About this blog

News and analysis of developments in the enterprise communication industry and market with primary focus on Europe.

The author aims to tap into ideas, insights and thoughts of the readers to get varied perspectives.

Views expressed in this blog are solely the author's opinion and in no way reflect those of his employer.

Tuesday, July 25, 2006

Why did LG Electronics lose Crane?

LG Electronics participates in the SoHo and sub-30 enterprise markets in United Kingdom. Their gear is imported to the UK by Crane and Capstan. The vendor enjoys a reasonable installed base in a market that is led by Panasonic and BT Versatility.

Recently, Crane announced its decision to severe relationships with LG. As reported by Comm Business, in a letter to its resellers Crane Chairman David George said:

“As you will be aware, Crane has communicated our intention to cease from the supply of LG products. In order to prevent a chaotic and disorderly market and transition, it has been agreed that Capstan will purchase all of Cranes inventory and will be the sole supplier of LG. We are no longer able to sell LG with immediate effect.

The sole UK distributor and importer for LG products is Capstan Communications. Any requests for support on LG product issues or queries must now be directed to Capstan.

Any outstanding and future technical support tickets, product issues, warranty requests, DOA’s and orders will be passed to Capstan with your consent.

Crane remains committed to continuing to support and build our LG maintenance & repair business and associated service contracts.”

It is interesting to note that Crane is happy to support its customers running LG gear, therefore protecting its customer ownership base. Apart from LG, Crane distributes Avaya, Mitel, Nortel and Samsung. This may help push Avaya's One-X quick edition.

It is believed that Crane was upset when LG Electronics announced the appointment of Capstan as a master distributor. While efforts were being made to diffuse tensions, I believe things didn't go as planned. Crane has over 20 engineers supporting 2000 LG maintenance contracts in the UK.

Monday, July 24, 2006

Speculating Alcatel's Q2,Q3 performance

In the last 5-6 years, the proposition of owning channels has undergone quite some change for large PBX vendors, at least in Europe. During this period, Alcatel's go-to-market shifted from being 100% direct to become 100% indirect. Still, its dependence on one channel (Nextiraone) can't be over emphasised.

As Nextiraone changed ownership recently, Alcatel's woes has begun. The channel is undergoing major restructuring that couldn't have come at a worse time for Alcatel. The vendor's merger with Lucent has exposed and sidelined their enterprise solution division. Adding to that is the poor uptake in France that lead the vendor settle for the number two position in shipments in 2005. And now, the restructuring of its primary channel.

I am told to understand that at the ground level, Alcatel is loosing base. Nextiraone's presence extends far and wide. Apart from France; Italy, Spain are affected. It will be interesting to Alcatel's Q2 and Q3 result. Knowing the great company that Alcatel is, I am sure they will take stock and react. And I believe their reaction might just become a good case study for the rest.

Product and Services-Gross Margins

Last week Nokia reported their second quarter 2006 results. Unfortunately, I couldnot attend the conference call hosted by Olli-Pekka. From their press release, it is understood that the quarter was a very positive one for the vendor, well yes, the vendor because when Nokia wore the service provider hat, it ended up in losses. Enterprise solutions reported an operating margin of (22%). How do we analyse this?

Motorola's Eric comes to help. I had a chat with him on Friday when he educated me on the offerings of Motorola's services business. They have recently merged their networks and GEMS (government and large enterprise) to form a single entity to offer end-to-end service and solution. Eric is heading the business in EMEA and CA . He helped me understand the business model and the financial outlays. Eric spoke about two extreme situations.

Case 1:

Network operators in mature markets are fanatic over control and they like to own their infrastructure. Hence, its a sell market. However, vendor financing is very strong in this space. On the other hand, in the greenfield opportunities in emerging markets, either the operator has a strong support from a financier who acts more as a guaranteer, or else the vendor helps the operator get upto speed, a fact that was coroborrated by the CEO of Ericsson during second quarter earnings call on the Friday last.

Case 2

Large enterprises believe in the mantra of 'core competence' and in 'efficiency'. Therefore, there is a general trend to out-task/outsource/offshore their infrastructure.

However, in both the cases, the comonality is the requirement of high capital outlay for the vendors to be compensated for regular long term revenue inflows. It is to be noted that the vendor bears the technology risk and this is affecting the value-chain. In today's world of fast changing technology, a new disruptor gives a vendor the edge for no more than 12 months, however, if he misses the boat, his value proposition drops by 10 points. When we compare the two and extrapolate over a $75 billion global market, with price differential on products dropping at an average of 11% in the services market, being a product vendor offers less advantages than being a service provider because-

1. Service provider is the prime contractor and therefore the owner of the account. This presents him with possibilities to upsell, cross-sell etc.
2. With operating margins in high teens, a price differential on products by 10 percent can be easily offset as products constitute around 40% of the total project in a typical multi-year managed service contract.

Mapping the pros and cons, while the gross margins drop to 30-35% in a services business, it guarantees longetivity.

Tuesday, July 18, 2006

Nortel partners with Microsoft

Microsoft is interested in unified communication. They propose to change the way enterprises communicate. They propose a people-centric model, which is markedly different from a network centric one that has been pervasive for the last 20 years if not more. But then the enterprise PBX market is saturated and most of the large vendors have strong relationships with their customers, why are they making a beeline to partner with Microsoft, who is unknown in the voice industry.

The reasons are deep rooted. While the market is owned by the traditional telephony vendors, the market is inherently hardware based. Microsoft believes that it can squeeze out some margins from these hardware products, thus forcing a bottom-line pressure on the telephony vendors.

From the announcement made jointly by Microsoft and Nortel, I feel that Nortel wanted to communicate its intention to move to the system integration space and leave the unified communication product gap to be filled by their partner. Like a move by IBM a few decades back.

Monday, July 17, 2006

Its not 'if' but 'when' calls will become free of charge

The telecom world is changing so fast these days. Not only is there a change in technology, but also a change in business models. I was reading a new item on Jagah, a PC based VoIP service provider. This company is planning to offer voice calls to the mobile, akin to the calling card world, but cheaper. If this offering along with several others come to mainstream, mobile service providers revenue stream from call processing and call transport will shrink. The will reduce these entities to charge for their connection (read to the web). The sad part will be the amount of mobile trunks and gateways that will become non-performing assets. In view of this, I would advise mobile service providers to get into managed contracts with the infrastructure providers and integrators and pay them a part of your accruals. This will help the mobile service providers adapt their business models and also share risks with partners.

From the consumers point of view, this is just amazing. Who doesn't want cheaper service. The only hitch will revolve around QoS and I personally believe that quality can be improved. Another problem will be around billing. The consumer might end up paying more than one service provider to stay connected to the web using the mobile device.

Finally, the looming threat of such a substitution will play a role in reducing the high service costs, a benefit consumers can enjoy.

Wednesday, July 12, 2006

Tax communication services?!?!?!

I was reading an article in 'IT Week' on plans by the EU to tax e-mails and texts. Before, I submit my opinion, lets have a look at the facts.

The article says that a working group in Brussles is reviewing a plan for an EU wide tax on texting and e-mail. It goes on to say that "the idea is to introduce an EU wide tax of 1.5 cents on each text message and 0.00001 cent on each e-mail."

It is estimated that around 196 billion phone text messages were sent across in Europe in 2005, and 5475billion e-mails (including spams). The tax if applied at the suggested rates will generate
€2.94 billion from text messages and another €0.54 million from e-mail. Let's not forget the exponential grow each of these services are having.....well, in case of imposition of such a tax, it would be prudent to say 'were' having.

Let's look at the scenario where voice calls are taxed too, say at the rate of 1 cent a minute. With over 966billion minutes of fixed-line traffic in Europe (82.585 billion in UK alone) and 447 billion mobile minutes in Europe (63.119 billion minutes of mobile telephony in UK alone), the total tax amounts to €14.13 billion (€1.46 billion in UK alone). Definitely, a huge sum of money.

However, as soon as such a tax is imposed, the market dynamics will change. Free SMS will be gone. The world of Yahoo mail and Google mail will have to treak their business models if they continue to offer free mail service. The pricing of data services in advanced third generation networks will be guided by the tax structure, thus all the discusions on pricing by size of traffic will be lost.

New service delivery models will become a difficult to pursue as even a nominal tax will increase the entry barriers. Further, enterprises would rather have premise-based systems instead of network based services. I can think of a whole lot of changes, however I will stop here to leave all my visitors ponder upon the idea.