The Cloud Revolution: Dropping Voice Prices Will Deliver Big Impact
As cloud providers plan next-generation communications and collaboration services, they'll have to figure out how to offer low-cost PSTN access.
Given the slew of communications and collaboration-related cloud announcements over the last 12 months, many industry watchers consider 2014 as the year of the enterprise telecom cloud. I'm not sure, however, that we've yet seen the real impact and transformative power of cloud on the telecom or, more accurately, the business communications and collaboration market yet. We may soon, though, considering the moves Microsoft and Google are making to position themselves as communications cloud providers.
I think about the cloud transformation and business communications and collaboration in terms of the argument software industry expert Timothy Chou lays out in his book, Cloud: Seven Clear Business Models. Chou suggests that the migration from a privately-owned, premises-based environment to a cloud model is well defined and predictable. He argues that cloud is not about technology but rather about a business model. Although technologies like virtualization and multitenancy are necessary underlying pieces, the business model is the critical consideration.
As seen in the chart below, Chou's seven models range from the traditional approach in which the enterprise buys and deploys software on servers it owns and operates with internal staff through an approach in which the enterprise receives services for free, often as a trade-off for information the service provider gleans from users. Model 6 represents the stage at which the enterprise has moved out of the premises and buys the SaaS capabilities it needs on a monthly basis (think Salesforce.com).
The critical point of Chou's logic is that from Model 3 to Model 5 an ongoing process of specialization, standardization and repetition reduces the cost of providing the service -- and, therefore, the price an enterprise organization pays to consume the service. As an example of this disruption, the chart shows a business application going from $20,000 per user per year in Model 1 down to $1,200 in Model 6. CRM is a case in point for the trend. Circa the year 2000, a CRM seat typically cost $3,000 to $6,000 annually when deployed and managed internally per Model 1. Then along came Salesforce with a monthly cloud business model that offered CRM at a per-seat cost of about $700 annually. The result is a three to five times, or 66% to 80%, reduction in cost to the enterprise.
Lessons From the Industrial Revolution
When I talked with Chou a few years back, I had an epiphany: Cloud is the computing equivalent of the Industrial Revolution. Just as the Industrial Revolution changed the manufacturing of things through specialization, standardization and repetition, so too will the cloud revolution change the delivery of communications, collaboration and other business technology today.
Prior to the Industrial Revolution, things (think chairs, tables, forks... any object) were one-offs. In 1750, if you wanted hinges for your new outhouse, you commissioned the local blacksmith to forge them. He pounded them out in an hour or two. By 1850, the Stanley works or some other factory was churning out hinges in a matter of a few minutes through specialization, standardization on certain sizes and repetition of the manufacturing task. Today, when you go to Home Depot to buy hinges for your outhouse, the labor cost is probably measured in seconds.
Let's look at how this line of thinking applies to telecom communications and collaboration services -- which, I argue, no company has yet really served up in a true cloud model. The cost of a business communications seat has not changed dramatically for more than 30 years (ignoring inflation). Total costs for a typical business-class telephone includes the cost of the device/user license, support and service, the cost of PSTN access, and the cost of internal administration (typically 50% to 75% of the basic device/service cost). The cost of the devices and service (excluding PSTN and internal administration) has remained steady at about $200 to $240 per year per seat ($17 to $20 per month). That's how much a Centrex line cost 20 years ago, and that's how much a PBX-based phone (TDM or VoIP) costs today.
In the PBX world, the cost is fairly evenly split between the original purchase/installation (and minor upgrades) amortized over a six- to seven-year period and the annual costs of support and maintenance including break/fix and moves, adds and changes. PSTN access prices are highly variable, but for a user with 20 to 30 minutes of daily use 20 days per month, the 400 to 600 minutes at 1 to 2 cents per minute is typically around $5 to $8 per month today. So the total cost of a business communications capability, including PSTN access, is around $25 per month plus internal administration (typically another $10 to $15).
Interestingly, emerging cloud vendors like RingCentral and 8x8 typically charge about $25 per month for a cloud service including PSTN access. While the cloud model provides economies of scale, the cloud service pricing still appears to be the same as or more than the traditional models. In fact, the mock RFP analysis at last year's Enterprise Connect showed every cloud offer to be more expensive at a system size of 2,000 users than any of the premises-based alternatives. The cloud providers are still operating much like blacksmiths necessary for crafting one-off, custom goods for purchase prior to the Industrial Revolution.
Click to the next page: Pricing Voice the Cloud Way