The Lippis Report

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Avaya is well known in the US for owning the leading share of the call center and voice mail markets and over a third of the PBX market. Over the past three years it has emerged as one of the leaders in the IP telephony market with over 50% of its shipments being IP vs. PBX based. Various market research reports it as either 1st or 2nd in the overall IP Telephony market. Part of its success has been the convergence migration options Avaya offers to enterprises, allowing them to transition as fast or as slow as they want. In fact, what I have found in my enterprise architecture consulting work is that in large enterprises the vendor selection is increasingly coming down to two vendors, either Avaya or Cisco.

Its financials show its progress as well with improved operating income for six consecutive quarters. I view Avaya as the IBM of the IP telephony market. Avaya views IP telephony as a professional service and software business and has taken action, especially within its Avaya Global Services group, to re-tool and broaden the professional services it offers to help large
enterprises envision, design, build and maintain multi-vendor converged networks which wrap IP Communications around its revenue and profit drivers.

But last week Avaya´s CEO, Don Peterson, seemingly feeling confident that its US operations are in order, decided to enter the European market with a ?¢‚Ǩ?ìgrow through acquisition" strategy. Avaya purchased Tenovis for slightly over $600M in cash, which will give it access to markets in Austria, Belgium, France, Germany, Italy, Spain, Switzerland and The Netherlands, taking their
IP telephony software and services into the heart of Siemens and Alcatel territory. Their timing couldn´t have been better.

The US is leading Europe in IP Telephony deployments by some two to three years. For perspective, there are some 400 million phones connected to PBXs where over 8 million IP phones were shipped this past year, up by a factor of 2. By most accounts, market analysts project that IP telephony shipments will double year after year for the next several years, providing a ten to thirteen year time span to churn the installed base away from PBX connections to IP telephony. With the US well on its way to converting enterprise voice systems to IP Telephony, the Europeans are sure to follow, which should translate favorably for Avaya if it can integrate Tenovis and execute the movement of product and services through it. If Avaya can integrate and execute on its Tenovis acquisition, it should find a welcoming European market. Why?

Well the Europeans have never really bought into all the tinkering required with US IT products. European concerns have a preference for purchasing kits or professional services, which allow them to focus on their businesses rather than hiring large groups of IT experts. If Avaya can export its software and services business effectively it should receive a warm European reception. But while Avaya has momentum in the US, it does lack market share, mind share and an installed base in Europe. It will take considerable time, effort and resources to leverage its Tenovis acquisition. Tenovis generated over $1B in revenues last year with 200,000 clients and 5,500 employees. If Tenovis can add $2B of new revenue to Avaya over the next several years, then I think we can look back and say that Avaya took advantage of timing, executed well and picked the right company to expand its European operations.