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Avaya is Giving it Away

One of the first things I noticed about Avaya's quarterly shipment report was that the number of UC licenses outnumbered telephony system line station shipments by almost a 2:1 margin, about 4 million UC licenses compared to about 2.2 million line stations. I asked Avaya about this apparent anomaly, thinking that the UC license data was the collective number of licenses for specific functions or applications and that some station users required multiple license fees. But no, the UC licenses were All-in-One licenses that include a range of Avaya UC-defined applications, including desktop soft phone, presence, mobile extensions with GUI client, teleworking, and Applications Enablement Services (AES) for API/SOA requirements. Why then did UC licenses so greatly outnumber line station shipments?The answer, it turns out, is simple. The majority of the UC licenses were free giveaways as part of a promotion plan to incent customers to upgrade their installed Communications Manager software to a more current release (R5.0 or greater). Normally only customers who purchase the Enterprise edition of Avaya Aura Communication Manager receive free UC All-in-One licenses for all station users; Standard edition customers pay a nominal fee of $50 per station user desiring the license.

To truly understand the potential dollar savings for customers who benefited from the license fee promotion one should know the original prices of the individual options before everything was bundled. When most customers first installed their Avaya system, the collective street cost of the individual license fees for soft phone, mobility, et al, were on the high side of $500. As an example, the original list price for the Avaya cellular extension software option was $150 and the mobile GUI client license fee was at about $100. Customers who received these options at no cost as part of the upgrade promotion certainly had a lot to financially cheer about; customers who did pay license fees for any or all of the station licenses included with All-in-One prior to the promotion are probably not so happy.

When UC features, functions, and applications first hit the market, it was thought they would generate a profitable revenue stream that would significantly increase bottom line profits, because software offerings have high profit margins. What has happened is that many of Avaya's UC features and functions are currently priced at bargain basement rates for competitive pricing reasons. More than once when Avaya introduced a new pricing initiative they said it was in response to Cisco's pricing strategy. Avaya's All-in-One bundle was a competitive response to the Cisco Unified Workspace Licensing (CUWL) bundle (Professional edition). Cisco offered its dealers major discounting incentives to pitch customers the CUWL bundle and to position it against competitor's UC-limited standard generic software offering. Though these two competing packages don't exactly align--e.g., Cisco's includes basic Meeting Place conferencing and collaboration capabilities while Avaya's Meeting Exchange option is priced separately--they do share several common elements, such as soft phones, presence and mobility. Other competitors have also joined the UC license giveaway fad, such as Siemens Enterprise Communications, who now includes some basic UC capabilities in its entry generic software package for OpenScape UC Server that were previously available with standalone OpenScape, only.

There have always been enterprise communications system promotions, but none have had the financial scope of what we are currently witnessing. For another example, I recently wrote about Alcatel-Lucent's free IP station license promotion, (which does include all standard generic software features, a fact verified after the post was published). Like the Avaya and Cisco bundle packages, this is a significant cost savings for customers, because this can be applied to a very large number of system subscribers. Previous promotions were usually for a limited number of telephone instruments or a fixed application server software license worth a few thousand dollars, at best. The Alcatel-Lucent promotion can save a customer about 25% of the total system cost; the Avaya and Cisco software bundles can save customers more than half if the once-optional license fees were purchased for all station users.

The likely reason we are now seeing free software as a marketing tool is that it is a relatively inexpensive form of discounting based on cost of goods sold. The primary cost to the system supplier for software is usually fixed, sunken R&D expenses that were itemized for income statement purposes many months, sometimes years, ago. System hardware costs are more current expense items and variable based on system configurations. The current cost for giving away 10 software licenses is the same as giving away 1, but the hardware costs for 10 circuit cards or telephone instruments are about 10 times the cost of only 1 card or phone. In addition to R&D expenses, hardware component costs must factor in raw materials, labor, storage, inventory, and shipping, among others. Software has virtually none of these components. What's in the past is past (like software development), but what happens today is important for tomorrow's earnings report.

Software can make for a potentially high margin sale, but if necessary it can be used as the primary sales incentive to sell the system, even with little or no associated profit margin. It appears that the highly competitive nature of the enterprise communications market is dictating that software be sold as the latter.