Hybrid VoIP and TDM Communications Environments to Drive Demand for Gateway Functionality

Enterprisemedia gateways have evolved over the past 10 years. From relatively simple devices with straightforward transcoding and protocol translation functionality they have now become critical network elements and are increasingly incorporating other functionality. While single-purpose, plug-and-play gateways will continue to appeal to certain customers, multi-purpose appliances are likely to become more common as gateway functionality is embedded into other network elements and gateways are enhanced with new features and capabilities.

Over the past four to five years, the gateway market experienced significant growth as businesses IP-enabled their Time Division Multiplexing (TDM) telephony infrastructure in order to realize cost savings on long-distance communications, a practice known as toll bypass, and as they increasingly adopted IP telephony platforms that needed to be interconnected with the public switched telephone network (PSTN). In 2008, toll bypass and IP telephony still accounted for over 80 percent of the total ports shipped, but their share is likely to decline going forward as SIP trunking and application integration drive new demand for gateway functionality.

Voice over Internet protocol (VoIP) access and Session Initiation Protocol (SIP) trunking services are rapidly gaining traction and are providing TDM and IP customers with significant cost savings by enabling them to converge access lines and reduce long-distance charges. They also provide some additional benefits such as network-based fixed-mobile convergence (FMC), voicemail and auto attendant and voice virtual private networks (VPNs) with abbreviated dialing across multiple sites. Since the majority of the installed telephony equipment is still TDM and interoperability with IP telephony platforms is limited, growing penetration of VoIP trunking services will be highly correlated with demand for gateway functionality. 

Internet protocol (IP)-based applications such as contact center, conferencing and unified messaging (UM) have created some new opportunities for gateway vendors over the past couple of years as these applications needed to be integrated both with premise-based telephony infrastructure and carrier TDM networks. Application integration is likely to account for a growing percentage – from 10 percent to about 15 percent – of total ports shipped over the next five to six years.  

The gateway market experienced growth deceleration in 2008 due to a number of factors including the beginning of the recession and the maturation of the traditional gateway markets – IP telephony and toll bypass – and the slow take-off of nascent markets such as SIP trunking and UC. In 2009, the market is likely to experience a decline mostly due to the tough economic conditions. Pent-up demand is expected to drive growth in 2010 and onwards.

In 2011 and beyond, the market is likely to continue to grow driven by mass adoption of IP telephony, branch office integration, and solid growth rates in the SIP trunking and UC markets. Due to market maturity and rapidly improving SIP interoperability among vendors and service providers, annual growth rates are not likely to ever reach the heights of previous years and are likely to peak in 2011 and 2012 and start decelerating towards the end of the forecast period.

Enterprise media gateway vendors will face a number of challenges over the forecast period as follows:

•The need to ensure interoperability with multiple CPE vendors and VoIP service providers

•Cisco’s dominant market share and router-based approach, practically limiting all other vendor’s ability to grow

•The need to differentiate in order to remain competitive

Market growth will be driven by the following factors:

•Growing IP telephony penetration will continue to drive demand for enterprise gateways required to connect IP CPE to the PSTN.

•Toll bypass opportunities continue to thrive in some markets where PSTN costs are still high.

•Increasing availability of VoIP access and SIP trunking services will drive demand for gateways required to connect to both TDM and IP telephony CPE.  

Market growth will be restrained by the following factors:

•Some concerns over the reliability of IP telephony platforms and the quality of IP voice will slow down IP telephony adoption.

•VoIP access and SIP trunking services have gained little traction so far and are likely to be slow to penetrate the market due to interoperability challenges as well as limited service provider focus and marketing efforts.

•Slow adoption of UC and other IP-based communication applications is slowing down demand for gateways associated with such implementations.

Competitive power is quite unevenly distributed in the enterprise media gateway market with Cisco holding over 60 percent share of ports shipped and close to 70 percent share of revenues in 2008. Cisco has benefited tremendously from its leading position in data networking in tapping into the enterprise IP telephony market. Cisco is likely to lose some share over the next five to six years as independent vendors aggressively pursue new market opportunities.

With IP telephony implementations accounting for over 60 percent of total ports shipped, the rest of the IP telephony vendors (besides Cisco) using their own gateway appliances or cards in IP telephony deployments accounted for over 25 percent of gateway ports shipped in 2008. Each telephony vendor’s share of the enterprise media gateway market is largely determined by its share of IP telephony lines shipped in the same year.

A number of standalone gateway vendors are competing for a share of the enterprise media gateway market. Those include Aculab, ADTRAN, AudioCodes, Dialogic, Edgewater Networks, Grandstream, Multi-Tech, NET, VegaStream, Veraz and others. Each vendor is trying to position itself somewhat differently from the others differentiating either through features and functionality or business model and partnerships.

Given the high concentration of market power and the mature stage of the market, it is not likely that many new entrants will seek to tap into this opportunity throughout the forecast period. It is possible, however, that some vendors in adjacent markets such as Aculab (entered in 2008) and Veraz (entered in 2009) may seek to leverage existing technology expertise or channel partnerships to diversify their portfolio and revenue streams. Going forward, it is likely that existing market participants will look to re-position themselves for continued success in an evolving marketplace.