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Channel strategy

A good friend tells a story about a previous job in product development for a minicomputer manufacturer. He was given the task of leading the development a large business telephony switch, a PBX, using the company’s hardware and a new protocol, voice over IP protocol (VoIP). Nowadays VoIP is common and sits at the middle of national telecom provider networks – most of your calls will at some point be converted to VoIP and back again, even if delivered via the Plain Old Telephone Service at either end. At the time VoIP was new and not used commercially.

The development was a success. They took the product to British Telecom (BT), who installed it in a Very Large Bank as a trial. The bank was absolutely delighted with the equipment and wanted to buy it for its head office. BT, however, refused to sell it!

At the time telephone switches were big, proprietary devices that sold for anything from tens of thousands for a few lines up to about £5M for a call centre version. At the same time they were BT’s 3rd largest profit stream after calls & lines and private circuits. BT could sell the bank an old-style Nortel switch for several million, or the new VoIP switch for a couple of hundred thousand. It had a 60% market share of the UK PBX market. Given that the CEO would have to tell the shareholders he was cannibalising one of their biggest revenue streams in the name of progress, it was no contest.

So the minicomputer manufacturer decided there was no market for the product and cancelled it! VoIP is, of course, a disruptive technology. It disrupted the big switch manufacturers like Nortel or Marconi and their sales channels like BT. Those that survive make their profits other ways. BT makes its profits from the broadband services over which VoIP calls travel.

Nowadays VoIP is common and a whole range of new VOIP switch manufacturers and handset manufacturers have arrived. BT sells these switches but makes most of its revenue elsewhere. And the original mini manufacturer? It’s not in that market anywhere. It struggled along until it was bought.

The kindest thing we can say about the mini maker is that they were probably expecting immediate, high volume sales from the channel that owned most of the customers, so chose to focus on more profitable business. They wasted the money on the development – and switches are expensive to develop – by not understanding the motivation of their chosen sales channel. They could have chosen to sell in competition with BT, or found a channel that did not have a conflict (a lot of consultancies did very well out of the integration of VoIP telephony into business IT systems). By not doing so they gave up the opportunity to be a market leader in a completely new industry.