Lippis Report Issue 73: Mega Industry Trends for 2007

2006 was a transitional year for our industry as key technologies matured to the point of being ready for prime time. It was a year of big acquisitions and mergers as the industry restructures to a smaller number of equipment suppliers and service providers. As the world moves to wireless and triple-play services the service providers consolidated down to a smaller number of large providers. The consolidation of AT&T/SBC & BellSouth, Verizon and MCI, Sprint and Nextel, etc., drove equipment supplier consolidation of Lucent and Alcatel, Siemens and Nokia, Ericsson and Marconi, et al. In the enterprise market lots of smaller acquisitions marked the year without any large mega deals. The big deals will happen in 2007 as Siemens Communications is looking for a new partner, Nortel pins its hopes on its Microsoft ICA initiative, Juniper is rumored to be looking to buy into the enterprise market and consolidation occurs in the switching and network appliance markets.

Private Equity Financiers Enter Market

2007 could be the year that financial sponsors such as KKR, BlackRock, et al., private equity players enter the enterprise networking market. These firms have invested in a small number of high technology deals primarily in the semi-conductor market. The private equity players do have an appetite to structure a multi-billion dollar deal that would stitch together a 10 to 20 billion networking concern that would be the clear number two to Cisco. The dynamics would be something like this. A private equity player or group of them would purchase switching, IP telephony, routing, network security, data center networking, professional services and other players into a large private company. The new company would rationalize product lines, develop a comprehensive architecture, up and cross sell customers and when the time was right, bring the company public providing exit for the initial investors.

3Com/Huawei The Flash Point?

There are many opportunities to aggregate a large networking concern by acquiring all or parts of firms such as Juniper, Alcatel´s enterprise business, Siemens Communications, Extreme, Foundry, ProCurve Networking by HP, Telcordia, NetApp, Enterasys, UTStarcom, 3Com/Huawei, et al. Last month 3Com announced that it was buying out the 49% stake of its partner Huawei for some $882M. It invested $160M in the JV back in 2003. This will leave 3Com with only $32M in cash but a large product line, potentially the Huawei brand and entry into China. 3Com could be the starting point from which private equity players build their networking giant.

Strategic Investors

If private equity firms find that networking is too rich for their taste, then the market will continue on its path of acquisition through strategic investors. Companies such as Cisco, Juniper, Avaya, Nortel et al will selectively acquire smaller players and integrate them into a growth through acquisition strategy.

There is no doubt that 2007 will bring further consolidation and paradoxically a more favorable IPO market as successful companies such as Riverbed have demonstrated. I say paradoxically since a slow down in spending is what usually ignites consolidation which one would think is a poor climate for IPOs. But our industry has lots of moving parts with newer growth market segments being rewarded with favorable valuations while either slow growth or dominated markets are hammered. It´s just the financial markets way of bringing in the new and getting rid of the old. Mitel and Crossbeam are two firms to keep an eye on as both are readying IPOs and could be industry bell weathers. So yes, small companies will exit by acquisition or IPO while the biggest of players seek mergers and strategic acquisitions for competitive gain.

One of the biggest 2006 announcements that promised to deliver an industry sea change was Microsoft´s entry into IP telephony with its unified communications architecture and ecosystem. Competition between Cisco and Microsoft will intensify in 2007 as both look to capture large shares of new markets such as unified communications, IT security and home networking. As these two giants prepare for battle, look for them to beef up their war chests with a larger number of acquisitions than usual.

So factoring all of the above what are the mega trends for 2007? Here´s my list:

Unified Communications: With Avaya, Cisco, Microsoft/Nortel, Siemens, Alcatel, Sphere, ShoreTel, et al., all geared up to deliver unified communications, 2007 will deliver a single launch point on the end-point for multiple communication applications. Knowledge workers will not have to jump in and out of desktop applications to access voice mail, e-mail, IM, chat, voice, video conferencing, etc. Finally the industry is moving toward a unified and integrated approach to communication access which will deliver increased productivity and speed workflow. I use the term end-point here as a general user interface or man-machine metaphor which enables communication. That metaphor may be a smartphone, desktop, laptop, cell phone, softphone, etc.

Communications Enablement: Communications enablement is one of the most exciting technologies which the industry will be promoting in 2007. In short, communications-enabled business process injects communications into workflow that can be triggered by some event, i.e., the movement of corporate stock by some predetermined percent, a hospital ?¢‚Ǩ?ìcode blue", a train derailment, a man made or natural catastrophe, a sales opportunity, etc. In short, key events require response and orchestrated communications between the right professionals to cease opportunities or conduct damage control. Software developers will be offered common web services tools and IT government models such as SOA to call upon communication services while automating business process through business planning modeling tools. Communications enablement will have a larger favorable impact than business process reengineering did in the late ?¢‚ǨÀú80s and early ?¢‚ǨÀú90s as corporations discover the efficiency and agility gains afforded by weaving communications into business process. In short, communications enablement is the orchestrator of communications in response to some event.

Mobile Networking: The initial conditions are set for the integration of enterprise IT services to be delivered over mobile end-points. 2007 will deliver a wide range of smartphones that link IP telephony features, directory, presence, scheduling and access to a wide range of corporate IT data and applications. The key difference between 2006 and 2007 will be that smartphones will be extensions of corporate IT resources rather than separate voice and e-mail tools. Mobile e-mail eliminated the stress of getting back to your office only to find a few hundred e-mails waiting for you. The next generation of smartphones capable of accessing corporate data will move a workforce to new levels of productivity while mobile by enabling workflow and communications to be conducted while in motion. Look for thought leadership from Cisco and Avaya as both have recently acquired Orative and Traverse Networks respectively.

The Year of SIP: I have said that 2005 and 2006 would be the year of SIP or Session Initiation Protocol and I have been wrong two years straight. You would think that I would call it quits and cut my losses, but no, I do think that 2007 will be the year of SIP. It has to be, with all the major IP telephony provides, mobile equipment suppliers, service providers and software companies building architecture, products and services around SIP for multi-model communications; it has to take hold this year just by sheer numbers.

The Network as a Business Platform: Network infrastructure has transcended its initial purpose of delivering a connectivity service into a business platform. By business platform, I mean the basis upon which to deliver competitive differentiation. The corporate network is the only horizontal IT asset. Other IT assets are vertical meaning that they are desktops, servers, data centers, storage and siloed applications. All of these IT resources are important but they primarily work in isolation. The corporate network is the only IT resource that touches all IT assets. This placement advantage makes the network an ideal resource in which to embed services that are required by all employees and IT systems. Services such as location, communication, security, mobility, storage, application acceleration, IT applications, et al., are being embedded into this fabric. During 2007 IT developers will be able to call upon these services while writing corporate applications. The tools will be the same as mentioned above, Web Services/SOA, but the location will be in the network making the network a strategic corporate asset.

The Year of NAC Appliances: Data points are building into trend lines that suggest 2007 will be the year of Network Access Control or NAC deployments. The data points are many. First and perhaps most important is that network and IT executives have turned the corner in their thinking from general interest to budgeted NAC projects as there are approximately 1500 companies who have deployed a commercial NAC solution today. There are non-commercial NAC implementations too, such as NESSUS scans which, if counted would drive the 1500 deployments up significantly. The number of NAC customers should well surpass 5000 in 2007 and there´s nothing to slow it down. With Microsoft´s Network Access Protection or NAP being dependent upon its Network Policy Server (NPS) in Longhorn, NAP will not be relevant until well into 2008. The real discussion in IT conference rooms will focus around spending budget on NAC appliance approaches. Enterprise buyers have become very pragmatic in solving their network access control problems. These problems are quickly turning into funded projects.

Branch Networking: Around the Americas and Western Europe businesses have been de-centralizing their workforce over the past 10 years. Over the past 5 years corporate employee pools have become more distributed and spread out, thanks to broadband deployment, a huge increase in working at home and branch office operations. Point in fact, Cisco has sold over 2 million ISRs to date in 2006 and the growth rate is not slowing down. With a huge surge in branch office networking, service providers and equipment suppliers have been innovating to deliver the same IT experience to branch office workers as their counter-parts in regional and headquarter facilities. 2007 will bring with it a wide range of innovation to branch office networking including encryption and tunneling to secure links, integration of communications, routing, switching, security, WLANs, storage and WAN optimization features.

Hosted IP Services: Hosted IP services including VoIP, messaging, contact centers, et al., will boom in 2007 for the small to medium sized business. In 2006 there were nearly 120 service providers worldwide who announced some version of a hosted IP service. There is a pent up demand for hosted IP services which will start to be satisfied in 2007 as these services ramp up.

Peer-to-peer networking: The client-server model of computing is on its last legs and will be replaced by a peer-to-peer model. You can thank Microsoft for that as it desires to diminish the value of Linux servers by embedding peer-to-peer hooks into its much awaited Longhorn operating system. This shift will have large consequences as traffic patterns will shift significantly requiring many network/IT business decision makers to re-architect their networks.

So 2007 may bring about a huge structural change to the industry as private equity concerns do their investment diligence and decide if it´s worth tens of billions to stitch up a networking powerhouse. For sure the industry will continue down the road of the big acquiring the small with a few spectacular IPOs in 2007. 2006´s transitional year set up the third and strategic phase of IP telephony which is driving networking into a more strategic corporate asset role.

4 Debates over Lippis Report Issue 73: Mega Industry Trends for 2007

  1. Virtual Hosted PBX News » Blog Archive » Lippis Report Issue 73: Mega Industry Trends for 2007 said:

    […] Original post by Nick Lippis […]

  2. Jim said:

    What are your thoughts regarding 2007 sales for Avaya’s On Demand solution? Do you think this is their year and what kind of growth do you expect? What about Sprints Hosted Messaging solution, I don’t ever see press releases from them regarding this solution. Hence, I’m assuming their solution is NOT being well received?

  3. Nick Lippis said:

    Not sure on Avaya ON Demand sales for ’07. They did a big annoucement during Interop ’06 and have not follow-up with anything significant since. IT seems that Sprint has not enough marketing dollars behind hosted IP service, thus no news from them.

  4. francisco24 said:

    Agree. Hosted Call Center market is gigantic. Though there were 120 companies announcing some type of offering this really needs to be broken down. There are less than 5 hosted multi tenant call companies and they are all private, but, the clear leaders in the space are Five9, Cosmocom and Telephony@Work (aquired by Oracle ’06).
    My prediction is that Five9 and Cosmocom will be acquired in ’07.
    Avaya – When you look at Avaya’s announcement of their SaaS offering there is no substance to it. Avaya will find out that offering “On Demand” call center applications is a different beast and they DO NOT currently have the expertise.
    Cisco – see Avaya
    Genesys – Genesys needs a less complex offering for their On Demand offering. No doubt that Genesys understands the call center market. But, there current offering is far to expensive and complex to sell into the service providers who in turn will sell to the SME market.
    Aspect – My opinion ONLY! They are going to start to get squeezed. They need to really acquire one of the hosted call center companies ASAP and start to introduce it to their customers and prospects. I think Aspect will easily see 30% 40% revenue decline in the next 3 to 4 years.

    The two biggest drivers for these acquisitoions will be:
    1) Market opportunity is $1B by 2008/2009
    2) Hosted call center companies such as the ones named above that have the same functionality as the larger companies
    3) Customers of these big companies will start to ask for this kind of on demand offering. Consider that the mobile workforce will increase by 20% in the next two years.
    3) Asterisk (open source), Asterisk’s developer community has done and incredible job of adding rich feature functionality over the past 2 years. Over the next two years you will see a very powerful open source offering that will become “user friendly”.

    **THE ASTERISK THREAT IN IT SELF SHOULD START TO WORRY SOME OF THESE COMPANIES CEO’S, SPECIALLY ASPECT**

    Again just my opinion

    Regards,
    SG