The Hosted IP Communications Market
I am currently updating Frost & Sullivan’s North American Hosted IP Telephony and UC Services study. This is one of my favorite enterprise communications markets and I have tracked it closely over the past nine years. To many that may sound unbelievable as hosted IP PBX and UC services have only recently gained popularity, boosted by the cloud hype.
Over the years, hosted communications services have evolved and matured – both on the platform/technology side and the business model side. BroadSoft has gobbled up two of its original competitors – VocalData (aka Tekelec, aka GenBand) and Sylantro; softswitch vendors such as Sonus and Metaswitch have more aggressively pursued feature-rich services; Nortel’s carrier group has been acquired by GenBand; and a host of PBX vendors have launched various hosted/cloud platforms. Fortunately for these vendors, service providers are becoming increasingly interested in hosted IP communications as traditional voice loses ground to mobile and consumer PC-based communications. On the demand side, economic factors coupled with greater awareness of the benefits of hosted communications are making enterprise decision makers more open to discussing outsourcing alternatives.
I will delve deeper into market trends, market size and competitive factors when I complete my research. In this article, I would like to focus on Mitel and its portfolio of hosted solutions. As always, Mitel is at the forefront of technology development, but this time also venturing with some new delivery models.
For about a year now, Mitel has been offering a multi-tenant platform – the Multi-Instance Communications Director (MICD). This solution is targeted at service providers looking to brand their own hosted IP communications services and provide all billing and management support. MICD is a high-density platform that competes directly with the more “traditional” hosted IP telephony platforms (such as BroadSoft’s) and appears best suited for SMBs looking for standard PBX functionality, along with voicemail, twinning and basic conferencing. Its architecture makes it more flexible than most other hosted platforms, however, enabling service providers to deliver more distinct sets of capabilities to each customer, resembling single-tenant hosted PBX implementations.
MICD has so far found appeal with CLECs, traditional VARs, as well as for in-building multi-tenant deployments. Service providers can purchase either perpetual licenses or a licensing subscription. Mitel claims about 15 service provider customers globally.
Mitel has been one of the first communications vendors to offer a virtualized solution – Virtual Mitel Communications Director (MCD). It is available to service providers looking to target a slightly different customer base – typically larger businesses with hybrid (hosted and premises-based) environments. Distributed organizations typically have different needs across their geographically dispersed sites. While larger locations favor premises-based implementations, smaller remote sites are more suited for hosted services. Virtual MCD allows service providers to deliver highly customized communications solutions to businesses that require integrations with premises-based platforms and databases. For service providers, the virtual MCD architecture is comparable to MICD in terms of implementation and management costs. It is less scalable, but delivers some superior features and functionalities, such as virtualized contact center, web conferencing and UC capabilities.
Virtual MCD has been commercially available for approximately one year and, to date, Mitel has mostly marketed it, directly and through its channel, to the traditional CPE base. More recently, it has enabled hosted providers to also take advantage of this cloud-based offering. Resellers can use this solution to generate additional revenues and differentiate, leveraging their existing customer relationships, knowledge of customer CPE infrastructure and close familiarity with Mitel’s portfolio.
For a little over two months now, Mitel has been offering yet another hosted alternative – Mitel Anywhere. With this solution, Mitel steps in as the communications service provider hosting the MICD platform in its own data center. Mitel recognizes that, while demand for hosted communications is growing, a lot of the service providers are not equipped to host advanced communications infrastructures. Mitel has identified the SMB customer segment up to 100 users as the sweet spot for Mitel Anywhere services. It can, however, meet the demand of larger, distributed organizations using Virtual MCD.
Mitel plans to add some advanced capabilities such as contact center ACD to its suite of messaging and audio and web conferencing apps currently available on the platform. Eventually, the full Unified Communicator Advanced capabilities are likely to become part of the offering.
Datacenter Accreditation for Cloud-based Communications Services
On February 7th, Mitel announced a new initiative. The Virtualized Datacenter Accreditation program is targeted at datacenters, and Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS) providers. The program is intended to certify partners’ infrastructure capabilities required to support Mitel voice and UC applications. Mitel announced three certified IaaS providers: Artisan Infrastructure, Host.net, and Hosting.com, who intend to support or offer hosted voice and UC solutions to the market in the coming months based on Mitel cloud-ready software.
Mitel acknowledges that there are many partners who wish to be between an agent and a service provider. They have the capabilities to interface directly with end users and design and market hosted communications to them, but are not well equipped to manage a datacenter or a sophisticated communications platform with the required billing and management infrastructure and processes. By enabling IaaS and PaaS providers to deliver the appropriate infrastructure to VARs and managed services providers (MSPs), Mitel effectively creates a new business model that leverages the specific skills and capabilities of different providers to extend the reach of advanced communications to a larger number of market participants.
The value chain in the communications marketplace is likely to disintegrate further as vendors and service providers choose whether to develop technologies, manage datacenter infrastructure and/or communications platforms (now increasingly part of virtual datacenter environments), or specialize in marketing, sales and customer relationship management. New business models will emerge and market participants will have to find the formula that best works for them.
Mitel has been fast to market with its hosted/cloud initiatives and is now offering some appealing deployment options to its partners and business customers. It is likely to face competition from other carrier and traditionally CPE vendors pursuing similar strategies. For example, BroadSoft has a cloud service delivered out of its own datacenter in beta trials and claims overwhelming interest from the service provider community. Microsoft is likley to launch a multi-tenant VoIP capability on its Lync platform in the future, even though it has so far declined to support service providers in customizing Lync for hosted voice. Alcatel-Lucent, Cisco and Siemens are developing technologies and strategies for the cloud market as well. As the market evolves, functionality, partner relationships and financial viability will represent key success factors.
On December 22, Mitel announced it had filed for what seems to be a record (Ottawa’s largest) $230 million IPO. The filing was somewhat surprising (at least, to me) because I typically assume a recessionary economy is not the best time to go for an IPO. The communications industry does not seem to be in any better shape than the rest of the market either. However, I can see some reasons why Mitel would wish to do it right now.
Firstly, Mitel has been determined to raise more equity for some time now. It filed for an IPO back in 2006 but then withdrew its application as it chose to pursue the acquisition of Inter-Tel. It then had to streamline its portfolio and organization before it could file again.
Secondly, Mitel has a significant amount of debt and the large interest payments are hurting its profitability and ability to re-invest capital into the business. As it states in Form F-1, Registration Statement Under the Securities Act of 1933, it intends to use the proceeds generated through the IPO primarily to pay off its debt:
“We intend to use the net proceeds of this offering as follows:
- to repay $30.0 million of borrowings outstanding under our revolving credit facility. As of October 31, 2009, the principal amount outstanding under this credit facility was $30.0 million. This credit facility currently has an interest rate equal to the London Interbank Offered Rate, or LIBOR, plus 3.25% and has a maturity date of August 16, 2012;
- to repay $ million of borrowings outstanding under our first lien term loan. As of October 31, 2009, the principal amount outstanding under this loan was $289.0 million. This loan has an interest rate equal to LIBOR plus 3.25% and has a maturity date of August 16, 2014; and
- to fund working capital and for general corporate purposes, which may include acquisitions.
While we currently anticipate that we will use the net proceeds of this offering as described above, we may reallocate the net proceeds from time to time depending upon market and other conditions in effect at the time. Although we occasionally evaluate potential acquisition and investment opportunities, we have no current arrangements or commitments with respect to any particular transaction. In addition, to the extent the net proceeds of this offering are greater or less than the estimated amount, because either the offering does not price at the midpoint of the estimated price range or the size of the offering changes, the difference will increase or decrease the amount of net proceeds available for general corporate purposes. Pending their application, we intend to invest the net proceeds in short-term, interest-bearing, investment grade securities.”
While Mitel’s net income of $12.6 million in FY 2008 and net loss of $193 million in FY 2009 (its Fiscal year ends in March), seem to paint a gloomy picture, a couple of factors need to be taken into consideration when evaluating its performance. In FY 2009, Mitel reported an Impairment of Goodwill charge in the amount of $284.5 million, which is not likely to impact its profitability in future years. Further, its adjusted EBITDA ($50.2 million in FY 2008 and $78.7 million in FY 2009) shows that, should Mitel be able to eliminate a portion of its debt, it will be able to generate a healthy return for its shareholders.
Thirdly, in spite of the bad economy and the dismal state of the communications market today, there appear to be signs of an imminent recovery. The U.S. department of Labor just announced that the number of unemployment claims dropped to 452,000 for the week ending on December 19, 2009, which is 28,000 less than the previous week. Further, most communications and technology vendor are now reporting stabilizing of demand, which remains weak compared to a year ago but is the same or better compared to the first half of 2009. Some industry pundits are suggesting the stock market is in a new bubble, which could be creating a beneficial environment for IPOs and other investment opportunities.
Fourthly, Mitel has made some significant investments in technology development to position itself more competitively in the evolving unified communication and collaboration marketplace. In addition to greatly enhancing its applications portfolio, it has also virtualized certain elements of its architecture looking to deliver further cost-efficiencies to its customers. As virtualization and cloud computing appear to be among the top 2010 priorities for technology executives, solutions addressing these customer needs are likely to generate growing revenues over the next few years.
Finally, Mitel continues to be one of the strongest SMB vendors worldwide, and especially in North America. In 2008, Mitel held about 9.6% market share of North American telephony revenues, placing it in fourth position along with NEC. In the highly fragmented SMB marketplace, Mitel is probably the largest market participant with a portfolio of software, devices and services that are targeted specifically at this customer segment. This is a significant competitive advantage given that customers are likely to have some concerns about the portfolio roadmap of the newly merged Avaya-Nortel and maybe shy away from getting locked in an end-to-end Cisco environment. Certainly, Mitel faces competition from some other agile SMB vendors including open-source providers (e.g. Digium), consumer solutions (e.g. Skype), ShoreTel, Interactive Intelligence, etc., but their current market shares are significantly lower.
We will have to wait a few months to see the outcome of the IPO. I am personally hoping to see Mitel emerge financially healthier in 2010 in order to be able to continue to provide its customers with the value of its advanced communications technologies.
Today, September 23, 2009, Mitel announced significant enhancements to its Unified Communicator Advanced (its core UC application) and TeleCollaboration solutions (see press release here).
Unified Communicator Advanced (UC Advanced) release 3.0 features capabilities such as dynamic status, integration flexibility, a launchpad for Web and applications access, knowledge management and context-driven communications, among other new or enhanced functionalities.
The dynamic status capability allows users to dynamically manage their extension in terms of specifying a user’s status with regard to various messages, presence and call routing. It also enables users to treat certain communications preferentially based on user-selected criteria. Finally, it allows users to remotely manage their status.
Further, Mitel’s UC Advanced solution now integrates with Microsoft Office, IBM Lotus Notes and UCA APIs. Calls can be launched from Internet Explorer, Word, Outlook, IBM Lotus Notes or the user’s calendar.
The knowledge management capability provides call recipients with information about callers such as recent emails, contact entries and exchanged documents.
The launchpad allows users to launch Mitel applications from a single access point. Individual contacts can be called with a single mouse click, including creating speed dials that navigate voicemail and conference service menus.
Context-driven communications is another valuable addition. It enables screen pops providing the called party with information about the subject and call priority. It also displays a picture of the caller and allows the user to respond via IM.
Some other UC Advanced enhancements include visual voicemail, secure instant messaging, RSS feeds, easy audio and web conference initiation through the desktop, etc.
The UC Advanced solution scales from small to very large enterprise and can support up to 5,000 users on a single server.
Mitel’s TeleCollaboration solution release 1.5 features integrated video and collaboration capabilities, low bandwidth requirements and high tolerance, and greater simplicity compared to competitor solutions. It offers browser-based collaboration and the ability to participate from anywhere, as well as session and snapshot recording.
With these technology enhancements Mitel is seeking to address some current business challenges such as the increasingly diverse, geographically dispersed and mobile enterprise workforce and the need to manage multiple communication media for greater productivity and efficiency. A plethora of advanced UC and collaboration solutions offered by communication vendors are looking to address the same business needs and challenges. Yet, Mitel has remained at the forefront of technology innovation. While most of the new capabilities are not entirely unique, they are very much in line with industry trends and match or exceed those offered by its competitors. My personal favorites are the knowledge management and context-driven communications capabilities. We frequently go through multiple emails and documents in order to prepare ourselves for a call with a colleague, customer or partner. The tighter integration of such resources into the communication process seems to have the potential to greatly enhance user convenience and productivity. I also believe that the integration of video conferencing with collaboration (file sharing, etc.) is a valuable feature that provides users with a more comprehensive collaborative experience.
What also makes Mitel unique is its consistent focus on the SMB market and its relatively strong competitive position in this space. When combined with the rest of its communication portfolio, these solutions can provide SMBs with capabilities typically available to large businesses only. Given Mitel’s efforts to gain greater penetration into the larger business space, the scalability of these solutions along with the rich functionality provide Mitel with an opportunity to more successfully move upstream as well.