Vanessa Alvarez and I just completed the update of our North American Hosted IP Telephony and UC Services Markets study. Here is a summary of our findings:
In 2009, the economic crisis continued to plague enterprises, particularly in the small and medium business segment, which is the target market for hosted IP telephony. Many service providers suffered customer retention issues as SMBs downsized and some even went under and couldn’t pay their bills. Customer acquisition was even more difficult as many enterprises held back on making communications decisions or made other IT technology investments a priority.
Yet, 2009 was a relatively successful year for hosted IP telephony. The installed base grew by close to 30 percent with new adds compensating for losses due to workforce reduction in customer organizations.
Although the concept of unified communications continued to make inroads into enterprises, it did not gain as much traction as originally anticipated. As a result, although many hosted service providers took 2008 to retrench and include more UC offerings into their portfolio, the market segment targeted by hosted services was not ready for unified communications, and UC adoption rates and revenue impact were minimal.
Frost & Sullivan estimates about 1.4 million installed hosted IP telephony lines as of the end of 2009 and expects the installed base to reach between 7.5 and 8 million lines in 2015. Revenues, estimated based on an average bundle of features and capabilities, reached about $700 million in 2009 and are expected to reach $3.8 billion in 2015.
Many factors will contribute to growth going forward. The macroeconomic situation forces enterprises to reconsider maintaining their own infrastructure as opposed to using hosted services. Enterprises today want to focus on driving their business, not managing their IT environments.
Parallel to this, hosted IP telephony, and hosted services in general, have evolved in terms of features and functionality. Underlying technologies are also evolving, allowing service providers to upgrade and enhance their own networks and data centers, making the delivery of IP telephony easier and more cost-effective.
The market remained fragmented with over 50 providers, each offering varying bundles of communications applications typically including local and long-distance voice, voicemail or unified messaging, auto attendant, conferencing, contact center and CRM applications, frequently also packaged with an access line and an Internet service. Frost & Sullivan predicts that consolidation in this market will accelerate, as large IT service providers look to bundle communications services into their overall IT hosted services offerings. As cloud computing begins to evolve in service providers’ data centers, it will become easier to deliver compelling cloud-based communications services. Also, within the next two to three years, some PBX vendors will look to develop their own solutions, in the form of virtual appliances hosted in their own data centers or the public cloud, and deliver services more directly to end users, bypassing the traditional telcos.
Enterprises today must consider what delivers greater value to their business. Many are finding that managing their own IP telephony systems, or any IT for that matter, just doesn’t make economic sense. It is best to focus their IT and communications management resources on delivering superior products/services to their customers as quickly and efficiently as possible.
The counterpoint to what? Good question. I wanted to talk about some personal experiences with communications technologies. Since the sentiments in this article may appear to contradict ideas I have shared previously – taking more of an analyst, rather than a consumer point of view – I thought I would present them as a “counterpoint”.
Frequently, nascent technologies promise to improve the way we live and work. But at the early stages, both businesses and individuals tend to experience more challenges than benefits.
I work out of a home office, like many other professionals today. Organizations are becoming increasingly virtual and IT managers are struggling to deliver reliable, secure and cost-effective communications to their growing remote workforce. In fact, many technological advancements – such as enterprise mobility, unified communications and SaaS/cloud-based communications, to name a few – are touted as particularly appropriate for mobile and geographically dispersed users. But remote workers frequently face issues that negatively impact their ability to leverage the full potential of these advanced technologies.
Here follow some quick references to popular marketing pitches and my counterpoints as an end user:
UC and software-based communications provide a cost-effective and convenient communications solution for remote workers.
COUNTERPOINT: At home, I have a regular POTS line, as well as a Cisco IP Communicator client on my laptop. I am glad I have the Cisco client because it allows me to call home when travelling or call an international number from home – free of charge to me. However, the few times I have tried to use it to attend an audio conference or make a critical business call, the quality turned out to be so poor that I had to switch to the POTS line or my cell phone.
There are several “weak links” in this scenario and the soft client is just one. It may be the quality of my Internet connection. I have a DSL line (I believe 4 Mbps downstream and 1 Mbps upstream) and I frequently have quality problems (breaking voice or slow website upload) when using various web applications or soft clients. It may be my wireless router – which is integrated with the DSL modem. It may be my laptop RAM or processing power. It could also be an issue with my VPN, the size of my Lotus Notes mail box, or any other application I access on my laptop. It may be some cookies or software bugs on my home network.
So it could be anything! But my point is, I am not ready to dump my TDM line OR my desktop phone for a PC-based soft client any time soon. Though my experience is that of a home worker, I think business environments are not immune to such challenges. If you really believe PC-based clients are ready to replace desktop phones, maybe you need to make sure the money you save from eliminating desktop phones is properly invested in assessing and upgrading LAN and WAN connections, PC processing power, RAM and hard drivers, etc. In my opinion, soft clients make a great adjunct to desktop phones, but not a viable replacement alternative … yet.
SaaS and cloud-based communications enable convenient self service for SMBs and remote workers.
COUNTERPOINT: I strongly believe in the value of hosted/cloud-based communications for businesses with limited in-house resources. But I have an issue with the claims around self service. I suppose, self service makes sense at the very initial stages of service selection and provisioning. Certainly, IP telephony – hosted or premises-based – also enables self-service moves, adds and changes (MACs), which provides substantial cost savings. IP telephony also enables IT managers as well as end users to manipulate settings through software/Web-based interfaces – providing flexibility and cost efficiencies.
However, self service only goes so far. In fact, hosted IP telephony and other ASP services never gained much traction exactly because service providers were not able to provide sufficient network implementation and management support required for mission-critical, real-time communications.
Inevitably, hosted services involve some customer premises equipment (CPE). To begin with, LAN and WAN reliability and security are top concerns with both hosted and premises-based IP communications. Therefore, router and switch selection, proper configuration and management are critical. Further, telephony endpoints and the respective wiring still require someone to literally crawl under people’s desks. Small business and remote workers should not be left entirely on their own when implementing or managing hosted IP communications.
Most of the time, a remote worker, similar to a residential user, uses… well, “cloud” or hosted communications. The Internet service, the POTS line – it is all managed by a service provider. And remote workers frequently face some common challenges. For example, my intermittent Internet connection has been an issue for a while. Having to spend hours on the phone with a customer service rep and stick pins into the router to restart and reconfigure it could be immensely frustrating. My phone company, on the other hand, has so far left me without a phone service only once (for about 24 hours). But even that one time, the warning that if they come to my house and it turns out to be a problem with my internal wiring or phones, they’ll charge me whatever it is they charge, etc., etc. … well, it leaves a bitter after-taste.
So, my point is, small business, remote workers, even medium and large businesses – they all want to feel taken care of. They’ll expect someone to come in and install or fix things for them as part of the monthly service charges and will not be too thrilled about self service.
I hope my thoughts make sense. Let me know what you think.
It’s only a few months after Microsoft finally put its Response Point (RP) System in the spotlight with the release of SP2 and John Frederiksen’s keynote speech at ITEXPO East in February 2009, and the wings of the entrepreneurial RP team seem to have been cut. It is clear that the latest wave of Microsoft lay-offs has impacted the RP team and some cryptic statements on the official Response Point Team Blog indicate that Microsoft wishes “to take a good look at the next version of Response Point and ensure it addresses the needs of Small Businesses.”
I contacted John Frederiksen, General Manager for Response Point at Microsoft, and he responded to my concerns with the following somewhat re-assuring comments:
The company will continue to support Response Point version 1.0.
We will continue to support our current OEMs, Service Providers and resellers that are selling Response Point version 1.0. Customers will continue to be supported through their OEMs.
We will also continue to promote the product online and spotlight compatible 3rd party services and add-on products.
The team is evaluating the strategy for the next version of the product and will continue to investigate the opportunity in the small business market.
The Response Point team has not been moved to another division.
Two years ago, when RP was still in beta trials, I thought it offered some interesting features and capabilities and I believed Microsoft was going to leverage this innovative solution to aggressively pursue the SMB customer segment as another entry point (vis-à-vis OCS) into the telephony market in general (see my article here). I did wonder if there was going to be some conflict of interest between OCS and RP and the respective teams, but ruled out that possibility assuming Microsoft had sufficient resources to support both lines of business as they seem to serve fairly distinct market segments. Today, the economic recession seems to be forcing Microsoft, not unlike other IT and communication vendors, to make tough choices. I am still unsure if the decision was made on the basis of comparing the respective potentials of OCS and RP, but RP has definitely fallen prey to Microsoft’s efforts to cut down expenses where short-term revenue and profit prospects are less certain.
Response Point Value and Market Positioning
In a more recent article discussing the release of SP2, I stated my belief that Response Point is uniquely positioned because of it features including the speech recognition capability and the Magic Blue Button (voice-controlled auto attendant and dialing), but mostly because of its ease of installation, use and management. It is as close as it gets to an affordable, plug-and-play telephony solution for small businesses, and thus in a category of its own, since most other small-business systems are neither as simple to use nor as inexpensive. Generally, it is hard to find an IP telephony platform that can provide a cost-effective communication solution for a business of less than 20 users, or a larger business with geographically dispersed sites of that size. SP2 offered some valuable enhancements such as analog phone support, intercom, VPN and multi-subnet support, an after-hours receptionist setting and more robust audio. The anticipated release of version 2.0 is supposed to make it an even more robust business-class solution that competes head-to-head with platforms offered by traditional telephony vendors such as Alcatel-Lucent, Avaya, Cisco, Nortel and Siemens.
However, what I believed was going to be Microsoft’s (not so) secret weapon in the battle for the small-business space was its extensive channel of VARs, resellers, specialists, etc. The traditional vendors use channels that have mastered the skill of marketing, implementing and managing more complex solution for medium and large businesses. Very much like the vendors themselves, these channel partners have a vested interest in pursuing larger implementations that produce greater margins and help them scale and grow more rapidly. Response Point, on the other hand, is well positioned to enable multiple Microsoft specialists and consultants to add a new revenue stream to their business and offer a more complete portfolio of business solutions to their small business customers. Response Point customers have indicated that they appreciate the features and lower cost of the solution, but their trust in Microsoft’s continued support and extensive channels represents a major factor in their decision to select Response Point versus open-source or some other less mainstream solutions. Yet Microsoft is currently failing to re-assure its channel by sharing a clear vision for the future of the Response Point system.
I talked to several RP resellers about three months ago and I was really impressed by the positive feedback. They seemed to believe that the features, though not on par with those offered by traditional vendors, were sufficient for most of their clients. A phrase that frequently came up in partners’ comments was: “This time they got it right from the start. It just works.” Also, partners appreciated the continued interaction with Microsoft allowing them to contribute to the development and addition of new capabilities that would further enhance the value of the RP system for small businesses. They were eagerly awaiting release 2.0 as the more compelling solution that would indeed enable them to compete successfully in their target market. My conversations with resellers as well as the blog entries I have read on various web sites dedicated to Response Point and Microsoft’s eco-system of partners indicate a very strong confidence in Microsoft’s ability to deliver and its commitment to this product line.
The Channel Awaits Microsoft’s Official Statement
As the rumors spread about the fate of the RP team and Microsoft delays making an official statement on the future of this products, disappointment and doubt are beginning to creep in among the partner ranks. For some of these small outfits RP had just opened up opportunities that now seem to be closing without proper notice. Not only the income, but also the reputation of these specialists and consultants is on the line since they have promised their customers a certain roadmap of product viability and evolution.
Further, partners are now having second thoughts about the quality of the Response Point system. They see more clearly some of its disadvantages in light of Microsoft’s hesitation to continue investing in further product development. Most of them continue to believe that, given continued development, this product is right for them and for their customers. Yet others are quickly beginning to look for competitive products to add to their portfolio in order to be able to sustain their competitive position in the small business communication space.
Finally, partners are now questioning the nature of their relationship with Microsoft – is Microsoft really committed to supporting its partner network or are they after quick and guaranteed profits only?
Speculations Abound at Times of Uncertainty
I saw speculations about the possibility of Microsoft integrating RP with OCS. I don’t see why they would want to do that. Microsoft can use certain elements of RP for call control with OCS if needed, but OCS is not a suitable solution for small businesses. If a business needs inexpensive telephony and/or IM client, they have other options. The value of OCS and unified communications is in their ability to integrate multiple applications from IM to voice to UM to conferencing, but in order to deploy all these capabilities, a business will need several servers with a significant price tag.
Others are speculating that Microsoft is planning to focus most of its efforts in the communication space on cloud computing and communications as a service (CaaS). I believe that Software as a Service (SaaS) and CaaS have some potential for delivering business applications and communications to SMBs. Similar to existing hosted telephony services, it alleviates all implementation and management hassles for small businesses typically lacking in-house technical expertise. However, SOHOs and very small businesses are likely to continue to prefer the least expensive consumer solutions. On the other hand, small businesses at the upper end of the range – 20 to 100 users – may actually benefit from inexpensive premise-based solutions such as Response Point.
In my opinion, Microsoft should certainly pursue profitable opportunities as that would eventually be best for both itself and its partners. I do believe, however, that Response Point has a good market potential. As I mentioned earlier, it is competing against traditional vendor platforms, many of which are just too expensive and difficult to manage for small businesses of up to 50 users. Hosted IP telephony has failed to gain much traction throughout its nearly decade-long existence, although it is touted to be a most suitable alternative for this particular market segment. Open-source telephony, on the other hand, is becoming a more viable option, especially with Digium and others focusing on developing a channel, something that was considered one of their major weaknesses so far. Consumer vendors such as Google and Skype are also vying for a piece of the SOHO and small business market and are likely to eventually gain some penetration. However, Response Point has the advantage of having been developed as a business system from the start and the channel has already been trained.
Overall, I believe that Response Point is a viable solution for the small business market. As with any technology, however, its success is largely dependent on the vendor’s execution plan, and I’ll repeat myself – “It’s all about channels”. Given the right marketing efforts, it will sell, and given the right vendor and channel support – it will thrive; without those elements, it is not going to make it on its own. The small business market continues to be under-penetrated and to offer tremendous opportunities. While the competition seems to be intensifying in this market segment, the various solutions seem to offer some distinct advantages and disadvantages thus basically catering to slightly different sub-segments. As some of Microsoft’s partners seem to believe, more extensive marketing efforts may be needed (TV commercials, end-user webinars, etc.) with a strong marketing message that clearly identifies the benefits of Response Point in order for Microsoft and its partners to be able to keep Response Point sales afloat in this challenging economy.