Market Report: The SMB Market for Unified Communications and Hosted Services

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1 Market Report: The SMB Market for Unified Communications and Hosted Services June 2015 Report sponsored by Edgewater Networks and Metaswitch Networks

2 Overview In March 2015, Edgewater Networks and Metaswitch Networks jointly sponsored a study of the Small and Medium Business (SMB) market for IP Communications and Unified Communications (UC). The study surveyed decision makers from 1,250 SMBs to understand current adoption rates for IP Communications and UC, purchase drivers, feature usage and much more. With participation from companies with 1 to 500 employees, this study offers unique insights into the near and longer term opportunities for service providers selling into the SMB market. This White Paper is the first in a series that will highlight the results of the study and offer service providers advice for selling IP Communications and UC in the SMB Market. Key Takeaways Although IP adoption rates have increased over the last decade, the survey data clearly shows that a large percentage of the SMB market perhaps more than expected still uses TDM systems and services. While old prejudices regarding service quality are largely gone, the data shows that SMB decision-makers still need to be educated on the benefits and implementation advantages IP offers. In short, the study shows that service providers have a tremendous market opportunity to sell IP Communications and UC to SMBs. We found: The majority of SMBs have not yet migrated to IP Communications. While adoption rates are higher in larger organizations, as high as 36%, adoption for smaller SMBs (< 100 employees) is less than 25%. The low adoption rates mean that the market for IP services is extremely large we estimate that the US market alone is worth over $26 billion annually. The majority of SMBs today are using aging TDM phone systems. The average age of in service TDM systems is 6 years. Key Systems dominate the low end of the market (<50 employees) while PBXs have the majority share among larger SMBs. IP and TDM users both place a high degree of value on Unified Communications and Mobility features and are requiring them when looking to upgrade from their current environment Across the SMB market, decision makers tell us that having an offer with the right economics from a service provider they trust are the key purchase drivers.

3 A Large and Immediately Addressable Market for IP Communications The SMB market opportunity for IP Communications is large. Figure 1 shows adoption of IP Communications by SMB size. For smaller SMBs, fewer than 20% have moved off of their TDM systems but adoption rates are low even for the largest SMBs. Figure 1 - IP Adoption by Company Size A quick comparison of these IP adoption rates against US Bureau of Census data shows an extremely large addressable market in the US over $26 billion annually. Awareness Buyer interest in IP Communications is extremely high. In companies with more than 20 employees, over 95% say they are interested. The charts in Figure 2 show expressed interest in IP Communications, on the left for SMBs with fewer than 20 employees; on the right, for more than 20 employees. Figure 2: Interest in IP Communications < 20 Employees (left) > 20 Employees (right)

4 It is important to note, however, that many of the study participants could not articulate why they are interested, especially at the small end of the market. Today 57% of companies with less than 20 employees reported being unfamiliar with the technology. In this market, education is critical to migrating companies from the circuit switched network. Service providers that can clearly articulate the true value of IP Communications to SMBs have an opportunity to quickly gain mindshare and shape how decision makers view IP over the long term. Interestingly, Quality of Service (QoS) concerns are relatively small, a factor that originally hindered widespread adoption of VoIP in the workplace. In fact, only 5.8% of companies using TDM solutions believed that IP Communications would have poorer call quality than their existing phone systems/services. Purchasing Considerations It is no surprise that economic factors are very important when SMBs consider a move to IP Communications. The majority of messaging from service providers on the subject focuses on cost savings and SMBs are notoriously stingy when it comes to capital expenditures. When surveyed, respondents placed tremendous importance on lowering TCO and eliminating charges they pay for support and maintenance on current systems. In a sign that IP adoption is moving into the mainstream, service provider attributes like reputation, customer service, and smooth sales process all factor heavily in the decision making process. Figure 3 - SMB Purchase Drivers for IP Communications

5 Purchasing Timeframes Another flag in the data that suggests that the SMB Market for IP Communications is moving to the mainstream came when we asked about timing for a move to IP. About 2/3 of smaller SMBs (<20 employees) and 3/4 larger ones (> 20 employees) tell us that they expect their company to make the switch from TDM in the next two years. About 4% of all companies surveyed say they are looking to switch immediately; the rest will need education on feature options, providers, and pricing to make a move. Implications for Service Providers With trust in provider ranked so highly in the decision making process, it is interesting to understand how the SMB market is being served today. We asked companies who had not yet adopted IP Communications what types of service providers would be in their consideration set. The results for smaller SMBs (<20 employees) are shown in Figure 4. Figure 4 - What Type of Provider Would you Consider? The ILECs (referred to as Traditional Phone Companies in the survey) generated to most consideration followed closely by Mobile Carriers. Interestingly, very few Mobile Carriers in North America offer IP Communications to SMBs. When we asked those SMBs who had already switched to IP, from whom they bought their service, the results in Figure 5 were surprising. Over ¼ bought their service from an Over the Top provider yet only 11% of non-adopters considered OTT as potential providers. Figure 5

6 State of the Market Generally speaking, adoption rates for IP solutions are higher in larger companies with more evolved IT departments. There are likely several reasons for this trend. First, many service providers prefer to target larger SMBs with IP offers. They are willing to accept longer sales cycles and more complex requirements in turn for larger deals. Secondly, many providers have a distinct techie focus to their messaging that obviously resonates more with the technical audience in an IT Department. Finally, like many technical solutions, IP Communications services were first adopted by larger companies then, as providers reduced service and sales costs, the services began making their way down market. The fact remains, however, over 80% of all businesses in the US have fewer than 20 employees. So how can service providers better penetrate the lower end of the market? Figure 6 shows how SMBs of varying sizes manage their IT needs. Some have a single IT Manager, others an IT Staff. Some outsource management and some, especially the smallest SMBs, don t manage IT at all. Figure 6 Service providers will need to speak the right language. Most often, the sales conversation at a smaller SMB will be conducted with a businessperson, not a member of a technical staff. Because of that, IP services should be positioned as business solution in clear, non-technical language to the business decision maker. It is important that service providers step outside of their internal worldview and consider how IP can make a difference in the life of the owner of a 15-person company. Learning from the Adopters Companies who have made the switch to IP are very satisfied with their new communications services and the companies who provide them. Over 90% of the survey respondents told us that they would recommend IP Communications and their Service Provider to their business peers. Many service providers understand this and use the high recommendation rates to produce case studies and customer profiles.

7 Often, the case studies and profile tend to highlight large, complex deployments that emphasize the configurability and scalability benefits of IP Communications. These are fine stories to tell for larger SMB or Enterprise customers but they miss the mark for communicating with smaller SMBs. Service Providers ought to consider Day in the Life stories about some of their small SMBs that can be used with other small SMBs to demonstrate the real world benefits of IP Communications. Summary IP adoption rates are increasing in the SMB market as it moves from Early Adopters to the Mainstream. But, the chasm has just been crossed and the majority of SMBs have yet to deploy IP Communications services. Consider the following when formulating a strategy for migrating customers from TDM networks: The addressable market for Hosted IP Services has reached $26 billion annually. Economics are a driving factor in all purchasing decisions; however, service providers that can establish a trust relationship with customers, and offer a hassle free sales process have an opportunity to gain mind/market share. The SMB market is moving to mainstream adoption quickly. Two-Thirds of smaller SMBS and ¾ of larger ones expect to purchase IP Communications in the next two years. SMB prospects are considering a range of service provider types to fulfill market demand. Winning service providers will leverage the recommendations of existing customers to gain market share. This is the first in a series of White Papers by Edgewater Networks and Metaswitch Networks on the SMB Market for IP Communications and Unified Communications. For more information or to receive the next installments in this series, go to the following link to register:

8 About Edgewater Networks Edgewater Networks has more than 12 years of experience in providing managed services platforms for the delivery of IP-based voice, video and data services. More than 4 million Edgewater ESBC sessions are currently deployed by some of the largest service providers and enterprise organizations, including one of the two largest U.S. carriers and three of the top five U.S. cable operators. The company is developing a new patent-pending platform that employs recent advances in SDN and NFV to open new markets for service providers by allowing them to quickly and profitably deliver a new class of business services. To learn more about Edgewater Networks solutions, please visit or follow us on Twitter ewn_inc. About Metaswitch Networks Metaswitch is powering the transition of communication networks into a cloud-based, software-centric, all-ip future. As the world s leading network software provider, we design, develop, deliver and support commercial and open source software solutions for network operators. Our high performance software runs on commercial, off-the-shelf hardware, as appliances or in the cloud. We package this software into solutions that are redefining consumer and business communications and enabling the interconnection between diverse network services and technologies. We also apply our software development expertise to removing network virtualization complexities in the data center, with a solution that easily scales and secures workload interconnection in support of mission-critical IT and real-time communication applications. To learn more about Metaswitch solutions, please visit or follow us on Twitter