The Lippis Report

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In this edition of the Lippis Report I expand on my Network World Column: Lippis On Communications entitled, Is Avaya poised for a breakaway? http://www.networkworld.com/columnists/2005/121205lippis.html. I received numerous e-mails in response to this column and came away with the conclusion that there is more to say. So here it is.

IP telephony was born nearly 10 years ago, when Cisco and 3Com purchased a few startups and launched a new enterprise voice market. It took about four years for companies such as Avaya, Nortel, Mitel, Alcatel, Siemens and NEC to feel threatened. Today, Avaya may be poised to break away from its competitors thanks to its focus on professional services and creation of a developer´s ecosystem around a new application development platform based upon Web services and service-oriented architecture (SOA). The next three years will be crucial for vendors as most enterprises choose an IP telephony vendor, locking in market share for years to come.

Since 1996, IP telephony has transitioned through two phases and is now entering its third level of maturity. The first phase involved experimentation with VoIP and proprietary communication signaling built on a PC platform. This experimentation phase led to a stable and reliable IP telephony platform built upon a hardened Linux foundation. For some suppliers, IP telephony products now have the same reliability, availability and performance levels as traditional time division multiplexing (TDM) telephony products. With the design center of IP telephony hardware based upon a traditional computing model, cost and performance have followed Moore´s Law. Cost benefits have propelled IP telephony adoption, with more than 50% of all new phones shipped now being IP phones.

The current second phase of IP telephony involves replacing legacy voice services with IP telephony for a favorable return on investment. Today, IT management can deploy a new IP enterprise voice solution with 15% to 50% savings, depending on installed base and what you count. In most cases wide area cost reduction frees up operational dollars and capital expense to finance the new IP telephony network. However, the current phase offers companies little in the way of strategic value. Think of it this way: when you replaced your old car for a new one, you got a nicer ride and less maintenance but you didn´t change your habits. You still drove to work and back or picked the kids up, etc. The same is true with today´s IP telephony replacement phase: most corporations view the new voice system as a lower cost way to provide voice communications to conduct business process in the same way.

The third phase of IP telephony is based upon a value proposition of strategic value vs. economic efficiency. Two new industry developments propelling this phase are Session Initiation Protocol (SIP) and Web services in an SOA construct. SIP standardizes call signaling and communications between different types of devices from different vendors. More importantly, SIP simplifies the writing of communication applications, albeit between SIP devices. The second development involves using Web services to write business applications that incorporate communications. SIP combined with Web services is enabling the business process to be linked with communications to deliver strategic value to users.

At the epicenter of business process is collaboration or the ability for employees, partners and suppliers to move work flow and satisfy customers. The movement of information over converged IP networks has been a boon to corporate productivity. Nearly every corporation in the global economy has benefited from IP networks as they have enabled the extracting of delay, both human and system, in business process. In business process it´s not just humans who have to engage other humans in communication to move work product forward; it´s the inability of humans to react to situations in microseconds. Communications-enabled business process can. For example, a triggered event that automatically engages the right personnel or applications or an alert that automatically puts in motion a business process to address a situation is communications-enabled business process. Communications-enabled business process can be event-driven with an ability to sense a business scenario which triggers an event and the ability for the enterprise to respond in real time, if required.

Deeply embedding communication into the business process offers the following value: improves knowledge worker productivity, enables the business to respond in near real time to situations, and enables Business Communication-Activity Monitoring or (BCAM). Creating a business application enabled by communication for situational context is at the heart of IP telephony´s third phase. A rules-driven communication environment which is tightly linked into business process will enable enterprises to realize strategic value from IP telephony solutions.

So what are the killer applications? The answer is there is no single killer application, but many smaller, customized applications that in their totality are the killer application. Many enterprises have started their own application development efforts by extracting delay associated with unstructured business process with click-to-call and click-to-conference tools while in the process aligning communications with business needs. Just like IT focused on automating structured business process with transaction processing over the past forty years, removing delay to organize knowledge workers into conferences will be one of the first applications to be automated and integrated into business process. The ability to improve communications between organizations and remove impediments in the value chain is of high strategic value to most concerns.
As IP telephony transitions into the strategic value stage over the next 18 to 24 months, the market may move right into Avaya´s value proposition of software and services. In contrast, most of the other major IP telephony vendors are product focused, offering little to no professional services or application development environments. Many vendors base their application development around a relatively small number of highly specialized developers who can program old protocols such as CTI, TAPI and JTAPI. As SIP and Web services/SOA take center stage, this developer community of thousands will explode to millions capable of injecting communications into business processes. Vendors that only offer IP telephony products may have enjoyed the appetizer but may miss out on the entr?√⬨¬©e as the strategic value phase takes hold. This prediction is based upon existing trends.

There is no doubt that the IP telephony market is a horse race between Avaya and Cisco, with Avaya owning 22% and Cisco 21% market share according to Synergy Research.The latest quarterly numbers show that the leaders are Avaya, Cisco, Nortel, Alcatel, then Siemens, in that order. What´s most telling is a look back over the past 8 consecutive quarters: Avaya has maintained worldwide IP telephony market share leadership, while Nortel has come on strong with a 17% share; 3Com and Cisco have lost considerable share as the IP telephony industry transitioned from phase one (experimentation) to phase two (replacement), according to Synergy Research.

So why is Avaya poised for a break-away? In short because they get it. The communications industry has changed more over the last five years than it has over the past 100 and we´re just starting. If the current buying patterns and market share trends continue to play out, then the traditional voice players may very well enjoy most of the entr?√⬨¬©es the industry serves up in the strategic value phase. Communications hardware will increasingly become both commoditized or virtualized resulting in margin collapse. The future of communications is all about software and services and when you look across the industry there are only a small number of firms that are positioned and structured in this way. The two best positioned are Avaya and Siemens.

Why not Cisco? Cisco is an excellent company with a deep product portfolio and one of the best product service organizations in the industry. But Cisco, at its core, is a product-based company that ships boxes and it does it very well. Its Ethernet switches and routers dominate the industry and the company´s revenues and profits. IP telephony to Cisco is a way to drive more sales of switches and routers. It´s unclear if Cisco has the interest in professional services which help companies link business process with communications.

Avaya is a $5B communications pure play. It´s hard to compare Cisco and Avaya´s IP telephony revenues since Cisco does not break it out, but it´s a safe bet to say that Avaya is about five times larger than Cisco in terms of voice communications revenues. Where Avaya and Cisco differ is on their software and services investments. Avaya has over 1300 partners and developers writing communications applications with their development platform. The Avaya development platform will support web services/SOA which will abstract SIP, CTI, TAPI, JTAPI, et al., so that IT developers can now incorporate communications into business process without knowing the intricacies and archaic communications languages. Cisco´s development platform is based upon JTAPI.

I mentioned Siemens above. Siemens Communications is a $16B giant with 55,000 employees. Its North American revenues were some $1.5B last year. Siemens also sees the next industry transition being the strategic value phase of IP telephony. Siemens Communications has invested in their development platform called OpenScape which will support Web Services/SOA this year. OpenScape has been in production for five years, and offers developers the tools to build communications applications. Siemens also has a large professional services organization and a focus on developers. I recently interviewed Mark Straton, Senior VP Marketing Siemens Communications and we discussed Siemens and its view of the IP telephony market. This interview will be available as a podcast shortly.

But Siemens IP telephony market share in N.A. is weak, with NEC and Mitel ahead of it, each with 7% share according to InfoTech. Avaya´s big risk is execution. It has to succeed at creating an ecosystem around its development platform and manage its transition to a software- and services-based firm. Avaya has three key initiatives concurrently in motion: 1) transition its product portfolio from TDM to IP telephony; 2) expand its infrastructure offering with partners Juniper and Extreme; and 3) transition to a software and services concern. That´s a lot of transition and its execution has to be nearly flawless. Cisco may find success by expanding its IT professional services relationships with EDS, IBM Global Services et al., to develop communications-enabled applications based upon call manager. Also, Cisco has the resources to bulk up its development program and platform to offer developers the tools to build communications-enabled applications which are linked to business process. But does Cisco view IP telephony as strategic or a driver for its switch and router business? It clearly doesn´t have interest in being a software and services concern so the question is can it truly succeed in the coming strategic value phase of IP telephony?

I´ll review Nortel, Alcatel and Mitel development platforms in another edition of the Lippis Report.