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In this Industry Buzz podcast, the UCStrategies Experts discuss recent M&A activity and its effect on the UC and the contact center markets.
The discussion is moderated by Blair Pleasant, and includes UC Experts Steve Leaden, Marty Parker, Russell Bennett, Don Van Doren, Jon Arnold, and Art Rosenberg.
Blair Pleasant: Hi everybody, this is Blair Pleasant here with a few of my UCStrategies colleagues, and there has been a lot of activity lately in terms of acquisitions and divestitures in the UC world. For example, Avaya acquired Sipera and Aurix while Alcatel-Lucent sold off Genesys to a private equity firm. So today, we are going to discuss how all this recent activity will impact the UC market and in particular on the contact center market, and also what other mergers or spinoffs do we see happening in the near future. What kind of shifts do we see as far as market share and leadership, and talk about some general things. So Steve, why don’t start off giving us an overview of what you see as the impact of some of this activity?
Steve Leaden: Sure Blair, from our vantage point we are definitely seeing a maturity of the UC market in general. We are seeing more and more applications being accepted by the enterprise user community. We are also definitely seeing a focus on reducing costs everywhere and helping cost justify the new technologies through that. And we are also seeing finally the introduction of how do we use these products and how do we use these applications through virtualization and other kinds of techniques to differentiate ourselves from our competition. Then of course, we can’t forget the fact that mobility has matured, the opportunity for remote workers, virtual workers, etc. are forcing the industry to take a hard look at what is really being driven out there.
So again, users are focusing on return on investment, they are looking at training, and they are looking at change management. They are looking at employee driven next-gen technology and how can we run out company virtually. How do we improve on productivity and how to reduce total cost of ownership as well as our communications costs? So we did a broadcast not too long ago on UCStrategies about SIP trunking and we are seeing a maturing there, that is one of the spotlights today with the acquisitions of Avaya and we are seeing differentiators up to 900% from high cost down to low cost just for the SBC’s that are available out there. So obviously, we are looking to manage down costs. We are also seeing just over the last 24 months, the idea of UC components i.e., presence and IM chat functions and other kinds of variable applications now being included in a basic license, for just a telephone or voicemail kind of licensing, if you will. So it is very interesting how that the market again has matured, price point has come down at least 10% and I think that is driving a lot of what is going on in the market. So, Blair back to you.
Blair Pleasant: Okay, thanks Steve. Let’s turn and talk about Genesis. Last week Alcatel-Lucent announced that a private equity firm Permira plans to acquire Genesys for $1.5 billion and Genesys is going to become an independent or standalone entity again, not connected to a switch vendor. So essentially, it is going back to its original roots. Marty I know you wanted to talk about the impact on Alcatel-Lucent Enterprise and Alcatel-Lucent in general, so can you start us off?
Marty Parker: Yes, thanks Blair. I think that all of the mergers and acquisition activity can be seen in a context that explains Alcatel-Lucent’s’ decision pretty well. And that is that every major established company and I say established, the incumbent companies want to protect and expand their share of wallet with existing customers. So their existing customers are paying them for a certain set of services to do a certain set of jobs and you always want to do more for that customer. You want to expand that share. So Alcatel-Lucent, who is in large part a networking company, they have a major data networking portfolio, and in even larger part a major carrier company, doesn’t want to let go of the ability to serve unified communications needs of their clients. They have done some very interesting and creative work there over at Alcatel-Lucent in the past I would say couple three years moving from the My Teamwork platform over to the My Instant Communicator platform which has a lot of SIP and presence and even Genesys Labs content in it. I am sure that this sale will have in it an ongoing relationship with Genesys Labs. So I see Alcatel-Lucent as finding a really attractive sweet spot here, they have got Genesys back out as a separate independent growth company that is not constrained at all by the Alcatel-Lucent brand. I am sure Don will say more about that later, but they can still serve their clients. It also helps them continue to defend their customers, especially seen from a carrier perspective, defend those from competition and of course remember Alcatel-Lucent is based in France and very strong there, but also I know from historical information they are very strong throughout Europe, very strong in South America, and with good strength in much of Asia. Actually, North America is a place they would like to have more distribution and more strength but they certainly have the technology if they could get the channels developed.
Then once a customer has covered the share of wallet and the defense problem, then they want to work on taking other people’s territory, you know, expanding their market share and entering growth markets. So one of the things that I see in a number of these moves, others will comment on the Avaya and Genesys moves and so forth. But there is a fair amount to trying to grow share of market and I see there is a cloud-based motion, and I do not think we have seen anywhere near the frenzy yet. However, I think we will see frenzy in the next couple of years, of carriers. Whether they are voiceover IP, voice telephony carriers or they are data backbone carriers, but they are going to be rushing to stake out their claim in the cloud market. Whether they are too early or too late is another conversation but I think you will see a lot of acquisition trying to build cloud capability.
I also see a lot of energy around figuring out what communications will look like in the social media world, in the world driven by social media, and I think customer interactions are going to be really a powerful part of that and we will see a lot of investment there too. So my sense of Alcatel-Lucent is protecting share of wallet for their existing customers and continuing to expand that share. Defend themselves from competition in their home territories while continuing to have the ability to attack and grow in other territories and certainly North America is one of those for Alcatel-Lucent.
Blair Pleasant: Okay thanks, Marty. Russell, do you have something to add and talk about what Marty just said?
Russell Bennett: Thanks, Blair. I agree with Marty that a lot of the incumbent enterprise telephony vendors are trying to defend wallet share and market share. I think the challenge that they are facing is the economic disruption of UC. You know, whilst it will be great to continue to extract the kind of premium margins from the customers that they have been used to, it is just not possible in the UC era. This is what is breaking all of the business models, is having to go head-to-head with new entrants to the segment, the enterprise communication segment, at prices that they cannot compete with without completely disrupting their business. So this is why all of the major telephony incumbents apart from NEC have ended up being spun off and gone to largely private equity, from Avaya, from Nortel, from Siemens, and now this latest thing with Alcatel-Lucent. So the traditional model is broke now. The traditional price, $1000 per user, acquisition costs, and then maintenance costs after that, nobody is going to get that anymore. It is going to be about $300, and if you can’t make money on $300 per user, then you need to get out of the business and that is what is happening. Back to you, Blair.
Blair Pleasant: Thank you Russell. Don, can you talk about the impact on Genesys and the contact center?
Don Van Doren: Sure Blair, thanks very much. Let me actually talk a little bit about the contact center from the perspective of some of the things that Marty and Russell were just discussing. Lots and lots and lots of changes of course happening right now within the contact center world. Obviously lots of new customer demands, much requirement for new mobile applications, customer portal strategies, so new ways of doing customer interaction. From the enterprise side, people are looking at obviously analytics, what’s the impact of social media, all of these things are really coming on. What’s happened, of course, is that we have seen a number of new companies emerging to attack specific point solutions within this marketplace. Now the legacy vendors of course are all saying, wait a minute, how do we keep our wallet share? How do we do more of this? And all of this is fueling sort of the move toward consolidation and acquisition, some of the things that we have been talking about. And I think we have seen an awful lot of that within the industry. You know, CosmoCom was acquired by Enghouse. Enghouse had previously acquired Syntellect, before that of course Syntellect had acquired Apropo. In another chain of these things, Vovici has been acquired by Varent, interesting little example here. You have a situation where you have a workforce management / workforce optimization company that basically went out and acquired a survey firm, the premiere survey firm, to monitor Voice of the Customer kinds of things.
The point is that one of the things that the Enterprises are struggling with is whether or not they can acquire suite solutions that are good enough in all the various categories. I think the legacy vendors in particular are really struggling to try to acquire companies and acquire new capabilities so that they can be a viable suite contender in this. And this all goes back to the wallet share issue again, and I think that is something that is driving a lot of the moves here.
So what is Alcatel-Lucent doing spinning off Genesys? Well they have really not been as big a player in the whole contact center marketplace. They have products, they have offerings in this area, but the kind of very specialized, sophisticated work that Genesys has always done is not something that is consistent with much of their primary business market. Genesys of course has always held itself out, even while it was under ownership of Alcatel-Lucent, always held themselves out as an independent company. Their positioning of course is that their platform could work with any PBX and could even serve as an integration point for those enterprises that had multiple PBX’s in different locations. And so their spinoff, I think, will certainly not hurt them at all in terms of their ability to go out and continue with that kind of positioning.
I think what is really interesting of course is within the contact center, we are seeing some very new models starting to emerge here. Hosted and cloud solutions are starting to really gear up now, and I suspect that that is going to put additional pressure on some of the legacy vendors. We are going to see a lot of new models emerging over the next couple of years; it is going to be interesting times.
And of course the last thing I will say about it is that one of the key drivers that is happening within contact centers is that all of the things we are learning about unified communications and the way they can improve the business processes and communications within this, this is exactly what the contact centers are needing, and so a lot of the movement in that direction is as well. Back to you Blair.
Blair Pleasant: Thanks, Don. Let’s turn to Avaya. Avaya announced two acquisitions in the past couple weeks as I mentioned, Sipera, which provides SBC capabilities and UC Security Solutions, and Aurix, which provides phonetic search technology for contact centers. Russell, can you talk about what you see in this area and the rationale maybe that Avaya had for these acquisitions?
Russell Bennett: Sure Blair, thanks. Avaya was probably the last of the UC market leaders to have a federation capability, which is the ability to natively connect two UC systems in different companies over the internet. Cisco, Microsoft, Siemens all have that to a greater or lesser extent. So I saw a blog entry on the Avaya blog about four or five months ago saying they thought the next big thing in UC was federation. They were talking about actually not vendor-to-vendor closed federation but multiple vendor open federation, which is an ambitious objective, and I look forward to seeing how they are going to operationalize that. But clearly they needed a network edge element, which is approximating to what we see as an SBC these days, and so they needed to go out and buy somebody and Sipera was a good candidate. I think they have been working with those guys as an OEM vendor of SBC’s. It would be very expensive to buy Acme Packet, so they went out and bought Sipera for that. I think probably some time in 2012 they will be shipping a federation feature, whether it will be Avaya-to-Avaya federation, or it will actually get to the open federation thing, remains to be seen. Back to you, Blair.
Blair Pleasant: John do you want to add in your thoughts?
Jon Arnold: On Sipera I think that kind of says it well. I think the key here is that the SBC market is really coming into its own, and for the cost of acquiring a company with their kind of background in this space, I think they get a nice kind of alternative to having to go the partner route. Where Acme is increasing kind of like the only game in town and for better or worse that is just the reality of the market but I think their customers are probably looking for lower cost alternatives. Especially as SBC’s start to become much more cognizant for enterprise networks, they are starting to really see that there is value to have it as they start to go deeper into the IP world.
Blair Pleasant: John, do you want to talk about another recent acquisition, Warwick Valley Telecom, that acquired Alteva?
Jon Arnold: That happened in the summer and there was some nice news today where they were recognized as the M&A deal of the year in the smaller end of the venture market for that deal to acquire Alteva. It was mentioned earlier in the Podcast, some of these deals have to happen to gain scale and for $17 million, Warwick kind of future-proofed themselves pretty nicely with Alteva because this is the other end of the whole UC offering is what’s happening in the cloud. For legacy operators like Warwick, they acquired a big backbone with USA DataNet a couple years ago. So they have the tools in place now to successfully migrate away from their traditional legacy voice business and now they have a full built in end-to-end solution now with the backbone and now with the Alteva platform, which of course is tightly integrated with Microsoft. So they have go a pretty complete solution now to really compete, and keep their customers. Also in their kind of market, this is another UC issue for down the road, but the cable guys are becoming an important form of competition now that are going after that business market and they are going to want to get their way into this space with a UC-type of offering. So again, Warwick is kind of defending its territory but also giving it options to grow. I think that is going to be an important thing for us here, something at UC, that the value proposition of UC is starting to become more important for the operators as a way to get their customers, and keep them, and replace those declining legacy revenues.
Art Rosenberg: Blair, this is Art, I would like to make a quick last comment. I think this is focusing on where things are going in terms of providing complete capabilities and suites. It is going to fit in well with the cloud market and mobility, because that is where it is not location dependent anymore and things are going to change all the time because it is software and it is going to constantly evolve and get better. So people have to prepare for being able to do everything all the time and still maintain their markets which is no longer going to be premise-based so much as it is going to be hosted services.
Blair Pleasant: Yep, good point. We will obviously be continuing this discussion as there are new mergers, acquisitions, and even divestitures in the coming months. So thanks everybody and see you all next week.
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