Cloud is Great, but I Want my Own System

I know I have dedicated quite a bit of blog space to discussing cloud and hosted communications. I have also, however, pointed out that premises-based solutions will continue to dominate the market for a long time to come.  Growth in this market will be driven primarily by the replacement of the installed TDM base with advanced IP telephony solutions.

Multiple trends are converging to drive further penetration of IP telephony into the business market. The technology has matured, and concerns over voice quality related to jitter, echo, and packet loss are rapidly dissolving. Moreover, high definition (HD) voice is now promising to give end users a superior experience compared with TDM communications. Furthermore, the cost of advanced IP telephony solutions (including platforms, endpoints, and media gateways) is continuously declining, making them an appealing investment even for the more cost-conscious customers. The available pool of professional and managed services expertise is also continuously expanding, driving down the cost of IP telephony implementation and support. Finally, SIP is quickly becoming the de-facto standard for voice communications, and its wider adoption is enabling businesses to take advantage of IP telephony’s full array of communications benefits.

The above chart shows the evolution of convergence technologies and their value to businesses over time. Over the past 10 years, IP telephony has evolved and asserted itself as the communications foundation of the future. Today, we are at a juncture where customers have acknowledged the value of network convergence and are rapidly deploying IP telephony. We are estimating that about half of all business telephony users are on IP or converged systems, though only about 30% use IP endpoints. It is important to note, however, that convergence is a gradual, stepped process for most organizations even today. Most start small and then look to grow bigger by adding more capabilities, more sites, etc.

As UC technologies mature and decision makers become more aware of the benefits of  UC,  forward-looking businesses are beginning to transition to the next stage of convergence – that of application integration. Yet, it will be at least 3 to 4 years before UC becomes truly mainstream and more businesses integrate communications into business processes. For customers to transition to that final stage and realize the strategic benefits of communications-enabled business processes (CEBP), technologies need to mature further and become more exposed to the larger developer community so they can develop specific applications for specific uses.

My colleague Alaa Saayed  just completed our World Enterprise Telephony Platforms and Endpoints research and here below are some of his findings.

The year 2009 can be defined as a very challenging, yet interesting year, characterized by landmark events and trends that will have a long-term impact on both technology evolution and competitive dynamics. On the negative side, 2009 was marked by worsened macroeconomic conditions, rising unemployment rates and a significant reduction of technology investments. Not only did the economic turmoil cause the sales of almost all major enterprise telephony vendors to decline at double-digit rates, but it also caused the demise of the former telco giant and one of the world’s premier technology companies – Nortel.

Nonetheless, history has shown that pulling out of recession often comes on the back of innovation and continued investment in technology development. In fact, the enterprise telephony sector has been one of the fastest and most efficient sectors to quickly adapt to these new challenging market conditions. Important actions that were taken to fight back the negative impact of the recession included major acquisitions and reorganizations (e.g. HP/3Com and Avaya/Nortel), the introduction of new flexible IP telephony solutions, the implementation of very aggressive customer programs, and increased focus on channel expansion strategies. Furthermore, 2009 was also marked by a significant uptake in certain advanced technologies and innovative delivery models such as SIP trunking, virtualization, hosted communications/ Communications as a Service (CaaS) offerings, SIP and SOA-based architectures (e.g. Avaya Aura), and professional and managed services. Finally, although it slowed down the pace, the economy did not completely stop the evolution of some of the key trends of previous years including enterprise mobility, collaboration, social media and open-source telephony. Social media, for example, enabled many telephony vendors to use non-conventional marketing methods to promote and communicate the value of their products and solutions throughout the recession.

It is no surprise the market plunged in 2009, but we do expect a modest recovery in 2010, with North America and APAC leading the way out of the recession and Europe maybe experiencing some continued challenges. This year, we expect positive growth in units, but close to 0% revenue growth. In the near term, there may be some continued hesitation in investment decisions– some Nortel customers debating what route to take, others waiting for Wave 14 to prove its value, yet others looking for cloud models to mature.

Over the next 5 to 6 years, however, we are projecting about 1% growth in revenues and about 3% to 4% growth in unit shipments. We expect customers with TDM systems to pursue IP telephony for both cost savings and productivity benefits, laying the foundation for advanced IP apps and future UC implementations. Infrastructure consolidation through SIP and SOA will be the other two drivers for IP telephony migration and further investments in this space. Towards the end of the forecast period, the user base should be almost all converted to IP , barring the impact of some unforeseen disruptive events. Cloud technologies may begin to have a larger impact in the long term restraining PBX line shipments towards 2014 and 2015.