I have written some earlier posts on Mitel’s and Siemens’ strategies for the hosted IP telephony/cloud UC market. But there are others that have tapped into this space previously reserved for the telcos (ILECs, CLECs), MSOs, ISPs and some ASPs. I get a lot of questions about BroadSoft, Cisco, Microsoft, IBM, etc. I have now completed my study on North American hosted IP telephony and UC services markets and have some new insights to share. Unfortunately, the individual vendor analysis is too lengthy to post here, but I will share excerpts that more broadly discuss the value proposition of these new business models.
A key new development in the hosted IP telephony and UC services market is the entry of PBX vendors with their own multi-tenant or virtualized (multi-instance) solutions designed specifically for carriers and partners or intended for service delivery out of their own data centers. Cisco’s Hosted Collaboration Solution (HCS) architecture, Mitel’s various hosted/cloud solutions and Siemens’ OpenScape cloud architecture are some examples of these new business models. These platforms are typically more feature-rich than the carrier softswitches and application servers traditionally utilized to deliver multi-tenant business telephony services, but they also offer some additional benefits. For example, Verizon’s UCaaS services based on Cisco’s HCS are positioned as most suitable for the highly demanding large enterprises who wish to integrate the hosted service with their existing Cisco premises-based infrastructure. Also, most of these new architectures are not truly multi-tenant, but are instead using shared hardware and dedicated software, thus addressing some security concerns associated with hosted services.
The new business models are likely to cause some re-alignment in the value chain, with potential advantages and disadvantages for all market participants. Their impact on end users, however, is going to be mostly beneficial as they will be able to choose from a larger number of alternative solutions. For the supply side, the key benefit is ability to focus on core competencies – vendors will be able to leverage their software expertise, data center providers will deliver the most cost-effective server hosting and management, and the diverse range of service providers will focus on customer acquisition and ongoing management, as well as the integration of typical carrier services such as SIP trunking.
- PBX vendors: PBX vendors are likely to benefit from gaining access to a customer base looking to outsource both infrastructure and infrastructure management from a third party. They will also be able to deliver greater value to their channel partners by enabling them to generate recurring revenues by either hosting the platforms themselves or reselling services hosted in a third-party data center. Potential pitfalls for PBX vendors include channel conflicts, if the vendors are also selling hosted/cloud services directly; customer mismanagement, if tiers of support and responsibilities are not clearly defined; and some loss of professional and managed services revenues. Also, customer churn is likely to be greater compared to that experienced in the premises-based business.
- Telcos: Service providers stand to benefit from the opportunity to deliver hosted/cloud services to more demanding customers using advanced telephony and UC platforms previously only available as premises-based solutions. Also, they can realize cost savings and reduce time to market, if the solution is hosted in a third-party data center, as the deployment and integration of multiple servers and software stacks is typically costly and time consuming. Virtualized solutions such as Mitel’s Virtual MCD and Cisco’s HCS also enable them to provide more secure hosted services to customers requiring their own dedicated software while leveraging the benefits of shared hardware and a hosted model. Potential challenges for service providers include the need to maintain multiple versions of vendors’ software stacks (as in the case of Verizon’s implementation of Cisco HCS), and more limited ability to customize the solution when hosted in a third-party data center. Furthermore, the new business model lowers barriers to entry thus potentially leading to increased competition.
- VARs, SIs and MSPs: For VARs, SIs, MSPs and smaller LECs this is an excellent opportunity to expand their portfolio and generate recurring revenues by introducing hosted/cloud-based services without the cost and hassle of acquiring, integrating and running the systems in their own data centers. The cost and complexity of next-generation architectures has prevented this group of market participants from exploring hosted services in earnest. Now they can more successfully compete against larger telcos and premises-based solution vendors by presenting several alternatives to their customers – from premises-based systems, managed in house, to provider-managed on-premises solutions and fully hosted services. With their strong expertise in CPE installation, integration and management and typically better customer service and support, smaller, regional interconnects will now be able to serve their customers even more effectively.
- Business customers: Business customers will benefit from increased availability and diversity of hosted/cloud solutions. As more service providers introduce hosted IP telephony or UC solutions, businesses will be able to choose a partner from a broad range of providers – from large telcos with a substantial brand-name reputation to trusted local system resellers with whom they have long-standing relationships. The increasing competition is likely to result in more competitive prices and better customer service. Also, service offerings now include a large spectrum of alternatives – from low-end basic telephony offerings to comprehensive UC bundles and packages of tightly integrated communications and business applications (e.g. CRM). Furthermore, along with the cost-effective multi-tenant services, providers are now able to address the needs of businesses with high security requirements by using virtualized solutions based on shared hardware but dedicated software.
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.
Today, a group of hosted communications companies formed an alliance, which they named the Cloud Communications Alliance (refer to the press release here). The following summarizes the objectives of the Alliance and lists the founding members:
About Cloud Communications Alliance
The Cloud Communications Alliance brings together leading Cloud Communications providers Alteva, Broadcore, Callis Communications, Consolidated Technologies Inc., IPFone, SimpleSignal, Stage 2 Networks and Telesphere to promote development of the Cloud Communications category. The Alliance is aggressively pursuing new technical standards, capabilities and applications. The Alliance harnesses the power of each member’s individual networks and systems to create a seamless, nationwide HD voice network that delivers outstanding voice quality, apps, features and cost savings. For more information about the Cloud Communications Alliance, visit www.cloudcommunicationsalliance.com.
Why these eight companies? These service providers have several things in common: they all use BroadSoft’s BroadWorks platform for the delivery of hosted communications; they have all been recognized as being among the fastest growing BroadSoft customers; they are all relatively small (30 to 50 employees) with mostly local or regional focus and limited geographic reach; and they all face similar challenges.
When did it all start? About a couple of years ago, this group of eight decided to collaborate and pool their resources together in order to become more successful and accelerate growth. Since then, these companies have been having regular meetings, at which they would exchange knowledge and best practices and discuss opportunities to leverage each other’s strengths for mutual benefits.
Why does it make sense for hosted IP communications providers to join efforts? Interestingly enough, I recently heard about what seems to be a common practice among cable companies. They would get together and openly discuss challenges and best practices and try to help each other grow in their respective areas. The cable industry is more mature than hosted IP telephony, but similarities include somewhat clearly defined territories of influence and a fairly large market potential that offers opportunities for everybody. Oh, and a common enemy – the incumbent telcos!
As I have discussed in previous posts, the hosted IP telephony market is very fragmented, and small service providers (some LECs, some next-gens founded specifically for the delivery of VoIP services) have been among the most innovative and committed to advanced hosted communications, but have had limited resources to promote and support their services on a large scale. While hosted IP communications eliminate a significant portion of the CPE and the need to dispatch technicians to the customer’s site, frequently, service providers have to ensure that the LAN is properly configured and literally crawl under people’s desks to adjust the wiring. This kind of tasks require local support staff and small market participants can greatly benefit from an alliance that helps them more effective serve larger, multi-site businesses.
Further, market awareness for hosted communications is still fairly limited. Service providers with small marketing budgets typically count on online resources, word of mouth and personal contacts to promote their services. By pooling marketing resources together, Alliance members can more effectively use market intelligence, more confidently market the capabilities of a more powerful entity, and provide customers with a “disaster recovery” option – the ability to easily port the service to another service provider if the original one goes out of business.
I asked the Alliance members about some of the additional challenges they have been facing, and they mentioned the following:
- Backoffice operations: accounting and provisioning could be slow and complex; integration with other software platforms is challenging;
- Customer acquisition is costly and difficult to scale;
- Individual providers have limited ability to come up with new ideas for apps and new sources of revenue;
- They are all looking to make their services more cloud-like.
Since the new formation is being marketed as a “Cloud” Communications Alliance, I inquired about how members saw the difference between cloud and hosted. We did not get into all the details on the call and I have promised to tackle this issue separately, so I will just highlight a few key points:
- Some member organizations have already deployed some of their capabilities (such as voice messaging, for example) on Amazon’s and other public clouds for cost efficiencies and plan to move more infrastructure elements into the cloud (maybe storage first, call control much later).
- The members plan to enable integrations with a growing number of cloud applications (such as www.salesforce.com, for instance) to help facilitate specific business processes for their customers.
- As businesses increasingly adopt mobile communications, Alliance members plan to be able to manage the fixed-mobile integration from the Cloud.
- Finally, the Cloud offers a great sandbox and a fertile ground for more rapid and more prolific application development. As Alliance members and other parties increasingly develop Cloud applications, the ability to integrate those and properly package and position them to end users will be key for their success.
I believe the formation of the Cloud Communications Alliance is a positive development. It is part of a consolidation trend in the communications market that is likely to accelerate over the next couple of years and will impact fragmented markets more so than the more concentrated ones (such as the PBX market, for example). Consolidation at this stage is healthy; I have, in fact, been recommending co-opetition as a viable approach in hosted IP telephony for some time now.
As promised, I continue to share my thoughts on the dichotomy of hosted/cloud communications and premises-based infrastructure. Eventually, I will have to deal with the differentiation (if any) between cloud and hosted, but for now, I am not yet sure where to draw the line. Although some tend to believe that these are two completely different animals, I believe the two have one major element in common: businesses adopting hosted or cloud communications should be willing to outsource all or most of their communications infrastructure and infrastructure management from a third party. Therefore, in discussing the potential for cloud communications, it seems imperative that we look at how the market has evolved over the past decade and what have been some of the factors determining customers’ choice for hosted or premises-based communications.
Historically, businesses around the world have favored premises-based implementations. The U.S. and Canada boast some of the highest adoption rates for hosted telephony, and yet the segment represents around 15 percent of installed business lines in those markets. Several factors have contributed to this uneven distribution and will continue to play a role in the future; the move to IP telephony and UC will, however, change the nature of these factors and their impact on communications investment decisions.
a) Supply-Side Factors
Functionality: Historically, hosted services have offered more limited functionality compared with premises-based solutions. Although TDM Centrex supports most key PBX features, such as abbreviated dialing, call forward, call park, call transfer, DID, DOD and music-on-hold, businesses are frequently drawn to PBXs for their superior functionality. With the advent of hosted IP telephony, however, more comprehensive service bundles (including messaging, presence, conferencing and other applications) are making the hosted offerings more appealing than alternative premises-based solutions.
Contract Terms: Centrex and other hosted services deliver greater flexibility, especially in terms of capacity adjustments at times of downsizing or rapid growth. Centrex contracts typically last two years, allowing customers to more frequently change solutions or providers based on new requirements.
Marketing and Awareness: The advent of IP telephony has further boosted PBX penetration as PBX vendors have been faster to market with advanced IP telephony platforms and have marketed them more aggressively than hosted services providers. Incumbent service providers have been slow to upgrade their communications infrastructure to VoIP and have only cautiously pursued IP communications offerings for fear of cannibalizing their existing Centrex and other legacy services. Service providers are, however, becoming more confident in marketing their next-generation services as they ramp up their cloud architectures and IP communications capabilities.
b) Demand-Side Factors
Security: Historically, telecom managers have considered multi-tenant, outsourced platforms to be less secure than premises-based systems, and IP telephony has raised even more concerns in that area. As security technologies rapidly improve for hosted solutions, we expect this concern to dissipate.
Control: Similarly, concerns about control continue to favor PBX implementations, in spite of the fact that advanced, hosted IP telephony offerings provide in-house staff with greater control than traditional Centrex services. For example, graphical management interfaces allow IT/telecom managers to perform moves, adds, and changes (MACs) quickly and conveniently without having to contact the service provider or pay for a technician to visit the site. These interfaces also allow managers to configure some features and settings on the go, based on user needs.
Businesses also tend to believe that they have greater flexibility and control over features and capabilities with a premises-based solution, since they can purchase or develop those internally as the need arises. In reality, the increasing complexity of communications architectures favors an outsourced solution, since a service provider is motivated to more rapidly upgrade and enhance the service offering.
TCO Analysis: The most compelling factor in choosing hosted or premises-based communications is the total cost of ownership (TCO) for the two scenarios. Of course, TCO varies widely, depending on a company’s existing infrastructure, number of sites, number of users (total and per site), specific application requirements, and available telecom staff.
For enterprises with a few larger sites, a premises-based solution typically offers a better TCO over a longer period of time. To a large degree, that’s because businesses often extend the life of their communications solutions well beyond the amortization period, at which point the asset has no book value – and therefore, no associated cost. Furthermore, with only a break-fix maintenance contract in place, support costs can also be reduced. Of course, this approach involves a significant amount of risk and can prove quite costly if an outdated solution begins to malfunction on a regular or system-wide basis.
Alternatively, Centrex and hosted IP telephony have been adopted by businesses that choose not to maintain in-house support staff and instead outsource their communications. Staff reductions, therefore, result in immediate and ongoing cost savings for these customers. It should be noted that TDM Centrex scenarios may involve some additional costs if a technician needs to be dispatched to the site on occasion; however, hosted IP telephony eliminates this cost burden as well due to more flexible network monitoring and management solutions.
Further, hosted services, and especially hosted IP telephony, provide significant TCO benefits to small branches and small sites within large organizations. Businesses choose hosted services for their remote locations in order to lower the costs of adding incremental capacity and to deliver uniform capabilities across geographically dispersed users.
Are you at VoiceCon? If you are, make sure you visit Siemens’ booth for a demo of a potential CaaS offering residing in Amazon’s EC2 environment. Unfortunately, I cannot make it to Orlando this year, but I can’t wait to hear/see more details. (And no, the picture above is not part of the demo :))
Not only does this eventual partnership bring Siemens to the forefront of UC innovation once again, but it can also give a boost to hosted UC and Communications as a Service (CaaS), as well as to UC, in general. Such a partnership marks a trend that will grow over the next few years and will be eagerly pursued by all leading communication and business application vendors. Time to market is a critical factor, though, and the trend-setters can both gain a competitive advantage and/or suffer the consequences of market immaturity. For the sake of Siemens, their customers and even their competitors, I hope they do it right from the start!
A potential OpenScape deployment in the Amazon cloud is significant, because it opens up a whole new growth opportunity for UC. As a hosted (CaaS, cloud) offering, it provides flexibility and a less risky entry point for customers that are willing to trial UC but have limited capital budgets. By leveraging a partner that already has an enormous brand recognition and marketing abilities, Siemens has just created a channel for its UC solution, that expands its addressable market well beyond the reach of its direct sales force.
It is too early to predict exactly how successful this partnership is going to be, but we can speculate. Although demand for CaaS and UC in general is growing, even a joint endeavor of this magnitude cannot overcome the numerous barriers to adoption including the general economic climate, availability of legacy infrastructure and customer hesitation about which vendors and platforms to choose. Further, while this partnership creates marketing and sales opportunities, how will services be handled? Which party will businesses turn to for CPE (phones, gateways, etc.) installation, maintenance and evolution/migration? If the entire premise-based infrastructure is up-to-date and all that’s needed is a hosted presence component, it may be a favorable scenario for this kind of solution. But if the CPE needs to be upgraded, will customers handle the migration and the new integration with the hosted service or will they call someone and who would that be?
There are a lot of further implications from that announcement. For example, this CaaS solution threatens hosted UC providers that are dependent upon their hosted telephony business to grow. Given the larger CPE base, a hosted UC platform that integrates with premise-based solutions has a greater potential than end-to-end hosted services. With Siemens’ superior OpenScape voice capabilities, a fully hosted package, if properly delivered (from sales to installation to management) can dramatically impact the hosted telephony and hosted UC markets, which are currently very fragmented and populated by multiple small providers with limited technology capabilities and sales resources.
Overall, a potential OpenScape UC in the cloud is good news for the industry and worth monitoring closely going forward. The concept is great, but let’s see how Siemens handles the execution.
Do you think soon we will be shopping for communication services like we do for books and CDs? Will we trust what we see on the Internet? Won’t businesses still look for a more direct touch, e.g. a call/visit by a knowledgeable consultant? Is the Amazon brand as popular with businesses for business solution shopping as it is with consumers? I have many questions. Let me know if you have the answers.