The acquisition of Skype could have enormous implications for Microsoft. If everything works out well, Microsoft gains access to about 600 million potential users globally. What it can do with those users is up to Microsoft, but the possibilities are almost infinite.
Even without any integration or service adjustments, Skype brings close to $860 million in revenues, even though they come at a loss. With the recent service enhancements (for instance, multi-party video, enterprise voice functionality) the existing (and rapidly growing) customer base can be further monetized for revenue growth and greater profitability.
But no one expects Microsoft to pay a premium (which the $8.5 billion appears to be) to just leverage the status quo. Microsoft is likely to seek to connect businesses using its own business software and services (from Office to Outlook, Lync, SharePoint, Office 365, etc.) to all the consumers and businesses using Skype’s VoIP and collaboration services. With Microsoft’s big push into enterprise communications and collaboration with the OCS and Lync platforms, Skype nicely complements its portfolio with cloud communications capabilities – including the app, the network, DIDs, mobility, and federation with other apps and networks. Potentially, this could help Microsoft customers enhance sales and marketing reach or create new options for economic and effective collaboration between office locations and teleworkers.
Skype’s capabilities can help Microsoft re-enter the SMB voice space, which it pretty much deserted after it chose to discontinue Response Point. OCS and Lync are fairly expensive for this customer segment. Skype can also help add inexpensive VoIP alternatives for Microsoft’s cloud-based Office 365 packages.
Certainly, Microsoft can leverage this acquisition in the consumer space by linking the Skype customer base with its Windows Mobile and Xbox 360 and Kinect users or simply integrating Skype services into its gaming and mobile products. But the bigger opportunity is in bridging the consumer and business worlds. The lines between the two are blurring as the prosumer segment grows both in number of users and in terms of application and devices used for both personal and business purposes, leading to increasing consumerization of enterprise IT. Prosumers expect familiar, intuitive interfaces in their business environments and access to inexpensive communications and collaboration tools anywhere, anytime. Skype can help Microsoft deliver some of these capabilities to its business customers.
This is also a big defensive move for Microsoft – against Google as well as against the enterprise communications vendors. It is not clear how Skype’s partnerships with enterprise vendors will fare after the acquisition, but regardless of whether they survive or not, Microsoft will limit the options for others, while expanding its own. If Microsoft pushes for greater federation, this will be beneficial to everyone, both on the supply and demand side. But it will mostly help Microsoft, the new kid on the block, make friends with the existing leaders, to be able to survive and thrive. It is a little hard to believe, but it is possible that Microsoft can use Skype as the common network for all its business customers (not just those using OCS or Lync for voice) to communicate and collaborate “on-net” among each other. Imagine free calls with your suppliers, partners and customers. Of course, businesses can use Skype to do that today, but having Skype integrated into Microsoft applications is going to make the value proposition a lot more compelling. The ability to get its foot in the door with businesses using competitors’ communications systems with a service that provides clear benefits and does not require a significant capital outlay, can open tremendous opportunities for Microsoft. It will have the disruptive impact that other communications solutions and cloud-based communications services have not been able to accomplish yet.
One of the biggest questions is how Microsoft will deal with the various challenges that the merger presents. Certainly, the two cultures are very different. Also, as an Internet-based, primarily consumer service, Skype does not offer the type of SLAs businesses require. The quality of Skype communications is only as good as the available bandwidth, the quality of the access network and the processing power of the devices it’s running on. If Microsoft plans to penetrate the enterprise space with Skype communications and collaboration capabilities, it will have to make sure it only promises what it can deliver or else customer disappointment will have an irreversible negative impact on future adoption. Also, Microsoft will need to learn about managing phone numbers and handling regulatory issues related to voice services in various countries. So the bottom-line question is – with all its ambitions to leverage the cloud and to grow its real-time communications business, is Microsoft prepared to be a voice services provider?
After months of turmoil and speculations, Nortel has picked Avaya as the preferred bidder (stalking horse) for its enterprise business unit. On July 20th, Avaya and Nortel announcement an agreement, based on which Avaya will acquire Nortel’s enterprise unit for $475 million, also assuming $28 million of debt with the acquisition. An auction is still pending, but chances are Avaya will be the one to offer Nortel’s enterprise technologies a new home. It is worth taking a look at the implications of this potential merger regardless of the final outcome of the auction. Should another bidder offer a better deal and this merger fails to take place, we will, at least, know what could have been the consequences, if it did.
So much has been said about Nortel’s troubles and how it got to this point that I feel it is completely unnecessary to dwell on that any further. It is now clear that it is not going to emerge from bankruptcy intact and the only question is who will acquire the pieces and for how much. On an analyst call, Joel Hackney presented the pending Avaya acquisition as the most beneficial outcome for Nortel as far as all stakeholders are concerned – shareholders, customers, partners and employees. He noted that other potential bidders will be evaluated not only based on price but also other, unspecified criteria. We can only guess that such criteria will include some specific commitments to the above stakeholders.
One of the most important questions is – what makes Avaya such a suitable partner after years of intense rivalry? Challenged by Microsoft and Cisco at the top and SMB vendors such as Mitel, ShoreTel, open-source vendors, etc., at the low end, Avaya and Nortel don’t have much of a choice but to hold hands and form a unified front against the newcomers. Many of their customers can be described as “risk-averse” or the kind that would prefer an established vendor with a long history of delivering reliable, enterprise-grade communication solutions. In our experience, some of these customers wish to preserve their TDM equipment a bit longer and Microsoft, Cisco, etc. would not be their vendors of choice. But vendor viability is critical and especially Nortel, but even Avaya, will not be able to withstand the aggressive push from the new-age competitors on their own. By combining their installed bases and diversified portfolios they can now offer their customers – from the most conservative ones to those pursuing migration to IP telephony and unified communications – better longevity and a wider array of options.
Speaking of portfolios, redundancies will be inevitable in this kind of merger. Some products will have to be eliminated or else the new entity will experience major inefficiencies and will confuse partners and customers. For example, Nortel’s Joel Hackney identified the two vendors’ most advanced and truly innovative solutions – ACE and Aura – as synergistic, but they will have to be integrated into a commercial offering and positioned with a marketing message that clearly identify their role and benefits to enterprise customers. Integration may be less challenging at the low end of the telephony spectrum as Nortel’s SMB products can prove to be a most valuable addition to Avaya’s portfolio. Further, both vendors have strong contact center portfolios, which, if successfully integrated, can position them very competitively against Cisco and the other communication vendors. Finally, Nortel’s government business must have been perceived as offering a major value proposition to Avaya’s stakeholders as well.
But what will Avaya do with Nortel’s data portfolio? Will it be able to integrate it with its other product lines and leverage it for growth and a more competitive positioning in the communications market? Most vendors are looking to become more focused rather than diversified today. For example, enterprise and carrier solutions don’t seem to mesh so well together any more. Similarly, as the data networking market becomes increasingly mature and commoditized, it doesn’t seem like a viable growth opportunity for a telephony vendor.
I would like to take a step back here to comment briefly on the lost opportunity for a Siemens-Nortel partnership. These two vendors’ portfolios would have generated better synergies with Siemens being particularly strong in the large enterprise space and Nortel offering an appealing SMB portfolio. Further, their geographic distribution of power would have been more complementary. Finally, both vendors have crafted major partnerships with Microsoft perceiving those as critical for their future success in the unified communications space. There must have been, however, factors that tipped the scales in favor of Avaya (and money can’t have been one of them given the fire-sale value attached to Nortel’s enterprise business).
I believe that one major aspect of the acquisition negotiations and a leading selection criterion was the acquiring party’s channel strategy. Nortel has historically been heavily dependent upon its channels for market reach and customer support. The channel partners represent major stakeholders in the process of Nortel disintegration and sell-out. Avaya, on the other hand, has recently admitted that its channel strategy had been lacking . For one thing, its direct sales force competed with the channel and created conflicts of interest. It has, however, stated that it intends to re-vamp its channel strategy and shift most of its sales to the channel. As part of this process, it is working towards improving its channel programs and growing its partnerships. Needless to say, the addition of Nortel’s partners will enhance its overall customer reach. Avaya’s new approach, on the other hand, guarantees Nortel’s partners some continuity in terms of product support and service delivery.
One can’t help but wonder if Siemens’ bid did not fail (at least for now) because of its historical preference for direct sales. It seemed like a great opportunity for Siemens to grow both its channel reach and its North American presence through the acquisition of Nortel’s assets. But could Nortel and its stakeholders trust Siemens that it would indeed preserve such an extensive channel?
The Making of a Super Power or Delayed Transformation?
Should Avaya end up acquiring Nortel’s assets, the new entity is likely to go through two or three main phases over the next five to six years. Phase One is going to be marked by gradual and most likely painful integration of two portfolios and two business cultures. With the economy likely to curtail growth for some time to come, the new entity will struggle to first come up with a cohesive and comprehensive strategy and then communicate it to partners and customers. Organic growth is likely to be limited for at least 12 if not 18 more months.
Assuming that Avaya’s management succeeds in integrating the two businesses and sends a VERY STRONG message to the market about its growth objectives and means of accomplishing these objectives, the new entity can become a very powerful communications vendor with an unrivaled installed base and one of the most diversified unified communications portfolios. This is where Phase Two starts for the new entity looking to secure a competitive position in the evolving communications market.
Cisco has been breathing down Avaya’s neck for two or three years now and has contested its leadership in telephony line shipments and revenues. Cisco’s determined advancement in the unified communications space is not going to be slowed down by a potential Avaya-Nortel merger. Cisco targets businesses that are determined to adopt a truly IP-centric architecture and many of those associate Avaya and Nortel with their legacy portfolios. Further, it has put together a comprehensive unified communications portfolio including instant messaging, audio, web and video conferencing, telepresence, collaboration, etc. that makes it a one-stop shop for more than just telephony and voice/unified messaging. Finally, with its increasing focus on cloud-based, SaaS-type offerings, Cisco is preparing for a completely different play in the communications marketplace.
The bottom line is, Cisco’s march towards market leadership will continue and it will gradually shorten the distance with the new entity as well. The potential Avaya-Nortel merger can delay Cisco’s market share gain but will not deter its ability to grow. I strongly believe that the market (customers, partners, etc.) need competition and options. Therefore, a stronger communications vendor with a different, yet similarly diversified portfolio, and a quite different approach and reputation is highly needed to compete against Cisco in order for innovation to continue and end users to enjoy the benefits of more compelling, yet less expensive solutions. I expect Phase Two to be market by healthy competition with two dominant players, but also some very strong Tier-2 and Tier-3 competitors.
There is another factor in this marketplace, however, that will determine the outcome of Phase Two and the transition into Phase Three. The enterprise communications landscape has changed dramatically since Microsoft’s entry two years ago (arguable it started much earlier). Microsoft has forced the incumbent vendors to reform themselves and adopt more open, software-based approaches. It has emerged both as a potentially powerful competitor and a highly sought after partner. There are many industry pundits who believe that the future of all the incumbent vendors – Avaya, Alcatel-Lucent, Mitel, Nortel, Siemens, and even Cisco is challenged not so much by competitive dynamics among them but by Micosoft’s rally for a market share of enterprise telephony.
How Phase Two ends for a combined Avaya-Nortel entity will depend on how it positions itself vis-à-vis Microsoft. It can choose to aggressively pursue an alliance and ensure that, in the short term, it is the preferred vendor for the telephony component of OCS-based unified communication implementations. It can instead choose to align itself more closely with IBM and thus slow down Microsoft’s penetration into the enterprise UC space. Eventually, however, Microsoft will be able to grab a significant market share of the telephony market and, alliance or no alliance, the incumbent vendors (not just Avaya-Nortel) will need to find new growth opportunities. They can choose to transform themselves into primarily services companies and provide integration and professional services in deployments where Cisco provides the “plumbing” and Microsoft – the applications, or they can continue to fight a very hard battle continuously looking to out-perform Microsoft by developing new competitive advantages in various application areas – conferencing, mobility, customer care, Web 2.0 integration, etc.
Phase Three can be a period of dramatic transformation for Avaya-Nortel as well as all incumbent vendors as they choose different evolution paths – either becoming services-oriented businesses, getting acquired by larger and more diversified vendors, or focusing on specific market niches such as vertical industries, etc.
In essence, transformation is inevitable. It will permeate all phases of market evolution throughout the next five to six years. It is really a matter of when it takes place for each individual vendor and how it is executed. It is critical for both Avaya and Nortel to understand that and do not delay the process because of a somewhat illusionary sense of greater power and security based on the size of a merged entity.
We can dwell further on Avaya-Nortel’s fortune once the acquisition is final. If it does not go through, Avaya will have to face a number of challenges on its own and Nortel’s fate will be determined by where it ends up. For now, I have a positive feeling about the potential merger and hope it goes through.
It has certainly been anticipated that the recession would force telecommunication markets (not unlike other industry sectors) into further consolidation. The enterprise telephony space, for example, has long been struggling with slowing revenue growth, limited differentiation opportunities and rising competition from non-traditional vendors such as open-source telephony providers, Microsoft, Skype, mobile carriers (somewhat indirectly, through increasing usage of mobile phones for business purposes), you name it.
Although we have no sufficient evidence on what is going to happen with Nortel, we can speculate based on recent news about M&A negotiations taking place and some general marketplace analysis.
At this stage, it just does not seem likely that Nortel is going to make it through bankruptcy protection intact. Rumors that Avaya and Siemens (probably among several others) are in acquisition talks with Nortel for its enterprise business unit should not be surprising. In tough economic times, as demand shrinks, there is no space for too many similar vendors. Also, acquisition costs are at an all-time low, so if anyone is striving for market share growth, this is the time to leapfrog ahead of the competition with an acquisition rather than waiting for slower organic growth.
Nortel’s enterprise business is attractive for several reasons. Nortel has some great telephony, messaging and UC technologies, leading contact center solutions, a large installed base and a loyal channel. Yet, the value of this business to its different competitors will not be the same.
With Siemens Enterprise now financially more stable with the Siemens AG and Gores Group joint venture, it is focused on growth and market expansion. A potential acquisition of Nortel’s enterprise unit could provide it with an immediate access to a North American channel and customer base. Further, from a UC point of view, there are opportunities for eventual synergies. For example, both vendors have partnerships with Microsoft for the delivery of unified communications solutions to business customers. A potential merger will position the new entity very competitively in the enterprise communications marketplace.
Some industry pundits claim Siemens and Nortel have similar technologies; yet, in my opinion, there will be major redundancies as well (e.g. MCS vs OpenScape, large-business telephony platforms, etc.). One of the most significant advantages is Siemens’ open standards approach which allows it to integrate with multi-vendor IM/UC and telephony environments. Finally, both vendors have been on track to become “services” companies for some time now, which could help the new entity more easily align resources under a common vision and consolidate business operations.
Avaya could also benefit from a potential acquisition of Nortel’s enterprise unit as it will emerge as the undisputed North American telephony leader, with a compelling global market share and a significant advantage in the SMB space. The two companies are believed to have a similar customer base described as fairly “risk-averse”, i.e. inclined to work with incumbent vendors with a proven track record of delivering reliable enterprise telephony solutions. Also, Avaya has committed to expanding its channel partnerships and further shifting sales towards a more indirect model, and access to Nortel’s partner base can help accelerate this trend. Finally, Avaya can thus get a hold of some of Nortel’s more advanced UC technologies such as MCS and other solutions already interoperable with Microsoft’s UC portfolio, which will position it even more competitively in the evolving UC space. Needless to say, there will be various portfolio integration challenges and redundancies as well.
Although Alcatel-Lucent is not mentioned to be in any active acquisition talks with Nortel, no doubt, it could also benefit from the opportunity to grow its North American presence leveraging Nortel’s customer base and channels. It could also use Nortel’s technologies to enhance its UC portfolio, which at present, is somewhat less complete than those of its telephony competitors.
Cisco, on the other hand, as stated in other commentaries in the press, may really consider a potential acquisition less beneficial given its proprietary technology approach and anticipated greater difficulty in integrating Nortel’s technologies into its portfolio. It should be noted, however, that Nortel’s contact center solutions could greatly enhance Cisco’s enterprise portfolio as it is somewhat behind its competitors in that market segment.
There are others that could perceive benefits in acquiring Nortel’s enterprise business: Aastra, Microsoft, NEC, etc. Yet, with no evidence of actual activity taking place, I would hate to go into pure speculation at this point.
I will postpone the discussion of other potential advantages and disadvantages of the above scenarios until an acquisition actually takes place. We should not exclude the possibility of a non-telephony vendor acquiring Nortel’s enterprise business. Let’s not forget, however, that there is no vendor or financial institution that is not experiencing some difficulties today. Therefore, a potential acquisition will have to be very carefully considered and tightly aligned with the vision and strategy of the acquiring entity.