UCaaS: Rough Road Ahead

UCaaS: Rough Road Ahead
By Dave Michels, August 27, 2020

1. Overview

1. 1. The unified communications as a service (UCaaS) industry is about two decades old, and it’s had a glorious run. 
   2. The industry has consistently experienced +20% annual growth as Centrex and premises-based users upgraded. 
   3. Most of that growth has been at the expense of premises-based telephony solutions (RIP Aastra, Asterisk, InterTel, Nortel, ShoreTel, and Toshiba, to name a few), though that opportunity is diminishing. 
   4. Several market factors today are conspiring to stifle future UCaaS market conditions. Sector growth will slow; but more significantly, the growth will be concentrated in a few major providers.
   5. UCaaS has gone through several concurrent and sequential stages of evolution, including appliance-based solutions, software-based servers, virtualized servers, private cloud, and multi-tenant. Also, the scope of services has been expanding. 
   6. The initial names for UCaaS were Hosted PBX and Cloud Telephony. The term “unified communications” emerged around 2003 and initially celebrated the convergence of telephony and data-centric applications such as softphones, unified messaging, and instant messaging. The term change de-emphasized the once core voice/telephony aspects. 
   7. Initially, UC applied to premises-based solutions, but soon “UCaaS” emerged as the cloud-delivered variation. 
   8. For years, UCaaS was described simply as a deployment variant of UC, but the difference was much more significant. UC was about the initial sale of call control. UCaaS is more about ongoing services (and retention), which includes operations and reliability, customer service, self-service, billing, and much more. Most premises-based vendors had a difficult time adapting to UCaaS. 
   9. The initial benefits of UCaaS remain valid today, including opex, evergreen services, and pay for what you use. However, the voice/telephony aspects have further declined in relative value due to both commoditization and user preference to communicate over other modalities. 

2. Modern UCaaS

1. 1. Today, UCaaS is largely viewed as multi-tenant software as a service (SaaS) for enterprise communications. UCaaS has evolved into a suite. The modern suite typically includes three components: voice/telephony, team chat, and meetings. 
   2. The pandemic in 2020 accelerated the general adoption of cloud-delivered services, especially video conferencing technologies. 
   3. While the initial benefits remain valid, it is opex and outsourced operations that are perceived as the most valuable features of UCaaS. 
   4. The term “cloud” is no longer a differentiator. The concept is as valid as ever, but within enterprise communications, every vendor and every product are now described as a cloud solution. There are several types of clouds: UCaaS, CPaaS, and CCaaS, as well as private, public, and hybrid clouds. Also, private and public clouds can be built on private and/or public cloud infrastructure. 
   5. As voice has matured, it has become increasingly difficult to convey value through differentiated services. For example, Microsoft lags in both features and reliability, yet leads in sales. 
   6. The traditional PBX required several vendors to complete the solution, including carrier services, call recording equipment, conferencing equipment, call accounting software, etc. Most of those adjacencies are now included as part of the core UCaaS offer. 

3. Headwinds

1. 1. There are several factors that will make UCaaS sales harder. 
   2. Giants: While there have always been size disparities among communications vendors, the differences today are bigger than ever. The largest PBX makers of the past were relatively specialized. Today, the largest and most powerful companies in the world dabble in enterprise communications, including Microsoft, Google, Amazon, and Facebook. These larger providers tend to offer UCaaS as a component of a larger portfolio. Also, Zoom and RingCentral have relatively high valuations compared to most providers in the sector. 
   3. Branding: The vendors and channel partners tend to identify around their product brand and capabilities. The market is shifting to prioritize surround services over the product. This is a different GTM. 
   4. Commoditization: UCaaS is now much less about displacing premises-based solutions — providers are now competing against similar cloud-delivered value propositions. For many users, the differences between UCaaS providers are less apparent. This favors the incumbent vendors as they usually offer the path of least resistance. Unfortunately, as the UCaaS scope expands, there are more incumbent vendors.
   5. Expectations: Not long ago, every knowledge worker was assigned a corporate phone. That’s no longer the case. Many organizations no longer treat telephony as a standard-issue service. Organizations are increasingly using in-app workflow communications, consumer applications, or personal mobile devices. 
   6. Recession: Although the industry has arguably benefited from the first wave of the pandemic, that’s likely to change. According to its August survey, about half of the National Association of Business Economics members expect that the US GDP won't return to its pre-pandemic level until 2022. Nearly 80% say there is a 25% chance of a double dip recession. UCaaS has done well due to WFH drivers and the infusion of stimulus funds (in the US). These benefits are declining, and the enterprise communications sector has not done well in prior recessions.
   7. Mobility: Carrier-provided smartphones can perform most functions found on an enterprise extension. The wireless carriers are also expanding into UCaaS. 
   8. Video-First: PSTN phone numbers have recurring costs. PSTN services are subject to local regulatory requirements and taxes. Video communication applications are less expensive and provide richer communications. This favors providers that offer video solutions and position voice as an optional add-on — many do it the other way around. 
   9. Messaging: Many organizations are finding new workstream collaboration or team chat applications as the best path for enterprise-wide communications. Social applications such as Workplace by Facebook or Yammer are reaching firstline roles more effectively than telephone-centric communications. This favors providers that offer messaging solutions and position voice as an optional add-on — many do it the other way around. 

4. Lessons from Email

1. 1. In the early 90s, the Internet moved from research labs and defense into general corporations. Email was an early “killer app” of the Internet.
   2. There were numerous email vendors including the LAN vendors (such as Novell, LANtastic, and Banyan Vines), there was Microsoft Mail (before Outlook/Exchange), and several specialized email products (such as Lotus Notes, cc:Mail, and Zimbra), and even email services (such as ISP mail, AOL, Yahoo, and Hotmail).
   3. Once it became clear that email was going to be a universal corporate need, the major vendors made it a central part of their value. Microsoft included Outlook/Exchange in its Enterprise Licensing Agreements, and Google pivoted Gmail into what is now known as G Suite. 
   4. In other words, as the market grew, the ecosystem consolidated. Today, enterprise email is largely a duopoly — though dominated by Microsoft. 
   5. We are positioned for the same thing to occur with enterprise communications, especially video. Neither Microsoft nor Google charges extra for meetings. Google recently made Meet free, and Microsoft recently included meetings in its free version of Teams. Both companies also offer voice and messaging services.

5. Dave’s Thoughts

General

1. 1. UCaaS providers are still largely leading with voice. Meetings and/or messaging apps may not be available without a voice line or extension. This is limiting their appeal with prospects as well as with current customers. 
   2. The 2019 Gartner UCaaS Magic Quadrant included this strategic planning assumption: “By 2023, 40% of new enterprise telephone purchases will be based on a cloud office suite – either Microsoft Office 365 or Google G Suite.” UCaaS via Microsoft 365 clearly has momentum and likely justified most of this prediction. The inclusion of G Suite was kind, but unearned. Google has not delivered or promoted a good enough UCaaS offer (yet). However, the pandemic has given this prediction more credence as meetings have become more important than voice. 
   3. The UCaaS providers are trapped between a rock and a hard place. Most UCaaS providers lead with voice and happen to include services for meetings and team chat. This bundled approach offers more value, but also dilutes the best-of-breed proposition. 
   4. The purchase/acquisition of communication services often extends to numerous suppliers for applications, infrastructure, carrier services, and other adjacencies. These adjacencies are logical areas for expansion.

Identical Products

1. 5. Providers are increasingly selling identical products. 
   6. Today, ALE, RingCentral, Avaya, Atos, AT&T, and others have nearly identical UCaaS offers, as do most Webex and Teams partners. The competitive win is less about product and more about partner attributes such as responsiveness, customer service, billing, support, etc. 
   7. Even in cases where the products are completely different, they are increasingly viewed as identical. 
   8. It’s very difficult to compete on telephony features. They are not easy to communicate to, or intuitively valued by, prospects.
   9. The UCaaS industry has a heritage of product differentiation, so providers and partners need to adapt and approach opportunities with more focus on value and outcomes. 

Best of Breed vs. Good Enough

1. 10. Telephony has historically been a best-of-breed application. It was inherently a stand-alone, independent service. Today, enterprise communications is largely viewed as a component of a larger set of tools. 
   11. The “best of breed vs. best suite” debate is as old as IT itself. Best of breed refers to the selection and implementation of individual IT products and services that best meet organizational requirements. The alternative is to select a suite that meets broader requirements less precisely. 
   12. Point solutions tend to be more innovative and agile, but often come with increased overhead related to integrations, data silos, and multiple vendors. Faster upgrade cycles in the cloud make this a shorter-term evaluation. 
   13. UCaaS is not a stand-alone application. The solutions are usually viewed as complementary to the core productivity stacks from Microsoft (Office 365) and Google (G Suite). For example, most UCaaS solutions easily integrate with third-party directories and calendars. 
   14. The result is that UCaaS providers have traded their best-of-breed status for a smaller bundled offering — one that directly overlaps with features of Office 365 and G Suite. 

The Suites Got Sweeter

1. 15. Both Google and Microsoft have dabbled in UCaaS for some time. Though positioned as optional add-ons, they still provide an integrated experience. These simple offers have not been well suited for organizations with complex requirements. 
   16. This year, we have seen considerable development and maturation of the offers from Microsoft and Google, particularly regarding meetings. Both Microsoft and Google have announced significant new features and capabilities in their solutions this year. 
   17. The pandemic changed priorities, and meetings have become the priority. Not all UCaaS providers offer meetings as a stand-alone service. 
   18. Google and Microsoft can use meetings as a loss leader. Both companies are primarily interested in selling suite subscriptions (G Suite and Microsoft 365). This loss leader capability is not viable for specialized communications providers. 
   19. This even impacts freemium pioneer Zoom. Its free level restricts meeting length and drives users to become paid subscribers. Google and Microsoft now offer unrestricted, free meetings. 
   20. Microsoft, Google, and Cisco all have the ability to create larger product and/or services bundles. 

The Contact Center Exception

1. 21. CCaaS is not under the same pressure as UCaaS. The UCaaS providers that offer CCaaS are not likely to experience significant changes to attach rates. The larger, more complex contact centers tend to evaluate CC independently of UC. 
   22. Most organizations need some contact center tools, and CCaaS can tap into a larger market than premises-based solutions which carry higher upfront barriers. 
   23. Contact center migration to the cloud has lagged the UC-to-UCaaS migration, so a large base remains. Also, the larger contact centers have been very slow to embrace CCaaS, but that’s beginning to ramp now. 
   24. Contact centers are also placing less value on voice and more importance on self-service and text-based channels. The contact center is less and less about telephony. 
   25. There are fewer giants in CCaaS. Eventually, Microsoft, Google, RingCentral, and Salesforce will likely have their own native (or acquired) offers. As of today, they do not. The giant in this space is Amazon, but it’s still perceived more as a tool set provider than an application provider. The larger CCaaS providers are relatively small companies, which creates a more innovative atmosphere.
   26. While CCaaS continues to grow, partnerships are not easy. We have not seen a lot of fruit from Mitel-Talkdesk. Both Fuze and RingCentral have multiple CCaaS partnerships. The Salesforce/Amazon partnership has potential. Only a few UCaaS providers have notable CCaaS technology stacks, including 8x8 and Vonage. 
   27. Microsoft, Zoom, and RingCentral do not currently have their own CCaaS solutions. Several CCaaS providers have forged recent partnerships with Microsoft and Zoom. Microsoft has been slow to expose UCC APIs for a tight CCaaS integration, however, these appear to be imminent. RingCentral is rumored to be developing its own contact center. 
   28. There will very likely be significant disruption in CCaaS. As larger organizations continue to embrace CCaaS, there will be more launches and alliances as well as enhancements from the premises-based vendors. 

Hardware 

1. 29. Hardware remains critical to effective communications and collaboration. This is less about servers and more about room systems and desktop devices.
   30. SIP phones have largely commoditized, however, the traditional PBX makers still offer a more integrated (proprietary) experience.  
   31. There is a greater opportunity for differentiated hardware in video. Cisco has a long-held advantage here, but Microsoft and Zoom have made significant advances in the past year through partnerships (Logitech, Neat, and Poly). Room system hardware presents a significant gap for other vendors that have limited or generic approaches to room system video. 
   32. There are even fewer options for personal video equipment. New options this year are available from Cisco and Zoom. 
   33. The UCaaS industry has been slow to embrace desktop phones. They tend to slow down the evaluation and purchase of services. The typical UCaaS endpoint is fairly limited regarding features. It’s also a voice-first device. We are in a video-first world, and endpoints need to be reinvented. 
   34. New low-cost video appliances are emerging. Microsoft recently introduced a Teams device, Google supports its Nest Max for Meet, and Workplace by Facebook supports Facebook Portal. These are modern phones and can be described as always-on, desktop communication appliances. Oddly, the Amazon Show does not claim to support Chime. 
   35. The challenge with these video devices is low cameras (though the Portal Plus is tall). 
   36. The pandemic has kept many knowledge workers at home, and there should be increased demand for inexpensive video meeting appliances. 
   37. The whiteboard remains as the last analog device in the conference room. Various e-boards have been available for several years, but penetration is light. The most integrated experiences are available from Cisco, Microsoft, and Zoom/Neat. 
   38. The all-in-one solutions are not ideal (Surface Hub and Webex Board) because the camera is too close to the user. However, the Webex Board companion mode is very intriguing. Also, the Kaptivo solution (recently acquired by Lifesize) leverages the low cost and familiarity of existing whiteboards. 
   39. Whiteboards introduce a security risk, as a significant benefit is data retention. 

Suggested Competitive Strategies

1. 40. Kill the Desktop Client: We are at or near a time when traditional clients are obsolete. Google demonstrates robust UC capabilities without a client. A single web UI can replace separate clients for Window and Mac, reduce development costs, and simplify implementations. Clientless solutions can also leverage Chromebooks and Windows 10 ARM-based machines. Web clients may require cloud delivered transcoding services. 
   41. Frontline: Enterprise-wide communications are still rare. Messaging apps are well suited to facilitate enterprise-wide communications. Workplace by Facebook is getting traction here. Microsoft and Slack preach it. However, most UCaaS companies still limit messaging to voice subscribers. 
   42. Expand Voice: Voice is broader than telephony. While traditional telephony is in decline, speech-enabled services are actually growing. This includes push-to-talk solutions, podcasts, voice assistants, voice analytics, voice biometrics, paging, telecare, dispatch, and more. 
   43. Security: After years of abuses and high-profile hacks, securing communications is emerging as a new way to differentiate. Encryption-at-rest and encryption-in-transit are no longer sufficient. Vendors prioritizing security include Cisco, Slack, Symphony, Wire, and Zoom.
   44. Embrace Teams: Microsoft is growing and appears to be open to innovative ideas. RingCentral and 8x8, direct competitors, embraced direct routing with Teams. Logitech and Poly are riding the equipment wave for Teams. Google is implementing a clever coexistence strategy with its new G Suite Essentials. This is a debundled version of G Suite that does not include email and calendar (includes Meet, G Drive, Docs, Sheets, and Slides). Essentials allows users to collaborate in G Suite without the approval or involvement of enterprise IT. 
   45. Agility: Cloud-delivered technologies evolve quickly. Microservices enable more frequent updates, and many providers can’t keep up with the associated testing and support changes necessary. One of the emerging differences among providers will be the ability to respond, leverage, and support rapid change. 
   46. Portfolio Expansion: Cloud-delivered services tend to naturally expand in scope. UCaaS was telephony and has expanded to messaging and meetings. CCaaS has expanded into WFO. UCaaS will continue to expand. Some intriguing recent expansions include the following: Slack’s acquisition of Rimeto to improve directories and discoverability; Microsoft’s inclusion of OneNote for Notes in Meetings (see Hugo); Ooma’s expansion into networking services; and Facebook’s move into hardware with an advanced (and inexpensive) video device (and Trojan horse). 
   47. AI: It’s time to move past the TTS parlor tricks. AI can be powerful, particularly in a WFH environment. There’s an opportunity to deliver real insights into communications and conversations. Prodoscore and Gong are good examples. 
   48. Devices: Integrated hardware remains a viable strategy for differentiation. The vast majority of UCaaS providers are using the same hardware. Dialpad has a strong integration with Poly Obihai phones. For over 10 years, Apple has been demonstrating the value of integrated hardware and software (iPhone vs. Android). 
   49. The Never Microsoft Camp: There’s a non-Microsoft ecosystem of best-of-breed software providers that seem to stick together. These are generally vendors that directly compete with Microsoft and include Google, IBM, Oracle, Salesforce, and Slack. I notice the same customers (some quite large) at the events of these companies. So a simple strategy is to prioritize co-marketing (GTM, events, and integrations) with these vendors targeted at these enterprise customers.

Antitrust Window

1. 50. The pandemic has largely benefited the large tech companies, and there’s an increasing backlash against them. 
   51. It didn’t help that the day after Congressional antitrust hearings, the companies reported pandemic-fueled results. Amazon’s revenue surged 40%, Apple reported 11% revenue growth, and Facebook’s revenue also increased.
   52. Slack Technologies filed an antitrust complaint against Microsoft with the European Commission, accusing its rival of “illegally” tying Teams to the Office 365 suite. 
   53. Epic launched a calculated war against Apple (and Google) regarding their app stores. Curiously, Microsoft and Facebook have publicly joined the fight against Apple. 
   54. I expect the large vendors will back off of aggressive moves and acquisitions — at least temporarily. I expect a near-term decline in both acquisitions and competitive posturing. 
   55. I doubt these antitrust concerns will amount to anything, but they should quell the fierceness we have seen. For example, Microsoft has been very transparent about its intent to beat Slack (and Zoom). 
   56. There’s a small window here to forge partnerships, conduct guerilla marketing, or take other actions that may not otherwise be tolerated. 

Final Thoughts  

1. 57. “Good enough” varies by organization, but Teams and G Suite will increasingly meet that test moving forward. They will expand into communications and collaboration at the cost of other providers. 
   58. It will become increasingly difficult for businesses to justify separate subscriptions for meetings. That is, it will be harder for voice, messaging, and video vendors to compete with Microsoft and Google. 
   59. The UCaaS market will not slow. But the growth will be more concentrated, and there will be fewer providers. 
   60. Providers and partners need to transition from product selling and focus more on overall value, outcomes, and benefits associated with their own brand. 
   61. Google and Microsoft tend to offer telephony for an additional charge, but it’s in their DNA to bundle services for “free.” They have already done this with video. It is quite likely they will drop or eliminate additional fees for UCaaS. Microsoft announced a new plan that was to include PSTN services for its E5 subscribers, but abruptly canceled the program last month without explanation.