Tag Archive | Cisco

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

I just completed a study on World Enterprise Media Gateway Markets and I thought I would share some of my findings through this blog post. 

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.

A Major Shift in Competitive Power in the Enterprise Communications Market

Breaking News

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.

Why Avaya?

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. 

Conclusion

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.

 

 

 

 

 

 

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