Does the Hotel Telephone Have a Future?

31st August 2005 (Last Updated August 31st, 2005 18:30)

While the costs of running a telephone system remain constant, revenues get smaller and smaller. It’s every controller’s nightmare. That old telephone switch needs to be replaced soon, an enormous expense. Where will the money come from? Doug Rice, executive director, HTNG, reports.

Does the Hotel Telephone Have a Future?

Guests just don’t seem to care. They merrily use their mobile phones, calling cards, email, pagers and SMS to do things that used to generate revenue from the hotel telephone.

How could they be so short-sighted? Can’t they see that hotels need to make money on telephones? Why shouldn’t they be willing to pay a hotel $75 for a five-minute international call, even though they can place the same call on their mobile phone for $5 or over a high-speed internet connection, using a free tool like Skype, for less than $0.10?

THE DEATH SPIRAL

The more the hotel industry tries to recoup telephone revenue by raising rates, the worse it gets. Outbound telephone calls from hotels are, with few exceptions, getting fewer and fewer each year.

In fact, call revenue dropped more than 50% in the USA between 2000 and 2003. By 2004, local and long distance revenue was just $2.00 per occupied room night, or the equivalent of two to three local calls.

If the current trend continues, most hotels in the developed world will have essentially zero telephone revenue within a few short years.

In short, hotels that need to buy new telephone systems risk spending hundreds of thousands of euros, pounds or dollars for a system that guests will use primarily as an intercom so they can order room service. Clearly, we need to do something to raise revenue or to reduce costs.

Equally, though, we need to ask ourselves what makes telephones so different from other guest room features. Do they really need to be profitable in their own right? We don’t expect beds, bathrooms, running water, or heat to generate direct revenues and profits. Rather, we expect that the provision of these features will be reflected in the room rate we can command and the occupancy we can drive.

Telephone service should not be entirely free, but we need to apply the same kind of thinking to telephones as we do to other guest-room features and amenities.

“Outbound telephone calls from hotels are, with few exceptions, getting fewer and fewer each year.”

When we look at future opportunities to raise revenue or reduce cost, several challenges are evident.

With dramatic declines in long-distance and international direct dial (IDD) rates in most developed countries, the vast majority of the costs of traditional telephone systems are now fixed rather than call-based.

Most costs are accounted for by switches, cabling and handsets; by add-on software and hardware for call accounting, voice mail, and emergency response; and by PBX staffing (which at many hotels is already at the minimum). The opportunity to cut costs in traditional telephone installations is smaller and smaller each year.

Traditional telephone systems do not lend themselves easily to additional services that might be used to generate new sources of revenue. They typically do one thing well, which is to place outbound calls.

While exceptions exist, the hotel industry as a whole has a reputation for price-gouging on long-distance and IDD telephone calls. Even those hotels that have rationalised their call pricing suffer from the (generic) guest perception that hotel telephones are priced excessively.

Some hoteliers have gone to great lengths to force guests to use hotel phones, further exacerbating negative perceptions of hotel telephone service. They install equipment that jams mobile phone signals, or they implement policies that block calls to local-access numbers for calling cards. More often than not, the primary impact is to drive guests to competing hotels on their next trip.

Eliminating the hotel guest-room phone it is not an option. Phones perform an important life-safety function, and also represent the primary means for guests to communicate service requests to the hotel staff from their rooms.

IP TELEPHONY: A SAVIOUR?

Clearly, the traditional hotel telephone system is in trouble. Will the next generation phone system – referred to as IP telephony because it is based on the communications standard called internet protocol (IP) – offer any solutions?

Before answering that, we need to clear up some terminology. IP telephony is frequently confused with Voice-over-internet protocol (VoIP). VoIP gets a lot of attention in mainstream media because it promises (and can in fact deliver) inexpensive or free telephone calls.

IP telephony and VoIP are related, but they are very different, and the greater benefit for hotels lies in the less-understood IP telephony field, rather than with better-known VoIP.

IP telephony refers to the all-digital infrastructure that allows traditional telephone calls, video calls, and other types of information to be carried on internet protocol networks – which includes the internet and most corporate and home networks.

In the simplest implementation of IP telephony in a hotel, the traditional PBX is replaced by a network switch that is identical or similar to those used in data networks, plus software that manages placing and routing of calls.

Dedicated telephone cabling is eliminated in favour of standard network cable (such as CAT-5). Analogue telephone handsets are replaced by small computers that look like phones and plug into the network, and the network includes a device that connects to the traditional public telephone network to place and receive external calls.

VoIP, on the other hand, is just one of many applications that can run on an IP telephony infrastructure. VoIP refers specifically to the transmission of a voice conversation on an IP network, which can be the internet, a corporate wide-area network, or a local area network within a hotel or other building (even a wireless network).

The media hype around VoIP relates to its ability to greatly reduce or even eliminate long-distance costs. This benefit can be very large for individual consumers, but for volume buyers such as hotels, the rates may be only modestly less than their current long-distance pricing from traditional carriers.

The simple implementation described above uses VoIP for calls inside the hotel (on a local area network), but uses the public telephone network for calls outside the hotel. It is also possible, but less common today, for hotels to use VoIP over the internet for calls outside the hotel.

VoIP holds the potential for cost savings, primarily on long-distance charges. In a corporate hotel organisation, calls between corporate offices and hotels can be routed over the internet or corporate network for free, bypassing the public telephone network entirely, anywhere in the world that high-speed internet access is available.

Outbound guest calls can be routed over the internet to VoIP service providers rather than to traditional telephone carriers, reducing international per-minute costs to $0.01 or less to many countries. There can still be call-quality issues, although these problems are becoming less common over time.

While the cost savings available from VoIP are certainly welcome, in most locations they pale in comparison to the revenue potential of many of the other applications that IP telephony can support.

IP telephone handsets are really just specialised computers, and are capable of supporting the same variety of applications as a personal computer. Many have digital displays similar to (although typically smaller than) a personal computer. In theory, anything that can be put on a computer screen can be put on an IP telephone – text, graphics, links, action buttons, and menus, for example.

Some of the IP telephony applications that have been demonstrated or implemented for hotels include:

  • Integration with room controls, allowing a guest to operate thermostats, drapes, call lights and electrical appliances from the telephone keypad and display, even saving their preferences for use on a future stay or in a different hotel.
  • Integrated messaging, where guests can retrieve voice, text, fax and email messages through a single interface (which can be extended to the television set, or the guest’s PC, if the phone lacks an adequate display).
  • Information applications, such as weather forecasts, flight schedules, stock quotes, maps and news headlines.
  • Automatic call forwarding and ‘follow-me’ capabilities, on the hotel network, to wireless devices within the hotel (great for key staff), and to the public network (such as to a guest’s mobile phone).
  • Video calling.
  • Personalised speed-dial directory for each guest, plus recall of numbers recently called or received.
  • Group-related functions, such as speed-dial directories for in-house guests who are part of the same group.
  • Pushbutton access to hotel departments, without the need to program each phone
  • Multimodal conference calls that can include webcasts, video and sharing of applications such as presentations or documents.
  • Instant text messaging with mobile phones, pagers, and other IP telephone devices
  • Streaming audio, such as web radio stations.
  • Delivery of relevant information to hotel staff (on their own handset display) when a guest calls a hotel department, including data stored in
    the guest profile (such as food and beverage preferences).
  • Display menus that allow a guest to order breakfast, to make a restaurant reservation, to set do-not-disturb, or to request laundry pickup.

Some of these applications are relatively low-value and might be offered for free as a service enhancement, while others offer some cost-saving opportunities in hotel operations.

Others, however, represent substantial revenue opportunities for hotels, either through user fees or advertising or to earn referral commissions. Imagine an onscreen menu for local restaurant reservations that could confirm a table without human intervention – how much would nearby restaurants pay for that business? And while some of these applications require upgrades to equipment beyond the basic IP telephony infrastructure described above, many of them are available even in the most basic installations.

In addition to the revenue potential, IP telephony holds many opportunities for short- and long-term savings.

  • IP telephones can operate on the same data network as other guest-room devices, including televisions, high-speed internet access, minibars, energy controls, and door locks. One cable infrastructure is ultimately much cheaper to build and support than several. Retrofits can be, but are not necessarily, expensive; many hotels already have either coaxial cable for televisions, or CAT-5 network wire for high-speed internet, and it is technically possible to reuse either of these to support IP telephony in guest rooms.
  • Because IP telephone systems can share the same network with the PMS, point of sale, television, and other systems, they can very easily integrate with these systems to coordinate the guest experience or hotel operations. As an example, one integrator implemented a multi-modal wake-up call, initiated from an IP telephone. At the appointed time, it launched a guest-specified sequence of events that could include turning on and tuning a radio or television station, opening the drapes, turning off the do-not-disturb light in the hallway, turning up the thermostat, and turning on the coffee. This proof-of-concept was developed in a matter of days, and was a hit with hoteliers at a major trade show earlier this year.
  • Hotels with good broadband connections can easily share the call-management software, support, and even PBX operator staff with other hotels. While the network and telephone devices are always local to the hotel, the software that runs them can be located anywhere – as can the operation and support services.
  • Reconfiguring telephones for fax, direct-inward-dial (DID), and meeting room requirements no longer means moving wires on patch panels; these changes can be made easily from the system management console via a web browser.
  • Many IP telephone systems come with tightly integrated call accounting, voice mail, fax and emergency response modules, allowing all systems to remain completely synchronised in real time. With traditional systems, the limited interfaces often result in false message waiting lights, missed or erroneous call postings, lost messages and other problems.
  • IP networks are as future-proof as it is possible to be. As long as the internet is around, the capabilities of IP telephone systems can only grow. So while the initial cost of an IP phone system may be higher, the long-term ownership cost will almost certainly be less.

As much as IP telephony can deliver revenue opportunities or cost savings today to many hotels, there are still important drawbacks, and the timing is not yet right for all hotels to consider migration.

  • IP telephony requires network-grade cabling to guest rooms (CAT-5 or better). Depending on how existing cabling is installed in an existing hotel, replacing it can represent a major cost. An alternative is to run the network over existing coaxial cable used for televisions. However, this approach is generally practical only if the hotel owns the cable itself. In many cases, the video services provider retains ownership or control of the coaxial cable, and some do not permit or support this capability.
  • Initial costs of the system are typically higher, primarily because IP telephone handsets cost more than traditional analogue handsets. These costs will come down as the number of installations grows. Current costs are affordable for higher-end hotels, but can still be high or prohibitive for mid-market and economy properties.
  • Most IP telephony systems were developed initially for the corporate office market and are only gradually gaining all of the hospitality-specific features supported by legacy hotel PBX systems. However, many systems are now getting close, and within one to two years this gap should essentially be closed, at least by several vendors.

IP telephony systems can support traditional telephone handsets and wiring, so it is possible to move to an IP telephony system without replacing guest-room handsets. Of course, few of the IP telephony applications will work on legacy handsets.

Nevertheless, some hotels may opt to install an IP telephone system today and to upgrade handsets in some or all guest rooms later, as opposed to buying a legacy telephone system that cannot meet future needs.

This strategy can reduce the capital costs substantially while still future-proofing the initial investment. Some hotels, for example have opted to install IP phones only in premium room types.

“IP telephony holds the potential to restore the revenue stream that hotels have lost to calling cards, mobile phones, and internet communications.”

IP TELEPHONY: WHEN NOT IF

There is little doubt in the telecommunications market that the days of the traditional PBX switch are numbered. Multinational corporations, which represent the lion’s share of sales for manufacturers, are rapidly moving to IP-based telephony.

We expect that within a few years, traditional switches will no longer be manufactured. Of course, existing switches will continue to function for a decade or longer. But make no mistake, if you buy a non-IP switch today, you will one day need to replace it due to obsolescence. And in the meantime, you will forego all of the potential benefits of IP telephony.

In summary, IP telephony holds the promise of lower costs for hotels (at least in the intermediate to long term) and significant new revenue opportunities – modest to start with, but growing over time.

IP telephony frees the hotel from needing to own or manage its own on-site switch, and can often share or re-use existing cabling within the hotel. It can also frequently share circuits between the hotel, the internet and the public telephone network, thus reducing monthly operating costs.

More importantly, IP telephony holds the potential to restore the revenue stream that hotels have lost to calling cards, mobile phones, and internet communications. The IP telephony infrastructure makes it simple to add features that someone (guests, advertisers, meeting planners, service providers, even people outside the hotel who want to communicate with guests) will be willing to pay for.

A re-think of the current pricing models will be needed in order to make this transition as profitable as it can be. Hoteliers need to ask themselves which telecommunications functions guests will demand to have for free or at a very low cost (generally the ones where they have low-cost alternatives, such as mobile phones); which they will be willing to pay for; and which can be built into a higher room rate or used to drive greater occupancy.

Ultimately, long distance and IDD pricing will need to be more competitive with mobile phones and internet calling, while other charge services can replace the lost revenue.

The hotel telephone still has a future. But it will not look anything like its past. The transition will neither be inexpensive nor painless, but properly managed, it can be profitable.