. The phone “system” no longer lives at your business but at the provider. Same with your voicemail messages: they’re not stored in your office but in the cloud equipment. In your data rack, you now have a gateway/router (Edgewater Networks is the big player here), which connects both to your POE switch and the Internet, which in turn connects to all your shiny new phones (made by folks like Polycom). Trivia: as with all VOIP phones, the comfortable and familiar dial tone you hear is merely an artifact generated by the system to make us tradition-bound humans feel comfortable before we start dialing.

Cloud-hosted VOIP presents alternatives for how you, the business owner, pay for their new phone system: capitalized (CAP) vs. expensed (EX). There are components of each, or none, based on what you buy, who from, and how they package it.

Without mentioning any names, there are two ways to package and sell VOIP phone systems:

Buy Your Own Hardware (CAP+EX). This is (a) cheaper per month in expense, and (b) you can capitalize/depreciate the hardware costs. If you’re a nonprofit, you can perhaps find a capacity-building grant that will look favorably on your request. In this scenario, you own the gateway, the POE switch, pay for the additional phone drops, and the phones up-front. You’ll pay a monthly fee to have each phone “lit” so it’ll ring and provide voicemail, etc. etc. As of August 2019, the monthly fee for service per phone runs between $19.95 — $25.00, and the hardware costs tooutfit a 50-person office will run between $16,000 — $30,000, depending on one’s existing wiring and other factors.

Lease to Own (EX). This is a very popular package with cloud-hosted providers. They provide it all: the gateway, switch, phone drops, and phones for a monthly fee, with a 5-year contract for service. You pay more, but if anything breaks the provider will roll a truck, replace the component, and you’re back in business quickly. You pay for this peace of mind: over the course of your contract, your provider will make between $44,000 and $52,000 in profit (assuming no equipment dies).

Neither is inherently bad or good — as always it depends on how you as a business choose to pay for the service you use. In most of the nonprofit world, capital is hard to come by, so the pure expensable option is slightly easier. You as an Executive Director can design a budget around that, and make sure it happens. Whereas a for-profit enterprise, where depreciation and “accelerated cost recovery” has been the norm since the 1980s, it’s easier to make part of the service an asset.

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