Lippis Report Issue 95: The Communications Industry Braces For Restructuring

In the early summer of 2007 I attended the Siemens Communications Analyst conference in London. And while I have known for the past five years that a massive industry change was unfolding thanks to IP telephony, it wasn’t until this conference that the change agents became clear. It was during the presentation of Eduardo Montes, Siemens AG, Managing Board Member Chairman, Siemens Enterprise Communications that the light bulb went off. Eduardo talked frankly about the restructuring and consolidation that would occur in the enterprise communications market and he used service provider and equipment supplier dynamics to make his point. I didn’t buy it. The SPs had consolidated which forced all the equipment supplier consolidation. These dynamics are not occurring in the enterprise space. So I challenged his ideas during the break and what he said, through a thick Spanish accent, made immense sense to me. In short, the distribution channel for enterprise communication is restructuring and will drive consolidation.

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Think of it this way: the old model of communications was that suppliers such as Siemens, Avaya, Mitel, Nortel, Acatel, NEC, et al., would sell a PBX and thousands if not tens of thousands of desktop phones at an average price of $600 per. Now, for some suppliers desktop phone revenues represented between 30% and 50% of total equipment revenues. Remember it was only a few years ago that the typical corporate office was equipped with a computer and phone. Now to Eduardo’s point, what happens when desktop phone demand drops off? What happens when Microsoft and IBM distribute softphones and equipment suppliers receive $8 per phone as part of their share in the license revenue vs. $600? What happens is that the amount of revenue available to be shared/split between six multi-billion dollar communication suppliers shrinks by 30% to 50%. In addition there are new players in the market such as Cisco, ShoreTel and 3Com taking share too. What happens is that these traditional multi-billion dollar enterprise communication suppliers will be starved for revenues, forcing consolidation to make up for lower sales and shrinking market share unless they fundamentally change their product offerings and business models.

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This was the wake up call that every executive received last June when Microsoft announced Office Communications Server (OCS) and Office Communicator (OC). Clearly firms like Cisco, ShoreTel and 3Com were pushing IP telephony since 1996 thinking that they could provide a communications system which was cheaper and more feature rich by riding Moore’s Law. They knew that standard hardware would get cheaper and more powerful to the point where it could support real time communications just as reliably as specialized PBXs hardware. The traditional communications players saw the writing on the wall too as the 1990s came to a close. How each have responded to these dynamics will lock their fate over the next two to three years as IP telephony market share will be locked in as large enterprises choose their suppliers.

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The question yet unanswered is how will Microsoft’s OCS play out in the market? OCS clearly has a long way to go before it will be competitive with any of the existing suppliers such as Cisco, Avaya, Siemens, Nortel, ShoreTel, Mitel, NEC et al. OC, being a SIP end-point, and Microsoft, teaming with all of the existing suppliers, are motivated to see interoperability between OC and communication management servers (the devices that set up and tear down calls). In fact, many of the existing suppliers are working toward delivering features that are accretive to OC such as linking calendaring, voice mail, email, presence, etc., on top of basic click-to-call or click-to-conference. The question is how OCS will evolve vis-a-vis other communication management servers such as Cisco’s Unified Communications Manager, Avaya’s MultiVantage, Siemens HiPath, etc. The other question is how will presence information federate between vendors and thus how do suppliers build upon a presence network to offer increased value? Increased value to users may be the elimination of phone tag and supporting different modalities of communications (desktop phone, softphone, smartphone, etc.).

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Microsoft’s OC and OCS are focused on desktop and laptop environments which leave out the huge mobile and smartphone market. Going back to the changing revenue model of communications, while the days of the $600 desktop phone are limited, business and IT leaders are spending nearly that amount on high functionality mobile devices such as the $400 Apple iPhone which delivers a highly integrated communications experience or the $300 RIM BlackBerry 8820 with features such as dual mode antenna, GPS, email, global phone, etc. While some view the Apple iPhone as a consumer device, in fact it is increasingly being used within corporate environments.

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In fact, during Avaya’s November 2007 analyst conference, it showed its One-X client on an iPhone with all the capabilities of its flagship One-X user experience. In addition to the iPhone and BlackBerry smartphones, Google’s Android development environment promises to bring the open source computing experience to mobile devices thanks to the Open Handset Alliance. While Android is a 2008 event, the fact remains that the value of communications and where IT leaders are willing to spend is on mobile devices, not expensive fixed desktop phones.

This leads me back to Eduardo. Clearly Siemens, Avaya, Nortel, et al. are changing. There is a clear focus and deliberate shift toward a software and services model. Some are far ahead of others. Avaya had pegged this shift back in 2000 and has been executing toward it since. With Avaya recently going private it now has a corporate organization and capital structure to make the changes it needs to address to be successful. For example, Avaya is hiring 350 new sales representatives from the software industry which will bring access to IT executives and software sales knowledge that is available in pockets throughout the organization. Its DevConnect developer ecosystem is populated with nearly 8000 firms, the largest in the communications industry. DevConnect is fundamental to Avaya as business and IT leaders are increasingly viewing enterprise communications as a PLATFORM play versus a PRODUCT.

Siemens has shifted its product portfolio to a platform approach too, based upon open standards such as SIP, Web Services and SOA. Its professional services organization has exploded in growth while it focuses on key integration partners such as IBM, Accenture and Microsoft to add value to its UC offering. Siemens is dedicated to delivering value on top of its HiPath and OpenScape software with communications-enabled business processes initiatives and fixed mobile convenience. Thomas Zimmermann, the Siemens CEO, has focused investments in mobile communications, voice communications, IT communications and managed professional services.

Cisco drove the IP telephony movement into the market as early as 1996 yet it does not clearly articulate a software strategy like the other traditional suppliers. Cisco’s purchase of WebEx along with its focus on Web 2.0 technologies will allow it to extend its leadership in collaboration and telepresence with unified communications delivering a different communication experience to its customers. With its Orative acquisition Cisco has successfully extended its unified communications environment to certain mobile devices.

Nortel is betting that its relationship with Microsoft, named ICA for Innovative Communications Alliance, will give it a leg up on the $40B UC market. However, there has been little evidence or proof points that Nortel has gained an advantage hoped for in ICA.

The enterprise communications industry is shifting toward a softphone and smartphone market that is predominately software and professional services based. This is evident in the new office environment taking shape today where knowledge workers are provided with a mobile phone, softphone and low cost desktop phone. As enterprise workers change their communications habits away from the phone and associated v-mail toward more productive communication environments integrated into fixed and mobile computing, a more software and services oriented enterprise communication supplier will be there to greet them.

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