Last year was not a good year for the customer premises communications system market in North America, though Cisco Systems solidified its market leadership with strong second-half results. After researching and analyzing the reported shipment data from the major system suppliers it was estimated that total market (SME and Enterprise) line station shipments for 2009 were 11.2 million, a 17% decline from the preceding year (see Diagram below).
The major reason for the decline was, of course, the recessionary economy: many customers postponed decisions to replace their existing communications systems for financial reasons (preservation of valuable capital resources), while rising unemployment had a strong negative effect on add-on station shipments. Major vertical market sectors that have historically accounted for a significant percent of the market demand, such as financial services and automotive (including parts suppliers), virtually imploded during the past two years.
Other factors contributed to the market decline, including the bankruptcy of Nortel, the continuing penetration of hosted IP telephony services in the SME market sector, and a wait-and-see position among some customers for a PBX replacement system offering from Microsoft:
* A good number of Nortel customers (representing more than 15% of the total market) who would have upgraded or replaced their system chose to see how things played out with the beleaguered system supplier; this contributed a percent or two to the decline. Fortunately, the unveiling of the Avaya roadmap early this year should help customers decide on their future plans and drive demand for either upgrades or new product this year.
* Hosted Communications as a Service (CaaS) offerings continued to make inroads among traditional small system customers, particularly those with multiple distributed facilities. A key benefit of a CaaS solution, a reduction of upfront capital expenditures, was also something of value in these economic times.
* The Waiting for Microsoft syndrome, analogous to the Waiting for IP Telephony or Cisco syndrome a decade ago, also hurt market demand. A good many customers have been trialing or seriously thinking about Microsoft's Office Communications Server (OCS) 2007 voice solution before making a long term commitment. The recent Communications System "14" release may be the tipping point to generate growing market demand for the offering as an acceptable PBX replacement.
Despite last year's double digit market decline, there was some good news in the details. Line station shipments rebounded in the second half with consecutive quarter-to-quarter positive results: the two market leaders, Cisco and Avaya, each had encouraging results. For this reason I am forecasting that 2010 will see strong annual growth of about 7.5%, despite continuing economic fears and high employment.
Customers who have not yet hopped on the IP telephony bandwagon will find it harder to hold out, and first-generation IP-PBX customers are also due for major upgrades, if not full system replacement. Shipment growth is expected to remain positive for the next several years, assuming macroeconomic conditions are favorable.
As can be seen in the diagram on the previous page, IP station shipments will continue to replace traditional TDM endpoints (both analog and digital). Digital line station shipments are drying up in the large enterprise market segment, but demand continues among small system customers, especially in the sub-20 line station market. Analog line station shipments (in support of installed 2500-type desktop instruments, modems, fax terminal, alarms, et al) are declining (availability of low priced SIP telephones are contributing to this), but will remain in the picture for the foreseeable future.
The Market Share Battle
In the race for market share there are two clear leaders comfortably ahead of the pack. Cisco and Avaya appear to be playing in their own league, with more than half the total market between them based on last year's shipments (see Diagram below), if Nortel shipments are included with the Avaya results. Cisco’s market share was estimated at 24%; Avaya’s at almost 17% (but 27% with Nortel’s).
Cisco took over the market share lead a few years ago from Avaya (though the latter's voice system market revenues are greater) and is considered by a few industry trackers to be one of the Old Guard after more than a decade in the market; someone like Microsoft would be considered the New Guard.
The once-numerous feature/function gaps in Cisco's core UCM offering have been filled and Cisco is expanding its market reach, though it must begin worrying about protecting its aging installed base of Windows-based platform installations from the competition. The Cisco product portfolio across the multimedia communications market is wide, also with significant depth, and the company has the resources (organizational and financial) combined with a strong strategic vision to continue gobbling up more share of the core system market.
Meanwhile, Avaya has the strongest voice communications portfolio (according to many of the industry experts) with a full array of technical and professional services in support. The Avaya Aura architecture is a also a very strong conceptual framework that can create a significant competitive advantage for penetrating competitor accounts through SIP-based networking and desktop control. Following the Nortel acquisition, Avaya has by far the largest installed customer base across the entire line size spectrum and greatly expanded market coverage.
This will be the last year that Nortel market share will be discussed, because going forward Nortel product shipments will be merged with Avaya's. Nortel's 2009 market share of 10% was a significant decline from 2008 (estimated at 15%). No top tier system supplier has ever lost such a significant percent of their market in one year; bankruptcy will do that to a company.
I believe that shipments of "Nortel" product under the Avaya brand name will likely experience another decline this year and next, because customers may avoid products knowing that their end of life is coming sooner than later: the popular BCM models for the SME market will be merged into Avaya's IP Office solution and the CS 1000 will be absorbed by the Avaya Aura architecture design.
If Avaya is to leverage the Nortel acquisition to recapture its lost market leader status, it must successfully win a sizable number of new customers to offset anticipated long-time Nortel customer losses, though many enterprise-level Nortel accounts are just as likely, and possibly more likely, to switch over to Avaya’s Aura platform than to a competitor's. Everyone is currently preying on the Nortel customer base with financial incentives and high-pressure marketing campaigns, making Avaya's task difficult. Cisco has a good chance to retain its market leader crown at this year's end, but Avaya will most certainly make it a tough fight.
Cisco and Avaya (discounting Nortel shipments for the latter) each slightly increased their market share last year from the preceding year. NEC did likewise, and will move up the competitive ladder a notch with the disappearance of Nortel from the scene. NEC had a good year, an estimated 9% market share, owing to improved large system sales, though their primary strength remains in the SME market sector.
Mitel, the next system supplier on the competitive ladder, declined slightly with a market share estimated at 7.5%. Though the other market leaders saw improving sales throughout the year, Mitel second-half shipments were below first half results.
The next tier of system suppliers includes Panasonic (3%) and Toshiba (2.7%), who are among the leaders in the SME market segment; neither has sizable market share in the large system enterprise segment. The three remaining Top 10 system suppliers, ShoreTel (2.7%), Siemens (2.6%), and Digium (2.5%) are a diverse mix.
ShoreTel's strength has been in the medium line size enterprise market segment and Siemens' strength has been among large enterprises; both are trying to be more successful in each other's sector based on recent strategy statements and product announcements.
It should be noted that Siemens had the strongest relative percent market share gain of any of the top system suppliers, owing to strong demand for its high-performance OpenScape UC Server offering. The Digium market share estimate is based on packaged system offerings utilizing its Asterisk open source software, and does not include Web downloads or third party repackaged solutions. Most of the Digium-packaged systems are for small system customers (30 line stations, average).
The remaining market share points are distributed among many other system suppliers, including some very well-known international enterprise system market competitors such as Aastra and Alcatel-Lucent. Also included in the Other category are a number of system suppliers who are repackaging open source software solutions (including the above mentioned Asterisk). The open source systems, estimated to have a collective market share of about 10%, are primarily installed in the small system market below 40 line stations.
Competition for enterprise communications in North America is fierce owing to the market’s openness and size. Next year’s market share analysis is likely to include a new competitor thrown into the mix, Microsoft, and if the company follows a road similar to that traveled by Cisco last decade the competitive market equilibrium will undergo a cosmic shift in the next few years. Though the market may be growing, market share competition is a zero sum game. When someone wins, everyone else loses.
Allan Sulkin is president of TEQConsult Group and a regular contributor to No Jitter.
