Voice in the Clouds
The voice in the cloud is not the creator of the universe, but rather some 800 service providers after your wallet. And they are getting it. Hosted voice and UCaaS is growing at an impressive clip. The premise vendors can’t ignore it any more. While Avaya, for example, touts that it grew IP office sales 46 percent quarter over quarter, but the firm also reports overall declining revenue. And they aren’t alone. That’s why Avaya, NEC, and ShoreTel all jumped to the cloud in 2012 (joining Mitel, Cisco, and Siemens Enterprise).
Market share information in hosted voice is very sketchy due to secretive providers (see prior post that hits on transparency). Team Frost got some data and reports the top service providers in 2011 (according to a 2012 Frost and Sullivan report) are:
- Comcast (BroadSoft)
- West IP
- Verizon (BroadSoft and Cisco HCS)
- MegaPath (BroadSoft)
- Thinking Phone Networks*
- WVT (BroadSoft)
Most of these companies are private about their financials, performance, and operations. But here are some clues that we can point at for confirmation of explosive growth.
8×8 F2Q2013: Total revenue up 33% year over year to $26.4 M. Ended the quarter with 30,498 business customers with average revenue per business customer was $256. Overall Gross margins increased to 68%.
ShoreTel M5/Sky F1Q2013 : Total Number of seats deployed grew to 78k, up 36% from a year ago. Backlog of $550k of revenue from not being able to keep up with installations. Revenues of $15.7M up 27% over last year. Saw a 34% increase in monthly recurring revenue net gain this past quarter. Added 159 new customers and the total average revenue per user is $61 with average seats per customer growing to 35. Overall gross margin in the cloud at 46.7%.
Broadsoft Q312: Total revenue increased 13% year over year to $40.2 million. Total revenue was $119.0 million for the first nine months of 2012, compared to $97.5 million for the first nine months of 2011, reflecting year-over-year growth of 22%.
Those are public companies. I also talked with some folks at Nextiva. Last month they were awarded Polycom’s Platinum Partner of Year award (video of Polycom’s Testa presenting the award). They claim to have implemented a new Broadsoft soft-switch in April of 2012, and by November of 2012 had over 10,000 net new users – without an outside sales force.
An important consideration about the hosted voice business is it is NOT a zero sum game. The cloud is growing so quickly that it is often without competitive bids. That’s not the case in premises, where a win consistently means a loss to other vendor(s).
I expect to see the following near term trends:
- Increase in M&A Activities. The goal in being sold is to get value for everything – the customers, the revenue, and the systems. M5 developed its own technology and that was a big part of why ShoreTel acquired it. Conversely, BroadSoft shops are more likely to acquire other BroadSoft shops as they can combine their licensing (presumably). M&A activity has been slow in 2012, Hawaii Telcom bought Wavecom, and MegaPath bought IP5280.
Growth out of SMB: SMB was the low hanging fruit, but providers have their sights aimed at larger accounts; both mid-market and enterprise. National organizations with multiple smaller sites are easy targets. Hosted voice was largely viewed as a curiosity by the enterprise until recently, but “the cloud” is emerging as a mainstream solution. As the space continues to grow, expect to see ecosystem changes. For example, the channel will become more critical with larger accounts. Also, new leaders will emerge as the pack segregates into different markets. For Example, 8×8 seems content with SMB accounts. Conversely, customers using Cisco’s HCS infrastructure need to have 100 seats minimum (because Cisco does not support multi-tenant).
- Video Services: Video services are the wildcard. Skype is 800 lb gorilla, but the real opportunities lies in any-to-any opportunities. LifeSize has a service. Polycom and Vidyo have promised one. Currently, none of the major premises vendors offer a solution as good as Vidtel or Blue Jeans. Video will be a major factor in this space soon – 2013 or 2014.
- Premise-vendor Strategies to Emerge: Avaya is experimenting with hosted with SMB only. The solution uses its own phones with an Avaya proprietary configuration. Video is only supported internal to a customer (not between two Avaya hosted customers). NEC has been testing its 3C service and expects to go public GA in 2013. Siemens Enterprise and Mitel were early on the scene, but flounder with confused channel strategies. ShoreTel intends to offer powerful solutions with new hardware and possibly hybrid solutions with its gear. Expect lots of changes in 2013 as the premises vendors begin to figure out the hosted segment.
- Big Wins: Expect to hear about some big wins in 2013. Google started touting some big wins with “the cloud” in 2012, voice/UC is the next show to drop. There’s lot of activity. For example, XO is reportedly doing well with converting US Post Office locations to hosted, but isn’t willing to talk about it yet. Also, Internet2 (Level3 and Aastra) are rolling out hosted voice to universities. There are lots of pilots underway, and 2013 will be a big year for legitimacy as major brands turn to UCaaS.
- Hybrid: Mitel and Fonality both offer hybrid solutions, but they don’t really offer any added functionality, they address scalability and migration. ShoreTel is making noise about a hybrid solution, but hasn’t announced any details yet. A hybrid solution could potentially offer some very unique features. I expect the model will materialize in 2013 – possibly by Cisco.