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The Big Squeeze

Players in the middle of the enterprise communications market--Mitel, NEC, ShoreTel and others--are under pressure from both the high and low end as a result of several conspiring factors.

The enterprise CPE voice market is going through a major transition. The pattern of a "Big Squeeze" is clear from Allan Sulkin’s reports of total market share, which are based on actual shipments of the major CPE vendors (his most recent report was last March).

Allan’s data is based on CPE shipments,which means it is missing two major components of the larger telephony market: hosted (non-CPE) and open source (downloads)--both of which are believed to be growing segments. Part of that growth explains why his numbers were 17% lower than the prior year’s report, but the economic situation in 2009 explained a big chunk of that drop as well. It is important to note the shipment data reports do not reflect the installed base. Since the life expectancy of a phone system is 5-10 years, short term shifts in shipment quantities don’t significantly impact installed market share.

In future reports, Sulkin intends to combine Nortel and Avaya. The companies merged earlier this year. As Allan points out, 50% of all CPE sales are likely to be either Avaya or Cisco. That’s impressive. Another impressive component is the sheer size of the "Other" category (stock tip: buy Other). Other includes Alcatel-Lucent, Aastra, 3Com (now owned by HP), Microsoft, Vertical Networks, Iwatsu. some Asterisk offerings, and many other brands with even small shares.

The Big Squeeze refers to pressure on the middle players--those who sit between Avaya/Cisco and "Other". The middle players, based on considerations of their market position and budgets, are Mitel, NEC, ShoreTel, Panasonic, and Toshiba. These companies are under pressure from both sides of the market as a result of several conspiring factors.

1) The Gorillas
Every industry has big players and small players and everything in between. Enterprise CPE voice has more than its fair share of major gorillas--but many of them are not industry leaders (yet). The Gorillas are: Cisco, Avaya, IBM, Siemens Enterprise, and Microsoft. These are enterprise-savvy major players that are throwing their weight into the unified communications battleground. Cisco holds the pole position and is growing; Avaya/Nortel were briefly larger after their merger, but Cisco has eclipsed that. Nevertheless, don't discount Avaya: The company has a huge base, huge channel, and has made huge strides in integrating Nortel.

Siemens is barely out of the "Other" category on the chart, but is serious about growing by leveraging its multi-billion-dollar managed service capabilities. It has aggressive technology and momentum. Sulkin wrote: "Siemens had the strongest relative percent market share gain of any of the top system suppliers".

Microsoft is dead serious about impacting the market. Microsoft is launching its third release (and fourth name) of its Communication Server product, now called Lync.

IBM is taking a very different and questionable approach to unified communications with its Sametime Unified Telephony product for the high end and its Foundations initiative aimed at the SME. It is positioning its Lotus and SameTime systems as critical components to UC (messaging, collaboration, and presence), and is integrating with ShoreTel, NEC, and Broadsoft for the telephony component of the all-in-one Foundations server for SMEs. On the high end, Sametime Unified Telephony shuns the Microsoft approach of entering the market with native call control, instead providing middleware specifically built to integrate multiple vendors' legacy PBXs.

For the other middle players, they need to develop their own technologies or partner with Lotus and Exchange independently. IBM's partners feel the pressure too, as they need to differentiate their solutions while committing to IBM's channel and technologies.

The gorillas are starting to dance, and when gorillas dance, onlookers get hurt! These companies have customer influence, capable channels, big budgets, strong and broad technologies, enterprise focus, and important relationships. ShoreTel, Mitel, and NEC already complain about not being invited to the table enough, and it's going to get harder.

2) The Shrinking Market The CPE equipment market shrank 17% in 2009 versus 2008. The 2010 economy looks to be slightly improved. However, hosted services are increasingly a viable alternative to premises-based equipment. Hosted voice is, without a doubt, growing. In fact, most vendors mentioned in this post are scrambling to figure out how best to play the growth (sell to service providers or be a service provider). Both options are fraught with complexities around channels, customers, and business models. Some will be victorious and benefit from growth in hosted services, and some won't. A contributor to the Big Squeeze is the shrinking CPE market.

The economy is a big factor. A slowdown in capital spending has required most vendors to reduce their head counts. Reduced staffing is an unfortunate consequence of reduced demand, but further increases the pressure on market incumbents during a time of industry transition.

Carriers are also experiencing declining revenues, but not necessarily the declining demand as the equipment makers are seeing. Carriers are seeing demand for increased bandwidth (wired and wireless), hosted services, and newer technologies such as MPLS and SIP. Meanwhile, the CPE vendors are seeing the market shrink while their channel partners need to invest and expand in broader UC solution skills. The shift from TDM to VoIP created some growth spikes, but the shift from VoIP to UC has brought with it a slew of new competitors (Microsoft, IBM, Skype, Google?), a smaller market, and a declining interest in desktop phones (which are being supplanted by soft phones and mobile phones).

3) The Rebirth of Mobile
In the Hitchhiker's Guide to the Universe, intelligent aliens describe humans as creatures that love digital watches. That was the 1970s. Today, alien beings would have to remark about our fascination over mobile phones; each week new ones are introduced with even greater fanfare. Telephony is more personal than ever, and the news is filled daily with faster, lighter, better phones. But it is cell phones, not VoIP or CPE phones, that are capturing the hearts and minds of the public.

Enterprise desktop phones are a different story; new generation IP phones aren't very different from legacy TDM models. Enterprises are wrestling with support and data control with the emerging consumer device-driven environment. RIM's prior success largely came from its ability to win over the IT department, Apple and the various smartphone makers are skipping that step and directly courting end users--and winning the enterprise. Smart phones are far more than phones; they are browsers, application platforms, bar code readers, video cameras, and more. These devices are working their way into becoming enterprise productivity tools.

The term "smart phone" has been claimed by the cellular industry, not the “phone” industry. And if the desk phone isn’t a smart phone, what is it? It's a pressure point on the CPE industry as a whole. The larger players--Avaya and Cisco are introducing for their first time 3G endpoints (in tablet form). That's a long road for the smaller and middle players. The smaller players will simply embrace third-party smart phones and tablets. The gotcha is that the endpoint represents a significant portion of sales revenue for the CPE makers--and the middle players are the most vulnerable.

4) Open Source
This one is the enigma category--nobody knows. Digium, the maker of Asterisk, is boasting about bigger and more impressive wins. But the actual number of Asterisk implementations is unknown. Digium only knows about customers that purchase support services. SipXecs, another open source telephony solution, is also gaining traction. The open source solutions are heading north in market share, maturing, stable, and robust--further contributing to the Big Squeeze.

Open source isn't just the free stuff for DIY telecom administrators. It is moving in enterprise and government implementations, and brings with it an entire ecosystem of developers, applications, and vendors. There are several branded and supported offerings of open source-based products and services including solutions from Fonality, Aastra, Xorcom, and VoicePluse. Numerous hosted voice service providers are also using open source based solutions.

The Squeeze
The CPE market is a veritable pressure cooker. It is impossible for every vendor to increase its share of the market, and in a flat economy, just staying even is hard work. Did I mention the recession?

So is it over for the middle players? Absolutely not.

This type of pressure can create a do-or-die environment, forcing the participants to take on aggressive strategies. Consider Mitel's moves into virtualization and carrier services. Or NEC's acquisition of Sphericall and its rapid positioning of it as a strategic offering. Or ShoreTel's partnering with IBM and ScanSource on its Foundation solution. All bold moves. The Big Squeeze is forcing innovation at a far greater rate than telephony moved in the past.

The industry is changing rapidly. Not long ago Skype's feature set was on the fringe, but now it’s practically the model of what many UC vendors emulate. Times of transition can be great stimulants for innovation. The middle players can take solace in the Nortel-demonstrated axiom "the bigger you are the harder you fall".

Middle players are smaller than the gorillas and should have the flexibility to move quicker, or could be lucrative acquisition targets. Watch for an uptick in acquisitions, unconventional new pricing models, and radical new features and offers. The Big Squeeze is real, and it's shaking things up.

Dave Michels, principal of Verge1, blogs about telecom at