Financial Results from the VoIP and IP-PBX Producers
In the past week Avaya reported financial results for their second quarter of fiscal 2013 (quarter ended March 31, 2013) and Cisco reported financial results for their third quarter of fiscal 2013 (quarter ended April 27, 2013). These two companies are the market share leaders for new shipments of enterprise telephony stations in North America and are two of the top market share holders on a global basis.
The results show no revenue growth in the enterprise telephony markets from these two leaders. Avaya product revenues for the second quarter were down 17% from the same quarter last year, coming in at $529M vs. $637M last year. Cisco quarterly revenues for their “Collaboration” business (also products, since Cisco reports services as a separate business unit) were essentially flat (well, up 0.6%) from the same quarter last year, coming in at $1,013M vs. $1,007M last year; but the Collaboration product category declined from 11.1 percent of Cisco’s total revenue to 8.3 percent of total revenue, i.e. Collaboration is a drag on the company’s overall 5 percent per annum product revenue growth rate.
Among other major market share holders Alcatel-Lucent reported a 5 percent decline in their Enterprise segment in 2012 compared to 2011; Siemens Enterprise Communications is privately held and does not report their financial results. NEC reports IP Telephony as part of a much larger IT solutions business, so it is not possible to assess specifically their VoIP and IP-PBX business.
There are some examples of VoIP communications revenue growth in the SMB markets, in some specialized markets such as contact center software, and in cloud-based offers (though cloud-based revenues for solutions using the leaders’ technology are included in the data above). And, a shift in the market from premise-based to cloud-based VoIP may cause a dip in total market revenues while sales shift from purchase to multi-year contracts. However, these factors don’t change the meaning of the picture presented by the leaders’ financial results.
Overall, this must be a disappointing picture for the producers of enterprise Voice over Internet Protocol (VoIP) and IP-PBX technologies, as their revenues are not even matching the Gross World Product growth rate of 3.5 percent (est.) for 2012 over 2011.
The VoIP and IP-PBX picture may be even more disappointing since these companies have invested in, or purchased, new technologies in the areas of conferencing, video, and mobility solutions. If those new technologies are producing revenue growth, then the core IP-PBX businesses are, by deduction, declining even more quickly. If the new technologies are not producing above average revenue growth, then the ROI for the investments would likely be pretty poor.
What might be learned from these results? Here are some points for consideration:
1. Business transformation, for the customer’s operations, is key. For decades, the great technology companies have found ways to convert some costs from other parts of the business – whether labor costs, cost of goods, or other costs – into technology revenues. This should be obvious to the IP-PBX producers, based on their successes in the contact center. But so far there is scant evidence that they have been successful in selling business transformation for other parts of their customer’s businesses, even though communication is a major labor cost in many other business processes. It seems that the productivity software companies (such as Microsoft with 5 percent growth on $5,838M quarterly Business Division revenue or Salesforce.com with 34 percent annual growth) are garnering the customers’ spending for employee-based business transformation.
2. VoIP and the IP-PBX are not business transformation. As elegant as Session Initiation Protocol (SIP) and other VoIP technologies may be, in the end VoIP is replacing a relatively satisfactory method of voice communication using low cost, fully amortized time-division multiplexed (TDM) products. Thus, the assumption that VoIP and the IP-PBX would cause a massive churn of the installed base of TDM PBXs has not been realized. While there may be some savings from SIP trunks and network convergence, even the vendors’ own ROI calculations show paybacks of three to five years for replacement of a TDM PBX with a new IP-PBX. Most enterprises have better uses for their capital.
3. Watch out for substitute solutions. Sure, voice and video communications are important but the users have options. E-mail and Instant Messaging and Texting are a substitute for many voice calls. Cellular telephones, which don’t require an IP-PBX license, are a more convenient tool for voice calls for many enterprise users. Peer-to-peer communications services (e.g. escalating an IM to an internet-based voice call) are often more convenient for the user and completely bypass the PBX. Social networking, collaborative workspaces, and web portals are also examples of emerging substitutes for IP-PBX voice or video calls. It would appear that the IP-PBX providers were unwilling, or unable, to embrace those options early on; leadership of those substitute communication modes now seems out of reach for them.
4. Match prices and revenues to value. This may be the big lesson. Conferencing, mobility and CEBP (communications-enabled business processes) are all major business transformation opportunities, but the IP-PBX vendors chose to keep their prices linked to IP-PBX licenses and telephone instruments rather than linking pricing to the value of the new transformative capabilities. One can only wonder what would have happened if, back in 2001, video conferencing and collaboration systems would have come with a free IP-PBX core system and a free voice telephony license for every user for whom the enterprise paid, say, $500 for a conferencing client license. The benefits of video conferencing in productivity and travel avoidance would easily justify the price. Similar strategic perspectives could be imagined for integration with cellular telephones and with business applications. Instead, what we see is continued protection of the core PBX license, with the most valuable "UC" features being "included." This sends a clear, though erroneous, signal of the net value to the customer.
5. Sales and service channels must be supported in changing their focus, skills, business models. If a vendor wants to develop new revenue streams from new value based on business transformation, then the vendor had best equip their sales and services employees and channels to discover the needs and sell the justifications. Point 4, above, is especially key to this. If there is no incremental revenue from the ‘included’ features, the channels won’t spend the time selling, installing and getting adoption of those new features. Sure, they’ll show the new features as sizzle in the demos, but they will follow the invoicing in the end. In addition to those incentives, of course, the channels will need support to enhance their skills into the new areas of value. Some leading Systems Integrators have built their own business transformation skills and are reaping the rewards, but often this has been at their own initiative and risk.
All of these points can be debated, for sure. But the recent GAAP financial results provide messages that seem worth considering, whether you are a vendor, an enterprise buyer, or a services provider for these technologies. From my perspective, growth will come from focus on the value of business transformation.