Will Ofcom continue to be friends with the low power GSM license winners

There are perks in being a Industry Analyst. At the end of a hard day's work, I had a meeting appointment with Ian Sugarboard, President and CEO of LGC Wireless at Picadilly Circus. The place falls on my way back home. Not really, ended up taking a circuitous route.

Ian started by articulating his vision for LGC Wireless, followed by explaining their value proposition, their place in the market and the like. James Cooper, who had arranged the meeting helped me to a shot of caffeine. Hey, not saying anything against Ian. He was superb, but then three meetings with senior managements of three companies earlier in the day had drained me of all my energy. Well not all!

Responding to one of my queries, Ian opined that Ofcom was visionary in licensing the 6MHz guard band to 12 players in 2006. The winners who include BT and Teleware have a very huge business opportunity to be leveraged in the wireless enterprise space in UK. However there remains some complications. While the license allows the winners to offer in-building GSM coverage, the solution will be successful only when it offers seamless connectivity outside the premise. The hand-over to wide area wireless carrier has to be transparent for the solutions to gain greater appeal. Till now we haven't read any deal in the press. Ian mentioned that while GSMA assures international roaming to all service provider, national roaming and interconnect is within the framework of the national regulator. What this effectively means is that, in the event of the new winners of low power GSM licenses not getting any interconnect agreement with the mobile operators, they can knock on the doors of Ofcom, who by regulation can force the mobile operators to open up interconnect with these new players. The big questions that remain to be answered include-

Will Ofcom be so friendly with the new winners?
Do we see a fixed price interconnect regime in the future?
Will mobile operators succumb to the pressure and offer access rates that are on-par with fixed operators?

Ian's opinion kept ringing in my ears throughout the 50 minute underground journey I undertook. What a way to end the day. Now, I am planning to do a bit of analysis on this rather interesting segment. Thanks Ian. You gave me another job and the inspiration. Thats why I say there are perks in being a Industry Analyst.

When to stop milking the cow?

Today I met with the Head of Strategy, Siemens Enterprise at my offices. Not technically. Although we were supposed to have the meeting in our offices, since all the conference rooms were booked, we descended to a bar nearby which we assumed would be empty at 9AM. To our surprise, we had company. Lots of people were having meetings, suggesting a serious shortage of office space in the Victoria area of London. Fortunately my guests liked the arrangement. They even collected the visiting card from the concierge of the hotel to which the bar is attached.

That was a sidetrack. Getting to the point. Siemens Enterprise is in a unique position. They have historically enjoyed a position of strength when TDM signals ruled the voice world. They were like a rajah, with a very huge entourage of direct sales force keeping their installed base happy. While their friends (or do we say foes in the market) such as Alcatel and Nortel slowly adjusted to newer market forces by moving indirect, Siemens Enterprise defied the writing on the wall and continued with their direct sales at the cost of falling margins. Till 2004, close to 90% of their revenues were attributed to direct sales. However, we have to give them their due credit. While the market pressure forced giants such as Ericsson and Nortel succumb, Siemens kept going, thanks to their strong portfolio. Today they stand at a juncture.

Its is known that the future is indirect, is hosted and is most likely to be a software based service. The brilliant engineers at Siemens' have built the product that will take them to the future. Yet, they can't stop milking their cash cows (legacy infrastructure). The big question before them is- When and how do we switch?

Appear Network expands to Netherlands and the UK

Appear Networks provides context-aware software infrastructure that transforms wireless data networks into rich multimedia channels to power next generation mobile application and services. Credited with the success stories with Dutch Rail and Paris Subway, Appear went on to win several awards at the recently concluded Cisco Networkers Event in Cannes, France. Leveraging a strong partnership with Cisco, Appear Networks is braving new markets. Recently they got on board two high experienced sales resource, one to be based in UK and the other in Netherlands. The space that Appear operates in is highly lucrative. Net margins of 60% isn't uncommon. However the level of skill set required is quite high and so is the risk in project execution. Currently Appear Networks can still be classified as a small business. Its nearest competitors Intellisync and iAnywhere was acquired by Nokia and Sybase last year.

News from Alcatel's desk: An analysis

Last week Alcatel-Lucent participated in the 3GSM in Barcelona. They announced the launch of unified mobile TV experience. Claimed as world's first, a single device (such as a pocket PC powered PDA) offered access to TV channels delivered by 3G and broadcast networks. This offers interesting options to service providers, content players and users. Optimal business model needs to be found, that offers value for money to users and ROI to service providers. Other challenges includes ironing out the content value chain, address copyright issues, create a robust value chain for user generated content. Pricing models is probably the trickiest part of the overall proposition.

That being said, the availability of mobile TV is expected to drive some sales in the video equipment market amongst enterprise segment. I believe that if a value proposition is created, enterprises would be one of the largest creaters of content. Advertising and corporate communication will go to the next level within enterprises. The billion dollar business question is to design a valuable advertising model.

Alcatel has a strong enterprise portfolio. Recently they shipped their 10 millionth OmniPCX office. Its interesting to compare this with the announcements that Avaya and Cisco made late last year. While one announced the sale of 9 millionth IP phone, the other quickly followed with a bigger boast-10millionth IP phone. True, Alcatel's OmniPCX office says nothing of IP phones, but then its simple to see who has a greater market share considering the average number of lines for OmniPCX ranging around 27.

The vendor also announced a new IP dedicated recording (IP DRlink) interface for its OmniPCX Enterprise IP PBX. The IP DRlink enables Alcatel-Lucent's IP phones to be connected to voice loggers and quality management systems for voice recording in call center, financial trading floor, public safety and other enterprise applications. This feature is expected to gain the interest of contact centres, financial services and the healthcare industry. Inline storage and archiving of communication has a great potential in the times to come, as we start seeing greater traction for unified communication and indeed convergence.

Other announcements centered around carrier grade wireless and wireline, an area where I am still a student. I won't delve into those now.

Overall, the announcements were pretty sound. However, a close view of all their announcements showed that the vendor lacks a clear cut vision into the future. Seems more like they are a supplier who meets customers demands. This is good in a lot of ways such as minimising risks, however it takes the margin and early market advantage that Alcatel-Lucent can leverage from the work that the great innovators do at Lucent bell labs and Alcatel's R&D team.

Siemens Enterprise changes guard

Andreas Bernhardt has stepped down as the CEO of Siemens Enterprise citing personal reasons. Erstwhile CEO of Siemens Enterprise, which the entity was a part of Siemens Com, Eduardo Montes has stepped in to take the position of CEO. Eduardo was been very successful with Siemens Enterprise in Spain. He took the position of CEO just before Dr Klaus Kleinfeld announced the Siemens Com demerger and the JV between Siemens Carrier division and Nokia Networks. The exact impact of the change is yet unknown. Eduardo is known to be very focussed to drive Siemens Enterprise business. Thomas Zimmermann continues as the president of the Enterprise systems unit with extended responsibility of indirect sales. Gerhard Otterbach carries on as the President of Services and Solutions with Stefan Herrlich who heads the direct sales and direct touch organisation worldwide reporting to him.

Nortel quantifies target reductions in workforce

Outlining measures to meet the objectives set out by Mike Zafirovsky, Nortel's business transformation plan is set to reduce headcount by 2900, 70% of which will take place in 2007. The reductions will be mainly in the general & administration and research & development functions. This is due to changed product mix, technology mix and out of efficiency improvement. In addition 1000 positions mainly in the R&D and operations functions will be shifted from high-cost to low cost locations, 40% of which will take place in 2007. The key countries to benefit from this shift are China, Mexico and Turkey. John Roese, CTO of Nortel explained that this transfer will help the company target the emerging markets better.

John went to offer financial guidance. He was speaking very fast, as a result I missed most of what he said. The key metrics that stayed with me are: 8.8% revenue growth in Q4, 2006, gross margins in excess of 40% for the first time in several years, and free cash to the tune of $900 million.

The area that John loves to discuss i.e technology came next. He outlined Nortel's focus on 4G wireless technologies such as mobile WIMAX, next generation carrier ethernet and next generation enterprise communication. He invited to view the first live LTE demonstration at 3GSM in Barcelona in a week's time and promised that the technology will only improve. John cheekily admitted to the excess noise created by getting BT's carrier ethernet contract to become a critical part of its 21 CN plan.

Finally the area that interests me the most, enterprise. John stopped to discuss their ICA with Microsoft. He seemed to dodge the question of where the alliance stood in the wake of the Microsoft-Motorola alliance. He outlined that while Nortel would contribute with telephony & real-time communication feature set and the signalling software, Microsoft will bring SOA, GUI, applications, presence amd collboration capabilities to the table. He explained that both vendors were free to choose other alliances.

Enterprise Mobility: Death of roaming charges

I get so angry and frustrated when I see the roaming charges on my mobile bill. As a engineer, I can't relate to the costing for a roaming service. In 2003, I presented a paper outlining how roaming is farcical. Let me take a couple of cases from the paper to illustrate my point.

Case 1: x number of customers of mobile operator A in UK travel to France to connect to mobile operator B. y number of customers of mobile operator B in France travel to UK to connect to mobile operator A.

Assume each customer calls to their home country only. For a call within the home country that costs 30 p/min, the roaming call cost on an alternate network can be expected (with anger) to be around 95p/min.

What we are told is that roaming charges go on as interconnect fees to be payed to the operator that is providing the access to make the call. In our case operator A earns (95-30)*y per minute and pays (95-30)*x to keep the difference as profit without a cause.

In technical parlance, what happens in roaming is that your HLR contents is transferred to the VLR of a different operator, which is the exactly what happens when you travel far from home in your home country. Apart from that the operators transfers the call through an interconnect, and CDRs are exchanged between operators. For this they charge what they charge.

Case 2: If a user A in UK travels to France and a user B in UK calls user A, both users pay excess charges. I wonder why?

Therefore, this roaming farce seems like cartel-pricing, rightly said by the European Union late in 2005. My reason to write this piece isn't to vent my frustration but to speculate the death of roaming with the rise of web based free services and private mobile networks. In a recent conversation with convergence specialist of BT, Rik Rocken, he outlined the forthcoming One-voice for mobile that will help enterprises get rid of roaming charges.

If we look at enterprise mobility and the rise of private networks, the value proposition is around saving costs (comparitively high access costs and long distance charges, and roaming costs). Its interesting that roaming charges gave enough reason for a new industry to be born only to kill its cause.

Alcatel-Lucent: The lay-offs begin

Lay-offs following the formation of Alcatel-Lucent has begun in the USA. During the merger announcement, we were told that close to 10% of the employee base of the combined entity will lose jobs by 2009. It is believed that Lucent is taking over the NA operations of Alcatel. Right now, there is a lot of restructuring, reshuffling and a good deal of lay-offs going on.

Content: The value proposition

While new distribution channels continue to enter the market, revenue streams don't seem to go up linearly. As a result the whole value proposition of content business is being challenged. Lets spend some time analysing this space.

Lets start by looking at the variables:

1. Number of customers
2. Access media
3. Distribution networks
4. Content

Adding customers increases the overall market size. But more importantly increasing their spending will impact the total revenue potential of the market. This is common sense. However, this is where we all seem to be struggling. Why? Because we don't know what will make the customer pay more? Is it content, quality of content, availability of content.....

Over the past couple of years, the number of access devices that can store/play content has risen manifold. HDTV and mobile TV are to name a few. Thus definitely we have improved on availability and reachability of content, yet not affecting the revenue to any significance. In fact, newer devices have started a price war for content and has taken the copyright protection battle to newer levels.

The argument of convergence has brought in several players in the content distribution map. Web based players for one, service providers both wireline and wireless, legacy cable players and the antiquated broadcasters of TV and radio have cluttered the industry space trying to win the customers attention. Last year saw a plethora of triple-play and quad-play services being launched in the market. However latest news suggest that the cummulative return from these new distribution networks haven't improved the total revenue earned from content consumption. In fact the competition is attempting to eliminate a few types of players rather than increase the size of the pot.

Having discussed the revenue implications of the three variables, we are left with content. And its here that we find few clear winners. And they are already well known. In fact its their success that started this new revolution. Yes I am talking of Youtube and Myspace. They set up platforms for newer content to be created which were then distributed via web. Some of the lucky creators got recognition and fame while others took pleasure in the experience of sharing their creation. One additional example that might be controversial. I add Skype and Vonage to this list where they share space with Google Talk, Yahoo! and other internet based voice services bundled with IM. They set up platforms where users created content (telephonic conversations) that was distributed over the web. Thus I think that until newer content is created and a strong incentive scheme build to motivate the artists, the distribution channel supporting various access media serving the same consumer will be pushing the same content. And the smart consumer will use the one thats cheap and easily available.

I argue that consumers are happy to compromise on quality to the extent possible. Remember the lack of five 9s in mobile phones. Given the choice of seeing a Bolshoi Ballet at the Royal Opera House or sitting on a cushy sofa and watching on the TV, it will take a connoisseur's effort to enjoy a live performance.

2007: Outlook

Climate Change in 2006 Rippling into New Streams in 2007

This outlook provides a concise review of the enterprise communications industry. The past year’s activities of the major players, equipment vendors, newcomers and start-ups are appraised against the background of the overall and ongoing changes in the industry and technologies.

A. Key Announcements in 2006 and their relevance in 2007

A.1 Microsoft’s entry into the Unified Communication Market

Microsoft unveiled its vision and roadmap on Unified Communication in 2006. The vendor has been in the periphery of telephony for more than 15 years. During this time it has built capabilities to offer components of what is now called ‘Unified Communication’. The greatest testimony of its capabilities is the announcements of several strategic alliances with the telephony vendors preceding this announcement.

As part of the roadmap, Microsoft announced new products that included Office Communication Server 2007 (updated version of LCS 2005), Office Communicator 2007 amongst others.

This announcement has offered credibility to the value proposition of unified communication, otherwise a buzzword for vendors and buyers hard to find. Also it has created a more competitive environment with increased seriousness at the board level of the vendors and awareness amongst large customers. Also Microsoft’s entry to be followed by IBM and others has the potential to create new categories in the overall competitive landscape that might shape the market in 2007 and ahead. Microsoft and others in this category carry the power to disrupt the centralised proprietary IP architectures of IP PBXs to create an open telephony model based on SIP centric application servers.

A.2 Alcatel and Lucent merge

Two of the largest telephony vendors merged to form one of the largest conglomerates in this industry. Although the fallout of this merger in the enterprise market in Europe is very limited, the future roadmaps seem poised interestingly. The merged entity can either focus on service providers and telcos offering them enterprise and carrier grade infrastructure to cater to enterprise telephony needs or Alcatel’s ESD division is left alone to do what it does best. Thus the ramification of this merger on the installed base of Alcatel in Europe and the future of its ESD division will become clearer in 2007.

A.3 Several vendors change management

Following two ‘not so great’ quarters, Avaya decidedly changed its management both at the corporate level as well as in EMEA. Lou D’ Ambrosio replaced Don Peterson as Avaya CEO while Carlos Sartorius took the mantle of the president of EMEA. Both of them have a strong services background, underlying the direction of their leadership in the times to come.

Avaya has announced greater emphasis on software and services as its strategy for 2007 and beyond.

Siemens Enterprise created a new management following the creation of an independent operating company within Siemens AG. Andreas Bernhardt became its first CEO and chairman of the executive board. Previously Eduardo Montes held the position of CEO when the entity was within Siemens AG. It is believed that Siemens will continue to leverage its Openscape portfolio and HiPath 8000. Its promises to provide ongoing, innovative open communication technology that promotes consolidation. The entity has expressed its intention to partner while by the latest reports seem unlikely to happen in the near future.

Nortel saw an executive re-shuffle in 2006 preceded by Mike Zafirovski taking over the mantle of CEO from Bill Owens in Oct 2005. Mike has placed a new team committed to improve transparency, focus on markets where it leads the pack and improve the efficiency of the organisation. Announcing the innovative communication alliance with Microsoft in 2006, Nortel charted a new course in moving to system integration.

Apart from these Philips, NEC United, Ericsson and Alcatel have seen changes in their management teams in 2006. The changes will affect the course of 2007.

A.4 New range of products in the P2P category announced

Acquisition of Nimcat Networks and the launch followed by runaway success of Avaya One-X quick edition in the small business market tells us a story in itself. It is well known that the small businesses have been deprived of IP telephony solutions because either they were too small or the solutions were too pricey for them. Not after peer-to-peer products pioneered by Nimcat Networks came to the market. Such was the influence that Siemens and Aastra Technologies used Nimcat’s technology to come up with BizIP and VentureIP products respectively. It is well known that small businesses represent the largest segment in terms of numbers in Europe. Estimates put the number of lines at around 48 million in Europe alone. From 2007 this segment will be a keenly fought turf where not only will the vendors claim a pie for themselves but they have to compete with players who offer P2P as a service such as Skype and Popular Telephony.

A.5 Nortel and Microsoft announces an Innovative Communication Alliance

Microsoft stunned the industry by announcing preferred partnership with Nortel to form an innovative communication alliance (ICA) that involved joint R&D and product development, sharing intellectual property and co-marketing. We believed that this paved the way for Nortel to move into the integration space with the creation of a global services business. Since July 2006 the business unit has come up with 3 joint solutions and 11 implementation services. The business unit with its expanded integration services portfolio spans the entire network lifecycle from design and deployment to support and evolution.

In addition, Nortel and Microsoft have presented a roadmap for 2008 and beyond for moving business communications onto a software platform that will drive a higher quality user experience and reduce total cost of ownership. The roadmap outlines several key applications and technology developments including a UC contact center, Nortel feature server, expanded hosted UC solutions, mobility and client solutions, and application-aware networking enhancements.

ICA is credited with several customer wins in the past few months in North America and Europe. The future of this alliance will be keenly followed by the industry in 2007.

A.6 Siemens Enterprise breaks free

After several attempts to restructure the ailing Siemens Com business unit, Siemens AG decidedly carved out the carrier business that formed a JV with Nokia Networks. The other big unit that carried the enterprise portfolio was made into a separate legal entity as of Oct 1, 2006 christened as Siemens Enterprise Communications, a wholly owned subsidiary of Siemens AG. The US entity of the business is named Siemens Communications, Inc.

One of the early adopters of open communication, Siemens suffers from being in the market too early. Its LifeWorks and OpenScape vision were too ahead of time. Another tricky issue that the vendor faces is to move its installed base to SIP based IP telephony solutions because most of the installed systems cannot be migrated without a forklift.

The biggest strength for the vendor is in leveraging on the vast breadth of businesses under which Siemens AG operates.

In 2007, the biggest challenges for the vendor are its large direct sales force and its rather limited presence outside EMEA. The vendor earns a substantial portion of its revenue from maintenance and services which with the ongoing market transformation will continue to put serious bottom line pressure.

A.7 Zultys goes bankrupt

Zultys Technologies was incorporated in 2001 and launched its first IP telephony platform, the MX-1200 Enterprise Media Exchange in January 2003. Zultys is one of the first few companies to introduce a completely SIP-based IP telephony system to the SMB market. Zultys offered MX250 - a SIP-based PBX and MX25 -Modular SIP Gateway. It offered text-to-speech capabilities on its MX250 system to enhance its value proposition. In April 2005, Zultys introduced the MX30, which integrates voice, data, video, and fax, and provided the functions of an IP PBX for a small business or a branch office in a single appliance. The vendor grew its installed base and enrolled several large distributors and resellers globally.

Zultys technologies announced large scale downsizing in July 2006 subsequent to its failure to seek funding. In spite of a pipeline of orders Zultys resellers and channel partners were left with no products to fulfil them. Also, a major section of their European team moved to ShoreTel.

This case is highlighted to depict the increasing entry barriers and growing competitive pressure for sustenance. In 2007 not only do we expect to see far less number of players entering the IP telephony market but also increased consolidation. Philips-NEC United and LG-Nortel are just the beginning of a trend. By 2009 the IP telephony vendor space is likely to be left with 3-4 global players.

A.8 Mobility gains traction: New products announced

The growth in the number of mobile workers and the development of wireless networks has enabled companies to provide access to the organization’s internal and external information to its mobile workforce. With the help of scalable technologies, it has become possible to deploy various applications, such as mobile office applications, customer relationship management (CRM), field service automation (FSA), enterprise resource planning (ERP), Sales Force Automation (SFA), Field Force Automation and other workforce management tools, to mobile executives, sales force personnel and field force employees, on a host of wireless devices.

Even the large enterprise players understand the value proposition. Avaya and Cisco for example have announced partnerships with Nokia to offer PBX type features on dual mode handsets that can be used to bypass cellular costs in a private wireless network coverage area. Regulators like Ofcom in the UK have licensed the guard band GSM to allow service providers to offer low power GSM services to enterprises. Also several wireline telcos are gearing up to offer private wireless networks while wireless operators are toying the idea of mobile PBX. In summary, in 2007 several of these products and services will face the litmus test of customer acceptance.

A.9 SIP based products launched

IP telephony not only broke technology barriers but also made ‘best-in-breed’ in vogue. As dust settled from the war between several standards such as H.323, MGCP, Megaco and SIP, the latter clearly turned the winner.

Vendors were fast to adopt SIP when it became clear that this standard is here to stay. Offerings from leading vendors such as Alcatel OmniPCX Enterprise, Avaya Communications Manager, Cisco Unified Call Manager, Ericsson MX-ONE, Mitel 3300 ICP and Nortel Succession series were made SIP capable. Several products including Siemens IP portfolio including Hipath 2000, 5000 and 8000, 3Com VCX7000 and InterTel 7000 were designed on SIP from scratch.

All new products introduced in 2007 will be SIP based.

A.10 Open source software gains traction

Ironically, as Microsoft’s application suite enters the enterprise telephony market, we see Windows gradually being displaced by Linux as the preferred operating system supplier. In the last three years, Linux has replaced Windows in most of the new products rolled out in the market. This along with the growth of Asterisk (now used by Digium and Aastra technologies) marks the ascent of open-source in call control systems of enterprise telecommunication. Apart from NEC United and Nortel (except CS2100) most tier-1 vendors’ flagship products run on open source operating system with Linux being the OS of choice.

Nonetheless, there is still a long way to go for open source. Today while they have made inroads into the call processors, application servers and media servers continue to predominantly run on Windows. This situation will only be bolstered with the advent of Microsoft’s UC products in 2007. In the short term, the strategic alliance partners of Microsoft will ensure that applications such as messaging, presence, collaboration continue to run on Windows platform. However, when the market gets past the early adopter stage, OS battle is likely to begin.

The above 10 market movements will greatly impact the shape of things to come in over the next 12 – 16 months.

B. The Market in 2007

I measure the enterprise telecommunication pulse by PBX lines. In the year 2006, the market in Western Europe grew by an average of 3.7% while Eastern Europe grows by around 11%. In total the total number of lines shipped in Europe stood at 20.54 million lines registering a growth of around 4.9% y-o-y. This being put in perspective paints a less than rosy picture as we stand in the middle of a replacement cycle. In the year 2006, CAPEX wasn’t as big an issue as the previous two years. However vendor’s strength in Europe seems to have diminished considerably. Amongst them include Siemens, Avaya and Ericsson. However that being said, increased challenge is being posed by service providers (including telcos, next generation carriers, and ASPs) offering hosted and IP centrex type of solutions.

C. Competitive Landscape

While the traditional market players such as Alcatel, Siemens and Nortel held ground, one of the largest slips was encountered by Ericsson. These four players in together constitute the traditional silo. While Alcatel and Siemens held on to their number one and number two spots, Nortel was ranked four while Ericsson at six. Together they own 70% of the enterprise (>50 users) installed base.

Aastra Technologies ranked third in Europe. This firm has grown in size through a series of acquisitions including Nortel’s legacy telephony assets, EADS telecom, Ascotel and DeTeWe.

Avaya has maintained its fifth rank. However it has lost some market share points due to a weak performance in the first two quarters. A change in management with Carlos Sartorius at the helm in Europe might change things for the better in 2007.

The dark horse in 2006 has definitely been Cisco. Rising from the bottom of top 10 vendors in Europe, it has shown remarkable grit to fight it on in one of the most competitive markets in the world. It has gained close to three percentage points in market share in 2006. This is definitely the company to watch in 2007.


D. Major Trends in 2007

Taking cue from the developments on the supplier’s side in 2006 on one hand and gauging the market’s pulse on the other, the following are the major trends that will shape 2007.

D.1 Disruption and Confusion precedes Convergence

Finally we are starting to see a transformation in the industry. I call this the ‘confusion phase’ that my peers term as the movement to shrink silos. It’s important to note that we are all talking about the same thing. The classical industry segments no longer stand in exclusion. It is getting difficult to categorise players, services, products and solutions into silos such as wireline-wireless, enterprise-carrier, business-residential, hardware-software and even IT-telecom. To me this is start of a larger transformation, the process when settles down will lead to new categories being defined. It’s an opportune moment for new innovative players who stand to benefit as and when the barriers are broken and new rules are set.

D.2 Unified Communication Story Gains Momentum

It is no doubt that Unified Communication has been the buzzword in the industry since the June 25th announcement by Microsoft outlining their vision and strategy in this space. Its importance amongst the suppliers can be felt by the fact that Microsoft, Cisco and Avaya have announced the creation of business units to cater to this market. Cisco has re-branded its flagship Call Manager as Unified CallManager.

Although there is euphemism on the supplier’s side, the market is still in the learning mode. There have yet been only a handful of complete rollouts. Surveys have revealed the need for greater awareness for enterprise users in terms of the capabilities and benefits.

D.3 Small businesses rally for peer-to-peer networking products

Small businesses have been left behind for quite a while now. While enterprises with larger sizes migrate to next-generation communication platform, a large market approximately the size of 48 million users in Europe alone have been left behind using the traditional key telephony systems or centrex type solutions from telcos. Starting 2005 but more prominently in 2006 a new hope came in the form of peer-to-peer networking products. Not only are these products priced affordably for a large section of the segment, it is easy to install, maintain and are generally flexible. One of the most notable vendors for this segment is Nimcat Networks, now acquired by Avaya Inc. Nimcat’s technology has helped Siemens and Aastra Technologies to come up with products for this segment. Going 2007, this segment of the market is likely to see a large scale churn of old key telephony systems leap frogging to pure-IP systems.

D.4 “Best-of-breed” or a single vendor solution

Shrinking silos, converging platforms and increased openness have created the notion for “best-of-breed” solutions. However if truth be said there are significant challenges in the path ahead. The increasing shortage of skilled labour pool to address the complex issues of integration is just one. The battle for openness is a keenly bought one with stakeholders trying every attempt to safeguard their interests and make the most of the opportunities they can. It is safer to say that in 2007 vendors will continue to place greater emphasis on nurturing ecosystems and that system, network and application integration business will continue to grow.

E. Final Comments


It is believed that 2007 will be the year for (a) mobility in enterprises and (b) Unified Communication. The quest for newer avenues for cost-cutting has led to mobile enterprise. Still in its buggy, this will be a story of a very fast growth as the necessary infrastructure is in place. On the other hand with so much of investment already gone into perfecting Unified Communications, the witching hour is near. Already the stakes are becoming unmanageable for some vendors.

Far from these burning issues IP penetration will grow unabated at a pace higher than last year. In 2007 we expect to see a stabilisation of the technology. Enterprises today understand that IP telephony do not guarantee cost savings or productivity improvements; but is a medium to be used to derive such benefits. In this year we expect to see the deployment of applications such as unified messaging, mobility and contact centres to derive greater value out of the investment in IP telephony.

Avaya acquires Ubiquity

A Purchase Towards Ubiquitous Services

An anticipated acquisition which places Avaya in a stronger position with potential to break into the carrier space….

Buying a creamy piece of another pie:

Ubiquity, a Cardiff based SIP application server vendor has been the torch bearer of session initiation protocol (SIP) and internet protocol multimedia subsystem (IMS). The company credits itself with a rigorously tried and tested SIP services platform, pursuing the case for ubiquitous IMS platform that would virtually enable all carrier grade applications.


Why the Acquisition Makes Sense:

While the broadband revolution takes place, telcos are re-aligning their strategies and re-architecting their networks. There is a growing prominence of Ethernet in the last mile and an extensive use of MPLS in the wireline space. Investments in 3G and other wireless high speed broadband technologies continue. These have created a huge market opportunity for next-generation delivery platforms such as SIP and IMS application servers. Studies (ours?) forecast an opportunity in excess of $5 billion by 2009.

SIP capability is the prerequisite for almost all next generation services that includes services such as virtual PBX, hosted voice, hosted speech, multi-modal applications, IP centrex, and multi-media collaboration. As IP gains ground the case for these services becomes stronger. In the last three years carriers and large enterprises have made significant investments in IP Centrex and hosted voice services.


Other pieces of the pie

In the SIP and IMS application server market, Broadsoft, Sylantro, Netcentrex (now acquired by Comverse) compete with Ubiquity. With the growing prominence of centrex type services, these vendors are seeing increased traction from the carriers.

The SDP is a prerequisite to offering enterprise hosted services, which in Europe alone could be around $7.9 billion in revenues by 2011. To this end we have seen the acquisition of Netcentrex by Comverse (a billing and messaging vendor) and HotSip by Oracle (an enterprise database vendor). Hence, given Avaya’s strong hold in the enterprise space combined with its vision to lead the communication industry, the acquisition makes perfect sense.

The merged entity:

Avaya stands to gain from access to Ubiquity’s technological edge in SIP and IMS application server space. Ubiquity’s programmable SIP server can easily be considered to be the best in the industry, and one of the most experienced.

Avaya has announced that the Ubiquity’s team will help them build a single software application development platform for both enterprises and carriers.

This being said, it remains to be seen if Avaya has any plans to enter for the carrier market. This can be argued since Mitel Networks (founded by Terry Mathews), a competitor to Avaya didn’t grab Ubiquity (funded by Celtic House that is affiliated to Terry Mathews) although the SIP vendor’s strengths have been well known. In case they do, there is a potential threat that telcos might see them as a potential competitor (read ISV) instead of being a supplier or partner. This threat is currently dispelled by Avaya announcing that the motive behind the acquisition is to move to the software application development world, which is bolstered by the fact that Ubiquity’s web services expertise can be used to develop solutions for a large section of enterprise users in the all IP world.

Ubiquity is considered as the leader in the service delivery platform (SDP) and in the IMS space, with affiliation to almost all major entities in this industry. Its tier 1 carrier customers include AT&T, Bell Canada, British Telecom and Global Crossing. Till now, it is credited to have 12 named carrier accounts including ISPs and another 120 carriers in trials and discussions. On one hand this shows the promise of the vendor while on the other explains how nascent the market is. In addition to these carriers, Ubiquity has entered into partnerships with Microsoft, Lucent and Huawei amongst others.

Ubiquity is a publicly traded company listed in the London Stock Exchange since May 2005. Before then it was funded by Celtic House, a venture capital firm affiliated to the leading technologist, entrepreneur and a successful venture capitalist Terry Mathews who has founded Newbridge Networks and Mitel Networks. Newbridge Networks, a leader in ATM technology was acquired by Alcatel. Mitel Networks is a leading IP infrastructure vendor for the enterprise market.

What does Google get from Youtube?

News talks of the $1.6 billion acquisition of YouTube by Google. In fine print there is mention that YouTube will remain a separate entity. I want to understand how is YouTube valued at Google's bid price.

I use YouTube. It offers fantastic service. Its simple to use and offers powerful tools. It offers a very strong value proposition around video sharing. And I had to look hard for their business model. Its a clever concept.

However when I compare with Google Video service, I don't see how You Tube can derive such large price out of its rival. I don't see anything that Google Video couldn't copy/substitute at a much lower cost. Additionally, such a development would not require Google to undertake the acquisition pains.

News suggest that YouTube has a larger user base. True, however YouTube offers viewers access to copyrighted video material mostly without permission thus offer a platform to increase piracy. I don't blame YouTube for that. However, Google with its clean image will have to develop checks and measures to stop the proliferation of video piracy. I fear that as Google tries to stop piracy in YouTube, it will loose the visitors and therefore a source of revenue. Also such a step will reduce the valuation of the business. It does not stop there. Creating a YouTube clone won't be much of a challenge. There are a number of them already. The visitors who move away from YouTube will choose to watch alternative video channels. My argument is to emphasise the point that Google Video has a lesser number of visitors not because of its content or lack of visibility. Its because of something that Google cannot do with its current public image.

In conclusion I think that YouTube acquisition is a costly decision where ROI calculations didnot factor in the potential threat of loosing visitors in wake of quality control and copyright protection.

Open source in telecom

Like in the operating systems, open source has come to telecoms. Spearheading the movement are two communities:

a) Asterisk
b) SIP Foundry

The community is quite extensive and geographically well spread. However the community is very restricted to the development of technical know-how. To add marketing and sales to these novel projects, four companies have been set up.

1. Digium: Founded in 1999, this company uses Asterisk as the base platform to develop enhanced suites to meet business needs
2. Pingtel: The base code of its products come out of SIP foundry. Pingtel focusses more on the support element to gain traction.
3. Fonality: Based on Asterisk, the company offers PBXtra- an advanced version of PBX using Asterisk base code. The value proposition of Fonality is around designing the communication architecture to offer best solution thus maximising customer value.
4. Hugh Symons Telecom: Recently launched SIPtrix, a Asterisk based solution developed by the distributors in-house technical consultants.

The big question is:

How successful will the open source players be?

Some analyst firms predict them to gain a market share of 1-2% in Europe by 2008. That effectively translates to anything between 21000-35000 lines depending on the market size estimates from different analyst firms. Most research firms agree that the initial traction for open-source solutions will be in the SMB space due to their lucrative pricing and close relationships/personal rapport that some of them enjoy in this segment.

However once the proponents of open-source demonstrate their products

a) reliability
b) scalability
c) security
d) features and functionalities
e) vendor support on customer lifetime management

that are close to acceptable standards, they will be able to negotiate a larger pie in the carrier market.

For example: Leading analyst firms have forecasted that by 2010, close to 15% of enterprise telephony will be hosted. This translates to approximately 3.8-3.9 million lines in Europe depending on whose market size estimate one refers to.

This is a significant market that open source vendors are likely to look into.

Nortel is trimming

Nortel executives are in advanced stages of discussion to sell of its UMTS assets to Alcatel. Nortel has a strong and comprehensive portfolio of access solutions that can compliment Alcatel's. This transaction will position Lucent-Alcatel closer to Ericsson who continues to impress the market with solid growth.

Mobile Hosted Solution- An opportunity!

During my latest industry briefing (August 2nd) I was asked to comment on "mobile hosted solution" by a mobile messaging and billing vendor who has recently invested in acquiring a platform vendor. Until a fortnight ago I could confidently say that mobile operators are only concerned over the strong anti-FMS (fixed-mobile substitution trend) and that they are looking at various options to mitigate the threat. However recently I have been involved in discussions towards creating a business model for one of the leading mobile operator in Europe. The operator plans to roll-out hosted business telephony services to enterprises. This is interesting from several points.

1. Entry of mobile operators in the enterprise telephony market will spice it up.
2. Ability to communicate business applications wireless with give credibity to the hosted proposition and in turn put immense pressure on customer premise equipment vendors.
3. Fixed-Mobile convergence and in turn triple convergence (data-voice, wireline-wireless, and IT-telecom) will move another important step closer to reality.
4. A new entity called "Managed Service Provider" will gain lot of traction.

The Zultys saga

Last week, the large scale lay-offs to reduce operating costs in wake of a funding crisis has crippled the operation and adversely affected the name of the vendor. Coming at a time when Zultys announced the launch of new products and a release that boasted of new capabilities in collaboration and messaging , Zultys failure to secure funding has devalued its branding significantly. Spotting the opportunity another innovative software based PBX vendor, Swyx invested with Google to divert eyeballs from Zultys to their website by exercising a cute marketing campaign.

There are a few takeaways from this episode. For one, the entry barriers have reduced significantly. However the importance of PBX hasn't dimished with the customers. This I believe is going to put significant pressure on the channel to constantly monitor their supplier's health to the effect to get contractual commitments from them to be in business.

Second is the intense competition in this market. The campaign launched by Swyx is indicative of the margins that can be gained when a software solution replaces a hardware product.

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.

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.

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.