Declining Revenue, So What?
As the UC industry moves toward software-based solutions, hardware sales decline. That should be obvious and healthy, but it seems to confuse a lot of people.
It’s the same thing for the broader UC vendors and the UC channel. It’s actually more than hardware vs. software, but products vs. services. Various forms of hosted services or software subscriptions are completely replacing capital acquisitions. We saw this first with newspapers turning into website subscriptions, but now it’s common in IT. Servers and software are commonly obtained as a service. .
This week on UCStrategies, Giles Adams wrote in the Bigger Picture that equating declining hardware sales “to a weak videoconferencing market doesn’t sit comfortably with me, because the market is quickly moving to a position where it won’t be defined by hardware sales but instead by usage volumes and delivery formats.”
The concepts I’m describing are easy to understand, but difficult to live through. It creates two challenging problems; year-to-year comparisons and operational implications of weaning off the hardware teat.
Many people determine growth by comparing year-to-year revenue. If the number goes up, the firm is growing. But this is not so straightforward with industries in transition. It is reminiscent of Roger Maris beating Babe Ruth’s home run record. Babe Ruth set his 60 home run record in 154 games. Maris broke the record with 61 home runs on the 162nd game of the season. 61 is bigger than 60, yet it was a dubious victory. Major League baseball was in transition regarding the number of games per season.
This just happened to Mitel. The firm beat expectations, reported healthy profits, and impressive productivity; but some were concerned about declining revenue. However, the revenue dip can be partially explained by its virtualized solutions and hosted services – neither of which involve the sale of Mitel hardware.
It’s across the industry – every major UC vendor is in some level of transition away from hardware. Subsequently, the industry as a whole has been reporting near flat revenues, yet no one seems to be without a phone? Speaking of phones, consider the rise of Polycom, snom, and Aastra. A decade ago phones came from the provider of the call processing solution. Same is true for firms like AudioCodes, Dialogic, or Patton that provide hardware components to UC solutions, so the platform vendors don’t have to.
It’s possible today to acquire a comprehensive enterprise class UC solution without buying a single piece of hardware from firms like Cisco, Avaya, NEC, and many others.
The second problem is many organizations use their revenues to determine all sorts of metrics. For example, figures like R&D spending get compared to revenue. Also, the sales compensation model is often defined by revenue. The challenge is revising all these things as organizations reexamine their business model.
This is a painful transition for vendors and channel partners. These businesses were built around upfront big transactions. It’s a new world: servers are generic, IP phones and SIP trunks don’t require specialized ports for expansion, and phones are being replaced with apps (desktop and mobile). The transition reflects numerous operational assumptions and cash flow requirements.
There’s no easy solution to the pain, except to stop looking at revenue and focus on profitability. If revenue is heading south faster than business is growing, it’s not necessarily a bad thing. Focus on profitability and other health factors.