Nortel’s bankruptcy and Avaya’s acquisition of its enterprise assets has caused uncertainty and fear among Avaya and Nortel customers and partners. Avaya recently presented its vision for the evolution of the combined product portfolio. I would like to hear from businesses, VARs, SIs, etc. about their specific concerns. Did Avaya’s roadmap alleviate some of these concerns or did it raise new ones? Which choices did you think were good? Which ones were wrong? Do you trust Avaya’s commitment to both installed bases and both channels? What would you wish to hear from Avaya? What strategy direction would best serve your needs?
As a Frost & Sullivan analyst I do not endorse any particular vendor. If you email me your opinions, I will protect your privacy and will only use your insight to develop an aggregate perspective on customer and partners sentiments.
Avaya-Nortel: SIP Architecture Becomes Foundation for New Product Roadmap
As I listened to Avaya’s new roadmap announcement on January 19th and wondered if they made all the right decisions, I couldn’t help thinking about the complexity of an M&A process and its implications for everyone involved. This article is not about the specific product choices Avaya made, although I thought they did a good job taking multiple factors into consideration including product features and capabilities, customer and partner investment protection concerns, and vision for the evolution of the total portfolio and architecture. Extending the life of most Nortel products for another 18 to 30 months and continued support for Nortel’s more advanced and unique products such as Nortel’s AS5300 were good calls. I was surprised to see so many end users inquire about the fate of the Call Pilot and I am glad Avaya had some good news for these customers. I also thought Avaya’s decision to keep and evolve ACE was the right one as I believe ACE and application enablement will be key for its competitive positioning going forward.
It is only natural that Avaya intends to eventually merge and integrate all products and solutions into the Aura architecture. Aura is a technological framework (and not just packaging or a marketing term) based on SIP and SOA, and it makes sense for Avaya to look to integrate its now extended product line into the same vision or framework. It will be critical for Avaya to continue evolving this framework with an eye on new technological developments and customer and partner needs.
Application Enablement and Openness Drive New Competitive Dynamics
I think we should, however, look at the Avaya-Nortel acquisition from another angle as well. It provides an example of portfolio integration challenges and possibilities in the context of current technology trends towards greater openness and interoperability.
The shift to open standards, SIP and SOA is now making such acquisitions less painful than they used to be in the past – for the merging vendors, the channel partners, and their business customers. It will take Avaya less time and effort to integrate the best-of-breed applications of both vendors into its Aura framework because of the greater openness and interoperability of both vendors’ advanced communications solutions. Customers can more cost-efficiently mix and match platforms and aplications, not only from these two vendors, but from other vendors as well, since communications are becoming more software-centric and standards-based. Overall, today, customer investments are better protected and less vulnerable in case of abrupt changes in competitive dynamics.
In Avaya’s case, SIP, Aura and ACE will play key roles in delivering a more flexible and cost-effective migration path to its customers. Other vendors have their own next-generation architectures and application enablement environments that allow them to integrate with competitors’ platforms and applications. The capabilities of each vendor’s application enablement technologies vary from a more limited set designed to integrate communications with messaging and presence platforms (e.g. Avaya’s AES) to a broad range of capabilities including integrations with messaging, presence, business process, Web 2.0, mobile, and contact center applications, TV and video broadcasting, etc (e.g. Nortel’s ACE).
As unified communications become further integrated with digital content, business process applications and other, non-communication technologies enabling “contextually-rich communications” and “communications-enabled business processes (CEBP)”, vendors will need to open their solutions and create tools for customers, partners or their professional services arms to develop custom solutions addressing specific customer needs. Such tools and application enablement environments can be made available to large communities in the cloud so that multiple parties can contribute to the process of creating new applications and mashups. Some of these new mashed-up applications that can be deployed out of the box can eventually become productized to provide a more cost-efficient alternative to SMBs and a new revenue stream for vendors.
Application enablement capabilities will be key for all communications vendors going forward, but they will be even more critical for vendors providing best-of-breed solutions designed to operate in multi-vendor environments.
Of course, vendors have a long way to go before standards become truly open and customers can seamlessly, quickly and easily integrate multi-vendor applications. SIP, though touted as the communications standard of the future, in its pure form offers only a limited set of features. Entirely or partially proprietary solutions still offer better features and capabilities than most open-standard ones. Therefore, although most vendors claim SIP support, the different versions of SIP used along with the proprietary enhancements are not entirely interoperable.
Most likely, the cloud and cloud-based communications will help push further the frontiers of openness and interoperability. Instead of connecting multi-vendor applications and platforms individually at each customer’s premises, vendors can integrate more economically and on a larger scale in the cloud, delivering choice and flexibility to their customers unmatched in the premises-based world. In the beginning, many of these cloud-based services will be simple and will only offer some lowest common-denominator capabilities, but will enable some integrations out of the box, sparing customers the hassle and the cost of complex integration processes taking place in premises-based installations.
Partnerships, Alliances and M&A in a More Open Communications World
Customer demand for application integration will drive vendor efforts towards greater interoperability and co-opetition. Improving standardization and openness in communications technologies, in turn, will enable vendors to more easily engage in partnerships and alliances in order to deliver greater value to their customers.
There are multiple reasons why companies wish to merge. Most often, they are looking for new revenues streams, but also – for opportunities to more tightly integrate their technologies and deliver a one-stop shop value proposition to customers. Will more open architectures reduce the appeal of complex M&A processes in favor of partnerships and alliances? Should we expect further market concentration or the proliferation of more innovative and nimble market participants providing business customers with a wide array of options?
Power in the top tier has become concentrated, but the SMB market remains quite fragmented. While it will become less appealing to go through an M&A for the purposes of ensuring technology integration, it will also become less challenging to integrate portfolios in case of an M&A. M&A will likely take place for the purposes of acquiring installed bases, skill sets and business models (e.g. professional/managed services), simply eliminating a competitor, or for geographic expansion. I believe both trends (consolidation and fragmentation) will persist, but the drivers behind vendors’ business model decisions will change. What do you think?
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.
Today, September 14, 2009, Nortel Networks Corporation (Nortel) announced that “it, its principal operating subsidiary Nortel Networks Limited, and certain of its other subsidiaries, including Nortel Networks Inc. and Nortel Networks UK Limited, have concluded a successful auction of substantially all of the assets of Nortel’s global Enterprise Solutions business as well as the shares of Nortel Government Solutions Incorporated and DiamondWare, Ltd. Avaya Inc. (Avaya) has emerged as the winning bidder agreeing to pay US$900 million in cash to Nortel, with an additional pool of US$15 million reserved for an employee retention program.
The sale is subject to court approvals in the U.S., Canada, France and Israel as well as regulatory approvals, other customary closing conditions and certain post-closing purchase price adjustments.”
Both the press release and the comments provided by Joel Hackney, President of Nortel Enterprise Solutions, on the analyst call this morning described the event as “a very exciting day in the history of Nortel”, “a historic moment” and “a big day for us [Nortel]”. These claims seem to be based on the anticipation that the deal will provide existing and potential [Nortel] customers with investment protection. The deal is expected to close by the end of the year. The finalization of the bidding process, which started last Friday, took, in fact, three days and was described as “a very productive process” demonstrated by the almost doubled price compared to the original stalking-horse bid placed by Avaya earlier this year. The names of the other two bidders were not disclosed, but the Nortel spokespeople noted that Avaya’s advantage as the stalking-horse bidder was primarily in the ability to gain a head start on integration planning.
Much has been said about the potential advantages and disadvantages of this transaction. As I go over my previous post on this subject matter (please see further below on http://www.sipthat.com), I feel that most of my earlier thoughts on the then potential merger are still valid.
The one important aspect that has changed, however, is the price. As mentioned, it has almost doubled since the original stalking-horse bid for US$475 million. I believe that the other two bidders must have played a key role in pushing up the sales price. However, Nortel’s spokespeople reiterated something they had stated earlier when the stalking-horse bid was announced – namely, that the interests of customers, channel partners and employees represented primary concerns in the negotiations. Therefore, other aspects of the transaction (in addition to the acquisition price) must have given Avaya a superior position in the negotiations vis-à-vis the other bidders. For example, Avaya’s commitment to preserve at least 75% of Nortel Enterprise Solutions’ workforce at the time the deal closes certainly demonstrates good citizenship on both Avaya and Nortel’s parts.
Nortel is most likely to continue gradually restructuring its business until the deal closes and to also invest in conveying a consistent and compelling message to all stakeholders about the benefits of the merger in order to ensure the most successful final outcome. Joel Hackney mentioned that the next 60 days will be critical for them to prepare the market for the upcoming transition. While Avaya and Nortel will continue operating as separate entities, each will work towards this goal to the best of their abilities.
For everyone’s sake, I hope that the higher transaction price indicates an even greater commitment on Avaya’s part to make the merger as successful as possible. I hope it takes this opportunity to invest in focused transformation and portfolio evolution and creates a strong entity that can compete more effectively against Cisco and Microsoft (as well as the rest of the communication vendors, of course). There have been speculations that Avaya is likely to just leverage Nortel’s installed base to convert it to Avaya solutions with a minimal investment in preserving and further developing Nortel’s technologies or partnerships. That would indicate complacency that Avaya cannot afford in this period of rapid technology evolution and drastic paradigm shift. I believe Avaya’s leadership has identified the need for change (judging by other initiatives taking place at the company) and is not likely to squander its good fortune granted by the acquisition.
As the merger provides Avaya with an uncontested leadership position both in terms of installed base and shipment and revenue market share, Avaya should use the “break” from the breath-taking competition with Cisco over the past few years to aggressively transform its product line, overall approach and marketing message. With the new threat posed by Microsoft, incremental changes are no longer sufficient to ensure a telephony vendor’s longevity. Some tough decisions may need to be made, but they need to be made rapidly, yet prudently, and with a vision for Avaya’s role in the communications marketplace not two or five but ten years from now.
As I stated earlier and as I can see my fellow analysts have commented, the merger definitely represents a positive development for Avaya. This was probably one of few and, most likely, the best opportunity for it to rapidly gain market share. Without more visibility on who the other bidders were and what they had to offer, it is difficult to judge if this was the best alternative for Nortel, but the increased transaction value and the highly positive comments by Nortel’s spokespeople, give us reasons to believe that Nortel secured the best deal possible given the circumstances.
From a channel perspective, partners may have some mixed feelings. In my opinion, channel partners should not fear that they would be abandoned empty-handed. Avaya has officially committed to a more channel-centric approach and, who else can best install and support Nortel solutions, but its partners? For some time to come, Nortel’s existing customers and those that continue to trust and invest in its technologies will represent a cash cow for Avaya and it will need trained individuals to help milk that cow. Eventually, nothing can prevent partners from also adding Cisco, Microsoft or any other vendor to their portfolio and thus diversifying their portfolio and reducing risk. As vendors struggle for market share, they are more likely than not to seek to attract and nurture new partners.
From a customer point of view, the most positive development is the end of the uncertainty – in its present magnitude, at least, as some uncertainty will linger on for some time to come until Avaya sends a clear message about its portfolio evolution plans and demonstrates some commitment to this plan through consistent execution. With the rapid pace of technology advancements, customers looking for cutting-edge communication solutions should be prepared for shorter technology refresh cycles, anyway. Declining technology prices are making such more frequent infrastructure replacements more affordable. On the other hand, as architectures become more open, most vendors are developing products and strategies for more seamlessly and cost-effectively migrating their competitors’ customers to their own solutions, thus expanding the array of options for end users and offering them much greater flexibility.
In conclusion, I would reiterate that, in my opinion, this is a positive development for the industry. Our eyes are on Avaya to share a vision for the future of the merged entity when the deal closes toward the end of the year.
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.
As we tried to (re)define SaaS and evaluate how different enterprise applications fit into this model, we assessed the different UC platforms from a SaaS point of view.
As I have previosuly stated, given the interoperability challenges when integrating disparate applications into an end-to-end unified communications solution, a pre-integrated service package offered on a hosted/SaaS basis provides great value to business users. But how flexible are service provider application platforms for a SaaS model given that most businesses have some existing premise-based infrastructure? And is SaaS really a panacea for the ailing communications market?
Let’s start by saying that, according to my colleague Melanie Turek (please see her post on SaaS – Enterprise 2.0 Blog » Melanie Turek, as well as Software as a Service: Everything Old is New Again), the SaaS story actually dates back to the dot.com era and the hype around the ASP model. In the old days, most hosted platforms were as monolithic as premise-based solutions which gave little chance to service providers to add more value to the service or differentiate. Today, it is still difficult to figure out to what extent different hosted IP services can also be considered SaaS. SaaS and hosted services bear a lot of similarities; yet, SaaS implies Web-based applications and also the ability of the service provider to manipulate, manage, upgrade, etc. the applications and fully control the back end of the platform in order to provide flexible services to its customers.
Open (understandably, somewhat of an arbitrary term), SIP-based platforms are opening up new opportunities for service providers today. Looking at the IP hosted telephony space, we can see that several of the service providers deploying a BroadSoft platform (including former General Bandwidth/Tekelec/VocalData and Sylantro solutions) have enhanced their service offerings by adding their own applications and improving the backend capabilities for faster and easier quotes, provisioning and service management. Some of the hosted IP telephony providers such as CallTower, Cypress Communications, Engage Incorporated, M5, Smoothstone, Vantage Communications and others have sought to deliver various communication and business applications (telephony, call control/contact center applications, chat/presence, etc., CRM) packaged in a SaaS/CaaS (Communications as a Service) manner.
BroadSoft is opening up its APIs for mashups and the potential integration of its voice communication platform with other applications for the delivery of more comprehensive service packages from the “cloud”. Not long ago it enabled the integration of services delivered on the BroadWorks platfrom with salesforce.com. More recently, LightEdge introduced a hosted UC package based on BroadSoft’s telephony platform and OCS, which shows that there exists a viable opportunity for service providers deploying BroadSoft solutions to expand their offerings with UC capabilities.
As mentioned in a previous post, UC platforms such as OCS and MCS currently used by CallTower and Cypress Communications, the two hosted UC leaders today, do not scale easily to multi-vendor PBX environments, which has pre-determined these providers’ business models whereby they offer a full package of telephony, VM/UM + chat/presence/UC + conferencing capabilities to their customers. This model certainly has its value and benefits to both the providers and their customers, however, it limits the overall target audience to those customers that do not have PBXs.
Cypress Communications, well ahead of everyone else with over 10,000 hosted UC seats today, claims that its Nortel infrastructure – MCS5200 and CS2000 – is one of the best solutions for delivering hosted communications to businesses. CS2000 is a scalable, robust, feature-rich platform that provides all the enterprise telephony capabilities required by business users. MCS52000, on the other hand, is one of the leading UC platforms available on the market today. I would like to point out, however, that Cypress Communications has been able to successfully leverage the capabilities of these platforms to grow its hosted UC base because of its ability to support the service all the way to the desktop including the router and the LAN switch.
CallTower, on the other hand, has experienced slower growth with its hosted telephony offering based on a Cisco UC Manager, but is looking to accelerate sales with a more comprehensive hosted UC package including network-based OCS. Going forward, CallTower is planning to leverage OCS for telephony as well.
There is a third company offering hosted UC and it’s probably the very first company that tapped into this opportunity four years ago – Engage Incorporated. Engage uses Siemens’ OpenScape to deliver voice as well as a number of other communication applications to its customers on a SaaS basis. Engage has had somewhat of a limited success as it has so far tried to bundle communications with other business applications – CRM, ERP, etc. – delivered as SaaS. OpenScape provides it with a unique competitive advantage, however, as it integrates with any PBX, any IM/chat client and any other vendor’s applications. It is one of the most open technologies available on the market today and is uniquely positioned as it does not seek to replace existing telephony or IM solutions but rather acts as the glue that converts disparate applications into a comprehensive unified communications environment.
While most service providers currently involved or considering hosted UC options already have some hosted/SaaS offerings – some started with email, others with telephony, yet others with CRM, etc. – going forward, hosted UC will provide an attractive revenue opportunity for telcos, VARs, etc., that do not yet have any hosted apps in their portfolio. Such providers may wish to consider OpenScape UC as it can enable them to integrate with multiple different premise-based infrastructure environments. Further, HiPath 8000 (OpenScape Voice) can enhance such service provider offerings with a telephony option as well. Developed from a softswitch and providing a robust PBX feature set, it provides a competitive alternative to existing hosted telephony platforms.
Siemens has long claimed to be striving to become a services company and with its open communications approach it seems well positioned to become one of the leading CaaS providers. Partnerships are going to be critical for its success in that space.
SaaS, and communications as a service, in particular, is not a panacea, neither today in the economic downturn, nor in the long term. It does offer a growth opportunity for service providers, however, and a viable option for businesses to test and trial new technologies and applications. Selecting the right platform from the start is going to determine each provider’s success in this space. Therefore, decision makers need to evaluate not only the existing platforms and their capabilities, but also each vendor’s vision and roadmap in order to make the right choice.