Microsoft Acquires Metaswitch
It was a real Brain Game when Microsoft announced that it acquired Metaswitch Networks this month. The last time I met with team Meta was at partner event in NOLA. The event had a cerebral theme and the guest speaker was Jason Silva, the host of Brain Games -- he must be behind this. I mostly knew Metaswitch for its UCaaS suite. So, naturally, I assumed Microsoft was acquiring Metaswitch for its UCaaS technologies. That seemed reasonable as it has been working to bolster its UCaaS offer. When I saw Microsoft's explanation that the acquisition was about 5G, I figured it was some sort of diversion tactic, and this initial assumption was shared by several other UC/UCaaS pundits.
My revised conclusion is that this acquisition likely has very little to do with UC (though there may be some second-tier benefits the Teams team discovers), and it really is about 5G. Ironically, 5G is about UCaaS or at least will be someday as our wired and wireless worlds eventually will collide.
By Dave Michels, May 26, 2020
1. Microsoft Acquires Metaswitch
- During trading hours on May 14, 2020, Microsoft announced a definitive agreement to acquire Metaswitch Networks.
- Terms of the transaction were not disclosed.
- The announcement blog post was attributed to Yousef Khalidi, CVP Azure Networking, and presented as a 5G strategy.
- The announcement builds on Microsoft’s March 26 acquisition of Affirmed Networks, also about 5G and also announced by Yousef Khalidi.
- Jason Zander, EVP of Azure, was named as the executive over both Affirmed and Metaswitch.
- Although this acquisition appears to be about Azure and 5G, many TalkingPontz subscribers know Metaswitch as a UC company.
2. About Metaswitch
- Metaswitch, founded in 1981, is a UK-based communications infrastructure provider with about 800 employees.
- The Metaswitch portfolio includes Data (5G Fusion Core, NOS Toolkit, and Networking Software), Voice (Clearwater IMS Core, Perimeta SBC, Universal Media Gateway, Emergency Standalone Proxy, MetaSphere MTAS, Rhino TAS for Mobile, Converged Network Message Store, MetaSphere QCall), UC (MaX, Cloud Contact Center, SIP Trunking), and Management (Metaview NMS, Service Assurance Server, VNF Manager).
- Most relevant products above include:
- Clearwater IMS Core: Cloud-native IMS core that provides voice, video, and messaging services to users and IoT endpoints.
- Perimeta SBC and Universal Media Gateway: Virtualized and distributed servers for signaling and media that maximizes value of existing TDM equipment. The SBC is certified for direct routing for Microsoft Teams.
- Rhino TAS for Mobile: Grounded in GSMA specifications and architected for NFV.
- MaX UC: This integrates UCaaS and mobile that goes a step further than most OTT offers.
- Cloud Contact Center: This is a branded version of Telax Contact Center (now owned by Intermedia). Unlikely that any meaningful IP was transferred to Microsoft.
- Fusion Core: Recently demonstrated on Azure to provide private LTE.
- VNF Manager: Standalone VNF Manager with automation capabilities and APIs for integrations.
- Microsoft describes the Metaswitch portfolio as complementary to Affirmed Networks.
- Metaswitch reported annual revenue of $180M and an adjusted operating profit of $31.4M in 2019.
- Metaswitch boasts over 700 customers, mostly in North America.
3. Stated Motivation Behind the Acquisition
- Microsoft intends to position Azure as a specialized provider of cloud infrastructure for 5G providers.
- 5G creates a rare opportunity where providers are expected to significantly overhaul how they create and deliver services. Microsoft believes mobile carriers will outsource many aspects of their infrastructure to modern cloud providers (instead of attempting to build it completely in their own data centers) as they build out new 5G capabilities.
- Microsoft is clearly expanding into telecommunications, but it does not appear that it intends to become a 5G provider directly. To reassure existing partners, it stated: “We will continue to partner with existing suppliers, emerging innovators and network equipment partners to share roadmaps and explore expanded opportunities to work together, including in the areas of radio access networks (RAN), next-generation core, virtualized services, orchestration and operations support system/business support system (OSS/BSS) modernization. A future that is interoperable has never been more important to ensure the success of customers and partners.”
- All telecommunications providers have a reason to be concerned. Microsoft is a huge company (how big? so big that it can announce acquisitions like Metaswitch during trading hours), and it is expanding into communications services. Though it likely won’t be a carrier — seems more akin to Oracle’s efforts.
4. 5G or UC or Both?
- Microsoft’s announcement of the acquisition was all about 5G, and there was no mention of UC. Though Metaswitch has UC products and services, UC represents a small percentage of revenue.
- Neither Microsoft nor Metaswitch has been willing to respond to inquiries. It is left to us to imagine if or how the UC/UCaaS assets of Metaswitch may be used by Microsoft.
- The fits are not strong. The most obvious opportunities are to leverage Metaswitch’s SBC technologies and better position Teams’ UCaaS solution for 4G/5G mobility use cases. However, neither may be a priority or plan.
- Other opportunities include channel expansion for Teams, possible use of UC MaX to expand UCaaS capabilities in Teams, and/or the creation of a new stand-alone UCaaS offer (for non-Teams users).
- There’s also a reasonable possibility that Microsoft will just terminate all Metaswitch UC solutions. It was not a priority for Metaswitch and may not be a priority for Microsoft.
- A stand-alone UCaaS offer could be positioned for small business customers.
5. Dave’s Thoughts
- Like all industries, carriers are also embracing software-based solutions. Historically, carriers have relied on built-for-purpose hardware. Predictably, this transition is disrupting the ecosystems of providers and their suppliers.
- Carriers now frequently utilize virtualized solutions, which can be sourced, implemented, and scaled very quickly as they are built on general computing resources. This is eroding the value of carrier-owned-and-controlled data centers.
- Combining Azure edge sites with its newly acquired VNF and NFV technologies positions Azure to host enterprise applications with low latency over 5G wireless networks.
- Microsoft is positioning itself to be the chief supplier of cloud-delivered infrastructure for 5G providers. This could be a lucrative opportunity as 5G is an emerging market opportunity, globally.
- Microsoft likely sees the carrier space as a legacy sector ripe for a massive software upheaval.
- The mobile carriers are excited about 5G and want to attach more value-added services to the next generation of wireless. With Cisco BroadWorks and Microsoft Teams, they have limited opportunity to create differentiated value. Using Azure for 5G infrastructure potentially creates an opportunity for providers to differentiate and control more of the user experience.
Microsoft and UCaaS
- Metaswitch assets, including its engineers and MaX UC, could replace or complement the existing Teams UCaaS solution. The bigger question is: Does Microsoft want to be a UCaaS provider? It is not clear.
- Microsoft restricts UCaaS to users of Teams. It could easily offer a general ‘MS Voice’ UCaaS solution tied to Office 365, but chooses not to. Presumably, this is to drive the adoption of Teams.
- Microsoft bundles meetings with Teams, and this likely drives adoption of Teams. It’s unlikely that UCaaS will drive adoption in the same way.
- Microsoft seems content with letting others manage the telecom, either via Direct Connect (BYO carrier) or integrated partner (UCaaS providers such as RingCentral and Vonage that now integrate with Teams).
- Microsoft has built a Teams ecosystem that provides tightly integrated experience without the full burden of being a global UCaaS provider (regulation, 911, channel conflict, QoS, complexity, costs, etc.).
- Regardless of whether Microsoft wants to be a UCaaS provider, it’s doing well at it. Gartner predicted last year that “by 2023, 40% of new enterprise telephone purchases will be based on a cloud office suite – either Microsoft Office 365 or Google G Suite” (note: Google Voice has minor traction). It’s an aggressive prediction, but Microsoft is winning large accounts, particularly in Europe.
- The UCaaS industry is largely separate from the mobile industry today. Most providers have mobile clients that are agnostic to mobile providers. Network-level integrations, such as Verizon One Talk, are rare.
- The integration between UCaaS and mobile is still young, a few pioneers in this area include Verizon, Cisco, 2600Hz, and Mavenir.
- Metaswitch and Ribbon have a long history of patent infringement litigation (at least six separate cases). Last year the two companies agreed that Metaswitch will pay Ribbon over $63M (over four years) and both companies will cross-license patents. This likely means that Microsoft now has access to many of Ribbon’s patents.
5G Is Bigger Than the Current LTE Mobile Framework
- The concept or definition of a carrier has become cloudy. The 5G opportunity is global, but in the US, it is much larger than just 3-4 providers.
- Twilio, for example, often positions itself as a “super-carrier,” however, it does not operate a traditional carrier network. Twilio leverages/aggregates wholesale services from other providers (wired and wireless). In cellular, we use the term Mobile Virtual Network Operator (MVNO) to describe cellular services that do not have their own network and antennas (such as Google Fi and Walmart Straight Talk).
- 5G is also applicable to private networks. Citizens Broadband Radio Service (CBRS) is an emerging technology for private wireless networks. CBRS uses unlicensed frequencies for 4G/5G networks.
- Enterprises could use CBRS for Wi-Fi replacement or IoT connectivity. Service providers are expected to use it to replace last-mile fiber access, deliver fixed wireless services, and even provide point-to-multipoint offerings.
- CBRS LTE services can hit 1Gbps indoors and maybe 5 or 10 times that for outdoor uses with line-of-sight access. 5G could be 10 times LTE.
- Microsoft is already a member of the CBRS Alliance. Other members include Ericsson, Google, and the major US MNOs.
- CBRS with small providers and enterprises is likely the area where Microsoft will see the most success in 5G.
- Microsoft is positioning Azure for communications services to any “provider” not just carriers. Azure already offers edge computing services and private wireless networking.
- Around the same time as the Metaswitch acquisition news, there was some other interesting developments on the 5G front:
- The US has increased the pressures on Huawei. The US Commerce Department has amended export rules to block shipments of semiconductors to Huawei. This poses an existential threat to Huawei, a current leader in 5G infrastructure.
- The US is concerned about 5G from a national security perspective. Huawei is clearly a target of this concern, but Nokia and Ericsson are not US companies either.
- This month, 31 technology and telecommunications companies launched a new coalition for 5G infrastructure. The Open RAN Coalition is championing the technology called "open radio access" as a way to advance competition and innovation in the 5G space. Facebook, Microsoft, Google, AT&T, and Verizon are among the founding members of the group.
- The Open RAN Coalition moves more of the 5G architecture from hardware to software.
- Microsoft’s revenue in 2019 was $125.84B, up 14% from 2018. It will take another $17.6B in revenue to maintain 14% growth. UCaaS is not going to do that.
- Microsoft’s 5G intentions put Nokia, Ericsson, and Huawei on notice. These are the major providers of 5G infrastructure. Note: Microsoft is the only US-based supplier.
- Microsoft now has its own SBC for direct connections. Though it probably won’t have a big impact on existing SBC partners for Teams Direct Connect.
- Microsoft has already certified other brands, and SBC selection has no impact on core services or experience.
- The SBC market is declining, unlikely to be viewed as strategic to Microsoft.
- Metaswitch produces SBCs for carriers, not enterprises. Enterprises have different requirements for SBCs than carriers (interoperability features for example).
- Oracle has not had success with selling its carrier-grade SBC solutions (from its Acme Packet acquisition) to enterprises.
- Google, AWS, Apple, and Oracle will likely explore ways to mimic Microsoft’s 5G strategy. Cisco could be a key partner/supplier (BroadSoft IMS and Starent).
- I don’t anticipate a major impact to companies such as AudioCodes or Ribbon. If I am wrong about that, Audiocodes is better positioned than Ribbon as it has diversified both its portfolio and SBC opportunities (with Zoom and AWS).
- This research note went in a different direction than expected. Initially, there seemed to be a stronger UC play, but UC pieces became relatively minor upon investigation.
- This acquisition appears to be driven by Azure and a 5G vision. Benefits to Office 365, UCaaS, and Teams are not cited, nor likely relevant.
- There is a risk to Metaswitch providers that Microsoft will discontinue the Metaswitch UC portfolio. This could benefit 2600Hz as it offers providers a brandable UC solution that integrates to mobile networks.
- Microsoft appears to be positioning itself to be the US leader in software-controlled 5G infrastructure. This is a huge opportunity that likely envisions a large percentage of the world’s smartphones (indirectly) connected to Azure.
- If true, it is a bold vision/strategy that is far from assured.
- US efforts to stop or block Huawei from use in western 5G solutions have not been successful.
- Large wireless providers have always been reluctant to outsource core capabilities.
- Oracle has had limited success in convincing carriers to outsource core components.
- Microsoft didn't buy Metaswitch for its customers or its revenue. Microsoft more likely purchased Metaswitch for its core network elements, engineers, and 5G knowledge.
- Microsoft has plenty of risk here. Not only is 5G unproven and several years away, but there’s inherent acquisition risk (times two), political and standards risk, and several alternative networking technologies including Wi-Fi, terrestrial broadband, and low orbit satellite services.
- Microsoft likely intends to tie together 5G, enterprise CBRS, cloud, and edge computing.
- 5G could enable a richer, native mobile UCaaS capability, but this is years away. First, we need to build a reliable and ubiquitous 5G network. Verizon One Talk offers a very compelling vision of a mobile-centric UCaaS. While the vision seems inevitable, it does not seem likely that Verizon will be the one to deliver it globally.
- This is the classic and only exit for Metaswitch—acquisition by a megacorp or perpetual reinvention as business opportunities shift. There was a time when entrepreneurs wanted to become the next megacorp, but the journey is so long and the gap is so big that the desired goal is increasingly to be acquired by Amazon, Apple, Facebook, Google, or Microsoft.
6. Related Links
- Microsoft Announcement Blog Post by Yousef Khalidi
- Metaswitch Announcement Blog Post by Martin Lund
- Communicano/Abramson: The MicroSwitch
- Light Reading/Dano: Microsoft Gets Serious About Telecom
- TMC/Tehrani: Why Microsoft Purchased Metaswitch