Analysis of the North American Hosted IP Telephony and UCC Services Market The Perfect Storm for Cloud Unified Communications & Collaboration July 2015
Contents Section Slide Number Executive Summary 3 Market Overview 9 Total Hosted IP Telephony and UCC Services Market --- Drivers and Restraints 29 Forecasts and Trends 38 Demand Analysis 52 Market Share and Competitive Analysis 75 Mega Trends and Industry Convergence Implications 128 The Last Word 134 Appendix 139 2
Key Findings The North American hosted IP telephony and UCC services market is undergoing major changes as it moves from early-adopter to mass-adoption stage. Increasing customer awareness of cloud communications is driving adoption, yet is also leading to greater scrutiny of service quality and reliability. Heightened customer requirements along with the proliferation of cloud solutions with little differentiation is compelling providers to seek mergers and acquisitions to gain efficiencies, economies of scale, and better compete in the marketplace. In spite of intensifying competition, however, the stilluntapped North American cloud communications market continues to present considerable growth opportunities for both existing and new market participants. In 2014, we adjusted the scope of the study to include selected hybrid cloud offerings such as those offered by Fonality, Interactive Intelligence and Star2Star. Using the adjusted estimates, the North American hosted IP telephony and UCC services user base grew by percent to reach million users by year end, adding million net new users since year end 2013. Revenues (without access) grew at a healthy rate of percent as demand increased and average revenues per user remained stable. Market growth will remain steady over the forecast period from 2014 to 2021 at compound annual growth rates of percent in terms of installed users and percent in terms of revenues (without access). Although growth rates will gradually decline year-over-year due to the larger installed base, the number of annual net-new users will increase consistently throughout the forecast period. Primary drivers for user adoption of hosted communications remain faster access to advanced features and capabilities and ability to supplement limited in-house IT staff. Control and security still top the list of key customer concerns when considering cloud solutions. Security, reliability and price remain critical factors in service provider selection. 4
Key Findings (continued) Budget and resource constraints continue to drive hosted services penetration among small and midsize businesses. Maturing technologies and business models, as well as concerted service provider efforts to penetrate larger businesses are driving adoption of hosted communications among larger distributed organizations. Hosted services adoption upmarket is helping accelerate market growth and improve service provider profitability through higher average revenue per user (ARPU) and lower churn. Multi-instance architectures provided by established communications vendors appeal to businesses with existing investments in premises-based solutions based on the same vendor technology and are rapidly gaining share of total cloud services implementations. Cisco Hosted Collaboration Solution (HCS) and Mitel MiVoice platforms, in particular, have gained considerable share of total installed users over the past couple of years. BroadSoft BroadWorks and BroadCloud platforms still hold a dominant position. Hosted services find appeal across all industry verticals with services-oriented business such as real estate, legal, consulting, information technologies (IT) among the most active adopters. Retail and the public sector are showing growing interest in hosted IP telephony and UCC services. Service bundles are becoming increasingly comprehensive with more features available as part of tiered packages and only few advanced functionalities (e.g., contact center, third-party app integration) still offered a-la-carte for an additional charge. Desktop and mobile soft clients continue to gain traction as user interfaces improve and more providers include these in standard packages. Over-the-top services are gaining traction with the success of providers such as 8x8 and RingCentral, and as others add more flexible bandwidth options to their offerings. 5
Market Engineering Measurements Total Hosted IP Telephony and UCC Services Market: Market Engineering Measurements, North America, 2014 Market Overview Market Stage Market Revenue Installed User Base Average Revenue per User Market Size for Last Year of Study Period Growth $ B (without access) M $ (without access) $ B (without access) (2014) (2014) (2014) (2021) Base Year Market Growth Rate Compound Annual Growth Rate Customer Price Sensitivity Degree of Technical Change Market Concentration % (without access) % (without access) % (without access) (2014) (CAGR, 2014-2021) (scale:1 [low] to 10 [high]) (scale:1 [low] to 10 [high]) (market share held by top 3 companies) For a tabular version, click here. Decreasing Stable Increasing Note: Adjusted historical estimates and forecasts include selected hybrid cloud solutions. All figures are rounded. The base year is 2014. 6
Market Engineering Measurements (continued) Competitor Overview Total Addressable Market Number of Competitors* Number of Companies that Exited* Number of Companies that Entered Renewal Rate Attachment Rate Years (active market competitors in base year) (2014) (2014) (average period of contract renewal) (current number of services per user 2014) Total Addressable Market Maximum Attachment Rate Current Potential Users Industry Advancement Average Product Development Time Average R&D Spend as a Percent of Market Revenue Marketing Spend as a Percent of Market Revenue Unlimited M 2 Years % % (maximum potential number of services per user) (business telephony users) Decreasing Stable Increasing *Companies with revenue of more than $5 M from hosted IP telephony and UCC services. Note: Adjusted historical estimates and forecasts include selected hybrid cloud solutions. All figures are rounded. The base year is 2014. 7
Executive Summary CEO s Perspective 1 2 3 4 5 Gradual customer transition to cloud solutions leads to steady market growth with no major inflection points. Growing popularity of multi-instance architectures drives cloud services penetration among larger businesses. Advanced features such as mobility, video, web collaboration, and contact center increase appeal for cloud offerings. Service reliability, security, regulatory compliance, customization and integration top customer solution selection criteria. Provider mergers and acquisitions are redistributing market power and positively affecting overall market health. 8
Market Definitions and Methodology Overview Geographic coverage Scope North America Study period 2013-2021 Base year 2014 Forecast period 2015 2021 Monetary unit US Dollars Unit estimates and forecasts are presented in terms of installed hosted IP telephony and UCC services users (also referred to as seats), roughly equivalent to software licenses and endpoints/stations as of the end of any given year. Users with multiple endpoints (e.g., IP desktop phones, PC soft clients, mobile clients) have been counted only once. Revenue forecasts for hosted IP telephony are based on an average monthly recurring charge incurred by enterprise customers on a per-seat/per-user basis. Monthly recurring charges generally include private branch exchange (PBX) functionality, local and long-distance calling, the cost of the data line, Internet access costs, and any additional features and applications (voicemail/unified messaging, automated attendant, conferencing, etc.) purchased by customers as part of the hosted IP telephony or UCC bundle. The revenue forecasts do not include one-time equipment costs such as those of IP handsets, routers, switches or gateways incurred by enterprise customers. Certain equipment costs may, however, be part of total revenues, if the service provider is leasing or renting the equipment and its cost is not itemized on the monthly invoice. Installation and other one-time services revenues have been included. The study encompasses both multi-tenant and multi-instance hosted IP telephony and UCC services; it does NOT include premises-based multi-instance solutions or hosted single-tenant (dedicated) solutions. 10
Multi-instance Multi-tenant Market Definitions and Methodology Overview (continued) Architecture Type Potential Advantages Potential Challenges Carrier-grade scalability including cost-effective provisioning and support of very small installations Cost-effective maintenance, updates, and upgrades across entire customer base Tighter integration and compatibility with carrier OSS/BSS systems Secure dedicated instances for each business, site, department, etc. Investment protection (license credits; re-use of existing terminals; established provider and customer skill sets; etc.) Limited feature/capability customization and billing by customer, department, etc. Partitioned software can pose certain security threats Functionality limited due to smaller number of platform vendors and shorter development history More costly maintenance, updates, and upgrades (particularly if multiple software releases supported) Vendor technology roadmaps still uncertain due to technology and business model novelty Feature set typically on par with premises-based UCC solutions Potential channel conflicts 11
Market Definitions and Methodology Overview (continued) TDM or Traditional Centrex Traditional (also known as legacy) Centrex services are defined as network-based voice services that utilize a time division multiplexing (TDM)-based network infrastructure to deliver circuit-switched telephony services. Centrex services have historically targeted certain verticals, such as education and government, whose budgets favor OPEX over CAPEX, as well as retail in which small distributed locations could not afford to purchase and maintain complex and costly PBXs. They have also been successful among small and medium enterprises that lack the financial and staffing resources needed to deploy and manage premises-based telephony solutions. However, the relatively higher recurring costs associated with traditional Centrex services, dependence upon the service provider for moves, adds and changes (MACs), upgrades, as well as a limited feature set have restricted its adoption among small and medium businesses. The majority of these businesses have retained their key telephony systems (KTS) instead. Still others, specifically those at the higher end of the medium-size enterprise segment, have capitalized on declining PBX prices (both traditional and IP PBXs) to implement premises-based voice solutions that provide business telecom staff with greater control over their company s communications networks. TDM Centrex is a declining market and will eventually cease to exist as businesses transition to premisesbased or hosted next-generation (IP-based) systems and services. This study does not include TDM) Centrex services. 12
Market Definitions and Methodology Overview (continued) Hosted IP Telephony (IP Centrex and Hosted IP PBX) Hosted IP telephony (IP Centrex or hosted IP PBX) services are defined as network-based voice services whereby all call control, voice switching, PBX functionality and network infrastructure related to service provisioning are owned, maintained, and managed by a third party (i.e., a service provider). Hosted IP telephony services are typically delivered over an IP connection and terminate at an IP endpoint. Mobile hosted IP PBX users are an exception as the service can be delivered over the cellular network and terminates on a mobile device. Emerging business models enable PBX vendors and UCC developers, data center providers, and telcos to host and manage the shared IP telephony platform and enable partners (telcos, resellers, distributors, etc.) to resell or white-label hosted IP telephony services to end users. Under a hosted IP voice scenario, business customers typically purchase/lease the IP-based handsets and/or mobile devices as well as access/connectivity (broadband, private lines, etc.) and the hosted telephony provider assumes responsibility for managing and monitoring all voice traffic. Whereas traditional Centrex services utilize circuit-switched telephony (typically based on Class 5 switches), hosted IP telephony utilizes software-based switching as well as an application server(s) to deliver packet-based voice services to business and enterprise customers. A bundled IP Centrex/hosted IP PBX offering may include local and long-distance voice, call-control and management features, a data transport line, and Internet access services. The service also provides subscribers with a Web-based interface for managing MACs, obtaining usage reports, and other tasks. Hosted IP telephony typically involves the use of shared service provider network infrastructure whereby several clients/customers are supported via the same softswitch or application server. Software instances may be shared or dedicated. 13
Market Definitions and Methodology Overview (continued) Hosted IP Telephony (IP Centrex and Hosted IP PBX) vis-à-vis SaaS/CaaS and Cloud Communications Hosted IP telephony is a Communications-as-a-Service (CaaS) solution which shares key characteristics with other Software-as-a-Service (SaaS) offerings. As a multi-tenant or multi-instance solution residing in a data center and utilizing IP infrastructure, hosted IP telephony is also a cloud communications service, offering the flexibility and cost efficiencies of cloud architectures. As businesses explore cloud architectures for more cost-effective utilization of computing resources, they are also considering cloud communications or CaaS solutions for similar benefits flexibility, operational efficiencies, and scalability. Some industry classifications recognize hosted offerings as being true cloud only when a high degree of automation is present. For the purposes of this study, we consider all multi-instance and multi-tenant hosted IP telephony and UCC offerings as cloud solutions. There are two types of hosted IP telephony solutions from an access point of view: over-the-top (overlay) solutions utilizing the public Internet, and managed hosted solutions delivered over private lines. Unlike public-cloud services delivered over the public Internet, private-cloud multi-tenant services delivered over a privately managed network offer superior security, QoS, and performance management as well as carrier-grade reliability. Service providers that also manage the access network can typically offer better service level agreements (SLAs) than overlay service providers, such as Google or Skype, that have no control over the Internet connection. 14
Market Definitions and Methodology Overview (continued) Hosted Unified Communications = Unified Communications-as-a-Service (UCaaS) UC or UCC is an integrated set of voice, data and video communications applications, all of which leverage PC- and telephony-based presence information and a common directory. A hosted UCC solution involves the delivery of pre-integrated network-based applications. UCC solutions simplify communications for end users by giving them ubiquitous and seamless access to various tools. The benefits of UCC are based on the vision for ultimate flexibility in accessing communications and collaboration capabilities anywhere, anytime, on any device and any network. Data PC and Telephony Presence Voice Video UCC Applications 15
Market Definitions and Methodology Overview (continued) Hosted Unified Communications = Unified Communications-as-a-Service (UCaaS): Multi-tenant versus Multi-instance Platforms UCaaS solutions are sometimes defined by the number of integrated applications sharing presence information and a common/unified user interface. For example, certain service providers have integrated the BroadSoft BroadWorks hosted IP telephony platform with Microsoft Lync in order to enable a common/unified user interface for both messaging and calling. In such scenarios, the telephony capabilities are supported on a multi-tenant platform, whereby both the hardware and the software components are shared across customer organizations. In other instances, however, UCaaS refers to a specific architecture, typically founded upon a virtualized UCC applications suite hosted in a data center and leveraging a shared hardware infrastructure, yet offering dedicated software instances to individual customer organizations. Examples of this type of architecture include Alcatel-Lucent OpenTouch Cloud Solution, Cisco Hosted Collaboration Solution (HCS), Mitel MiCloud, NEC UNIVERGE Cloud Services, and Toshiba VIPedge. In such scenarios, customers may only be deploying certain elements of the solution (e.g., telephony), however vendors and service providers use the term UCaaS or cloud UC to refer to the underlying multi-instance architecture. 16
Key Questions This Study Will Answer What is the market potential for hosted IP telephony and UCC services in terms of users and revenue? What factors are driving and restraining market growth? How are technologies and business models evolving and what are the implications for vendors, service providers, and end customers? What features and capabilities are customers looking for in hosted IP communications solutions and what are some of the key purchasing factors? Who are the key market participants and how are they positioned for growth and success? What criteria should end-user organizations apply when evaluating different solutions and providers? 17