The Shift to UC Is Visible: What Does It Mean?

The Shift to UC Is Visible: What Does It Mean?

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The Shift to UC Is Visible: What Does It Mean? by UCStrategies Staff

UC Experts Marty Parker, Dave Michels, and Phil Edholm discussed the recent market findings from Infonetics, and the conversation went something like this...

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On May 28, Infonetics Research released vendor market share and forecasts from its 1st quarter 2013 (1Q13) Enterprise Unified Communications and Voice Equipment report: Tough times for enterprise telephony market, down 10% from year-ago 1st quarter.

Analyst Note

"In the first quarter of 2013, enterprise PBX spending dropped to its lowest point since mid-2009," notes Diane Myers, principal analyst for VoIP, UC, and IMS at Infonetics Research. "The big squeeze is coming from hyper-competitive price pressure all over, with average revenue per line down across the board. But conservative spending by businesses is exacerbating the problem in some regions, while demand is actually flat-to-up in North America and Asia, reflecting uneven economic recoveries."

Myers adds: "Meanwhile, demand for unified communications is increasing in all regions as businesses seek tools to help them boost employee productivity and flexibility."

1Q13 Enterprise Telephony Market Highlights

  • The global enterprise PBX market (TDM, hybrid, and pure PBXs) totaled $1.8 billion in 1Q13, down 9% from the previous quarter, and down 10% from the year-ago 1st quarter
  • Sequentially, Asia Pacific was the lone bright spot, with PBX revenue up 7% in 1Q13 (typically a strong quarter for Asia)
  • At the other end of the spectrum, licenses for unified communications (UC) are up both quarter-over-quarter and year-over-year, and revenue is up 21% from the year-ago 1st quarter
  • The top vendors - Cisco, Avaya, NEC and Avaya in 1Q13 - remain in a battle to gain customers and hold on to existing ones as enterprises migrate to IP and UC solutions
  • LG Ericsson, Mitel, NEC, and ShoreTel all notched year-over-year revenue gains in 1Q13
  • Microsoft continues to post gains in the PBX market, leveraging its strength in unified communications

Report Synopsis

Infonetics' quarterly enterprise telephony report provides global and regional market size, vendor market share, analysis, forecasts through 2017, and analysis for TDM PBX and KTS systems, hybrid and pure IP PBXs, IP PBXs by system size, VoIP gateways, unified communications, IP deskphones and softphones. Tracked: Aastra, Alcatel-Lucent, Avaya, Cisco, HP (3Com), LG Ericsson, Microsoft, Mitel, NEC, Polycom, Samsung, ShoreTel, Siemens, Sonus, Toshiba, and others. To buy the report, contact Infonetics:

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Excerpts from UCStrategies Experts Discussing the Announcement

Marty Parker: Of course, I’m not surprised. In fact, this was the theme of my post on the recent financial results.

Infonetics should continue and put 2 + 2 together for us. IP Telephony is down – right. But since almost all the vendors bundle UC licenses with the IP Tel licenses, discount the UC licenses, and have priced the UC licenses as telephony features (similar to voice mail pricing) not as the core solution value, the 21 percent growth in UC revenues is not enough to offset the 10 percent decline in IP Tel licenses.

We may be reaching the tipping point where UC actually does define the market, but that will leave a lot of suppliers out in left field.

Dave Michels: I contend this is largely misinterpreted and the basic approach of counting voice ports is obsolete.

As far as I know, organizations aren't going phone-less and aren't cutting back on UC.

The cloud is booming – the providers that we count are showing 30 percent growth, and have for years. We don't count very many of the providers, and lots are using their own technology.

Also, the old model of counting ports counted local ports. A network of branch offices, each with 80 employees each, probably had 100 ports at each location. Now that they go centralized, the total line count doesn't match the displaced ports even though the phone count is the same.

Then there's also the problem that every vendor insists they don't sell PBX, but PBX voice ports is all the industry counts. Isn't counting what the industry claims not sell a recipe for disaster?

"Revenue per line down across the board" Revenue per line means nothing! Just switching to a virtual appliance with softphones will half revenue per line without any other changes.

Marty Parker: Hi, Dave. OK, good points.

Then, to complicate this even further in your direction, let’s note that there is no longer any correlation of numbers of communication end-points to users. One-to-one is gone. Heck, I’ve got four or five text, IM and voice software clients just on my smartphone. That could be good news for those selling that infrastructure. As you point out, that is probably not the IP PBX vendors.

So, (I) agree that the “basic approach of counting ports” is what’s dead.

However, the signals are pretty clear that it is not a boom market for the makers of enterprise IP Telephony systems. Whether their revenues are declining because customers and users are going to cloud solutions which the IP Telephony vendors are not providing, or because voice is a declining media type, or because new mobility and UC solutions are reducing the number of “stations” needed in the enterprise, it’s still true that the publicly visible revenue reporting for these companies (or units of larger companies) are flat or declining.

Dave Michels: Yes - it's complicated alright.

But mourning the death of UC premises is like mourning the death of stick shift – car sales are just fine. Car rental firms don’t even offer manual shifts any more.

We are talking about UC – and UC is up. As you said, you have communications coming into every device. People are working more distributed requiring more collaboration. BYOD isn't about the lack of need for communications. The fact that premises is declining while cloud/hosted is booming (even private cloud) is all part of the transformation.

We know that presence is increasing. We know mobility is important – we know video is growing. The fact that premises-based ports of telephony, MCUs, or even phones are down is confirmation of the transformation. Congratulations are in order. Firms like Twilio, Voxeo, and Snom appear to have adapated to a new world of telecom - our challenge now is to redefine our measures to better gauge progress.

Marty Parker: Dave, I agree that we’re passing the tipping point and celebration is in order.

However, we continue to find clients who believe that by replacing their PBX with IP Telephony they are going to get UC benefits. NOT.

The reason the clients are behaving that way is because the marketing clout of the IP PBX vendors (or IP network vendor) is telling them that’s what to believe.

I guess we could celebrate that enough customers are making the UC decision in lieu of the IP PBX decision that the market is tipping. Hooray for that, for sure.

I simply keep pushing the PBX-type vendors to really go “all-in” with UC and UC apps and UC benefits.

You’re probably right that one way to do that is just to have one UC celebration party after another and pretty soon they will come ’round to see what’s happening!

Party on!

Phil Edholm: This is an excellent discussion as we have long counted ports as the representation of the market, and… "The times, they are a changin'" (50 years old next year – Bob Dylan).

I think the core of what is happening is much more a transition of spend away from telephony to UC and the impact on the market – the end customers typically spend between $200-400 per user “end-point” per year all inclusive (CapEx, support, maintenances, internal admin staff, etc.) over the life of the installation. The wide range is a reflection of capability, with the low end reflecting simple “analog” like capability, and the high end being more executive (touch screens, etc.). The range is further extended by the relative wide variance in the use of TDM access, which can easily add another $200-300 per year for some users.

The key point is that this spend used to be done on a pure PBX and could be counted by counting “ports,” but now it is more diverse and actually needs to be counted as spend per employee or “seat.” As many of you have noted, this spend is increasingly including the UC components of IM, presence, and even video and social. However, I think the reality is that the actual spend is increasing at modest rates in two dimensions, one on total dollars spent per seat (slightly more than inflation), and in seats served by UC in the growing knowledge worker community and therefore actually spending more per seat. But the reality is that the basic telephony service is decreasing in both cost-per-seat (primarily as there are minimal upgrades in this space, they are just sweating the assets), but also in the total number of seats as more of these seats move into the UC domain as either Knowledge Worker seats or spend on Information Worker integrations through CEBP.

So the traditional “telephony” vendors are being impacted in three ways:

  • The telephony-to-telephony transitions are not happening as in the past, and when they do, Cisco is winning many/most of them.

  • The number of telephony seats is not increasing, yielding reduced expansion dollars in the installed base.

  • The customers are often reducing their telephony spend and spending on other areas (IM, presence, video), and often with alternative vendors. This is reflected in reduced upgrades and transitions to “basic maintenance” alternatives to full support.

The result is what we saw with Avaya, a reduction in revenue in FY2Q13 of 11.1 percent from 2012. In fact, if Avaya revenue follows historical Q-Q for the remaining two quarters of FY13, Avaya will come in at a little over $4.6B total revenue for the year, with a reduction in revenue of over $500M versus FY12, a reduction of over 10 percent. Another confirmation to this is that over the last few months I have talked to a number of long-term Avaya and Avaya/Nortel channels and many of them are taking on Lync as a services offer and selling Lync components such as SBCs, gateways, devices, etc.. In talking with them, it is less because they are excited about the Lync revenue prospects, but are being pushed by their customers.

As a counterpoint, I have heard that Microsoft is claiming a growth of 2M seats of enterprise Lync voice in CY1Q13 (from 3M to 5M total seats), which, assuming a revenue of $90 per seat for the Advanced CAL and Lync Server, $30 per seat for gateways/SBCs, and other functions and $80 average for phones (for a percentage of the seats, therefore lower than an actual phone per user), represents a “marketplace” product revenue of $200 per Lync voice seat or $400M of “product” revenue in the quarter. If this is extended to a complete year it is about $1.6B. Avaya’s product revenue in FY2Q13 was $529M, so annualized (assuming this was a bad quarter) that is about $2.4B. Removing 15 percent for contact center brings it down to about $2B for communications systems (Aura, CM, and IP Office). So this would say the spend on Lync Enterprise Voice will be within 20 percent of the Avaya product spend in 2013...

Finally, Cisco appears to be winning the majority of the transitions to VoIP that are happening, the question is whether they will follow Avaya into the same challenged position with Lync or if Jabber can sway a significant percentage of their customers. This remains one of the key questions going forward.

So the net is that the industry is not shrinking, the normal transitions you see in a mature industry are just not going into a PBX replacement with another PBX as much (except for Cisco at this point). If we assume a 5 percent annual installed base transition rate (20 years with a vendor on AVERAGE before transitioning), this is 5 percent of the total installed base changing vendors every year. If we assume 400M worldwide “comm seats,” this means that about 20M are transitioning every year. Per MZA, the total shipped number for Q412 was just under 14M “lines.” As Q4 is normally about 28 percent of the revenue, this translates to about 50M total shipments, which means that 30M are upgrades/expansions and 20M are transitions. So if we assume the current transition rate is 20M seats per year, then it is possible to see what is happening in that market. If Cisco gets 30 percent of their seats from transitions, this is about 5.5M seats. I assume about 30 percent of the 17.5M total seats they ship based on moving their 38 percent 2012 NA share per MZA down to 35 percent globally are into transition accounts. If Lync does 8M seats this year, then together Cisco and Lync account for about 14M transition seats, leaving 6M to the other vendors. The net result is a major shift in the market. If this trends continues for a couple of years the market structure will change dramatically. UC certainly appears to be the future and telephony is the past.


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