North American market demand for enterprise communications systems rebounded by almost 10% during the second quarter, after a very rough first quarter. But total line station shipments for the first half of this year were down about 25% on a year-over-year basis; H1 2009 shipments are estimated at 5.5 million.
Retaining its position as the market leader is Cisco Systems with an estimated market share of 20.9%. Avaya is a strong runner-up with an estimated 15.4% share of the market. Nortel, surprisingly, had a strong second quarter despite the specter of bankruptcy, and managed an estimated 11.5% market share. Rounding out the top five suppliers are NEC (8.3%) and Mitel (8.2%). It is interesting to speculate that should Avaya be successful in its bid for Nortel's Enterprise Solutions (ES) business unit it would likely leap ahead of Cisco when the shipment totals for the two product portfolios are combined, for at least the first year of the merger. This would give Cisco incentive to try harder to recapture its lost leadership position.
The leading five suppliers collectively captured just under two thirds of the total market. As impressive as this sounds, the total for the same five suppliers declined from about 70% for full year 2008 estimates, indicating increased strength from the rest of the pack. The remaining system suppliers are difficult to count, because it seems that a new one appears to pop up almost every month. It is most difficult to track the growing number of entrepreneurs repackaging open source software to small system customers. Of the system suppliers using open source software--excluding Digium, the developer of Asterisk--each has market shares of 1% or less (and most are less), but their collective shares add up to maybe 10% of the total.
The second tier of market share leaders includes seven system suppliers with estimated market shares within the 2%-3% range: Digium, Toshiba, Panasonic Communications, ShoreTel, Siemens Enterprise Communications and Vertical Communications. Digium's shipment totals include its packaged offerings, Asterisk Business Edition and Switchvox, and excludes Asterisk downloads only. Toshiba, Panasonic, and Vertical are leading suppliers of what are now known as Small Medium Business (SMB) systems, what I used to call Key/Hybrid Systems (KTSs); the former two suppliers are also leading global competitors, while the latter is primarily a North American player. The offerings of ShoreTel and Siemens are primarily targeted at larger enterprise customers. In a study in contrasts, most of ShoreTel's shipments are in North America while most of Siemens' are outside North America.
Cisco's seemingly never-ending record of market growth appears to have leveled off this past year, something to be expected when they reach the top of the competitive ladder. It is difficult to know if the economy has played an important role or whether Cisco is finally at equilibrium with the rest of the competitive field, including old and new market players.
Looking back at 30 years' market research and analysis, there has been relative stability among the leading competitors. The current top five have been in place for several years, taking into account that Cisco has moved up and that Mitel and NEC frequently trade positions. Before Cisco began to make its move several years ago, Siemens was a longtime fixture in the top five, along with Avaya, Nortel, NEC, and Mitel. During the past few years, Siemens has slipped back several places for total CPE shipments, though it still remains a strong player in the system market above 100 line stations, accounting for about 96% of its sales. Siemens on a global basis is stronger in the small systems market, owing to a stronger and more established distribution network.
Several reasons account for Cisco's success in a market it entered about ten years ago:
* The supplier's dominating data communications market presence and success
* A top-rated dealer support and training program
* Strong marketing in a market contested by too many competitors not known for their marketing prowess
* Being a "safe" choice for customers during volatile market times
Avaya, not accustomed to being number two in a market it led for decades and decades during its AT&T/Lucent days, has hung in tough against the new market leader and slightly narrowed the gap between itself and Cisco since the end of last year. I believe a major reason why Avaya has retained as much of the market as it has, despite intense competition the past few years, has been its revised pricing strategy. Avaya prices are far more competitive today than at anytime in its history. When I was at AT&T in the days prior to the 1984 divestiture, the company's PBX system rate tariffs were the equivalent of at least 25% higher than competitor sales prices, and for many years after, the company believed it should receive a market leader premium of at least 10%.
Things have changed: Avaya is no longer the market leader and its prices are often lower than competitors with a fraction of its market share. Today nobody beats the price of Avaya's UC All-in-One license fee when it is bundled at no cost(!) with its Aura Communications Manager Enterprise Edition generic software; the $50 license fee for Standard Edition customers is also one the industry's best bargains. Avaya pricing can even give Mitel, always very aggressive with its pricing schedule, a run for their money. It also doesn't hurt Avaya sales that its overall voice communications product portfolio is rated the strongest by most analysts and consultants (including me).
I don't know how to account for Nortel's strong showing last quarter, which helped it remain several percentage points ahead of Mitel and NEC after a dismal first quarter. One can speculate that many customers thought that Nortel filing for bankruptcy was the right move at the beginning of the year, protecting the company from its creditors and allowing the individual business units to focus on sales rather than worrying about the shop closing down.
Nortel may have the most loyal enterprise customer base in the industry, more loyal than any of its competitors, and it has relied on this to sustain sales efforts and results. At the same time Nortel has, in fact, lost sizable market share at the high end of the market; it has been more stable in the small systems segment where less money and risk is riding on product buying decisions. Many major Nortel dealers picked up Cisco voice product during the past decade, and several other competitors, most significantly Avaya and Mitel, have been signing up the troubled system supplier's dealers here and there during the past two years. As Nortel ES's days come to an end, they appear to be going out with a bang, not a whimper.
NEC just edged out Mitel for fourth place based on an improved showing in the larger line size segments during the past quarter. NEC had lost ground in the large enterprise market for about two years or so while it was preparing to launch and ship its new flagship UNIVERGE SV8500 system. The SV8500 design is an improvement over the earlier SV7000 model, and finally offers the very large installed customer base of NEAX2400 systems an upgrade migration path that includes investment protection of PIM cabinets and port circuit cards; for a company that prided itself on its technology design expertise, it was strange (some would say stupid) that someone at NEC forgot about NEAX2400 migration when it designed the SV7000.
Now that the SV8500 is here and shipping, NEC should be able to retain and possibly recapture some lost market share in the large line size segment. A little more marketing creativity would also help out at a company historically dominated and run by engineering types. I'm greatly pleased that during the past year they suddenly discovered the potential benefits of webinars to better disseminate company and product information to the consultant and analyst communities after too many years of near silence about their accomplishments.
Mitel has strongly benefited from the demise of Nortel ES, especially in its home market of Canada. Once Nortel is broken up into many pieces following the bankruptcy auctions, Mitel will battle Aastra Technologies for the title of largest Canadian telecommunications system supplier, a battle hard to envision a few years ago when Nortel easily claimed the crown.
Mitel's market share has held up better than any of the traditional PBX system suppliers since Cisco's market entry, probably owing to the fact that the company was heavily focused on the lower end of the enterprise market for many years and did not register strongly on Cisco's competitive radar. During the past few years, however, Mitel has been expanding its market reach towards the higher end of the line size spectrum, because the port capacity of its flagship 3300 offering more than doubled. Its acquisition of Inter-Tel two years ago also helped the company retain its market share position while gaining several dozen direct sales/service offices and a newfound skill to sell managed services.
On another note, the company's bottom line could be helped greatly if it could improve its position in the contact center market: Per-line revenues and margins for contact center positions are more attractive than administrative PBX stations. Contact center customers are also more likely to require enhanced Unified Communications and business process integration solutions. Less than 3% of this year's line shipments for Mitel have been ACD positions, a percent far lower than most of the other leading competitors, especially Avaya and Cisco.
There is a relatively large gap between NEC/Mitel and the next tier of competitors. Toshiba and Panasonic are both global corporations, headquartered in Japan, that focus on the SMB market segment but also have diverse, extensive product portfolios that go far beyond enterprise communications systems. Toshiba explored the large enterprise market about two decades ago, but quickly withdrew. Panasonic has always stayed within its preferred SMB niche, and also is a major player in the consumer market for home telecommunications products. Both suppliers have retained a strong presence in the North American market by knowing their strengths and playing off them.
Digium is new to the market leader board. The company is best known as the innovator and promoter of Asterisk, the most popular open source telephony platform, but it also packages the software as part of an enterprise communications system offering, complete with OEM server, media gateways, and telephone instruments. Digium's Asterisk Business Edition (ABE) is designed for intermediate/large enterprise customers; Switchvox is an appliance server solution targeted at SMB customers.
The former solution accounts for about two-thirds of its estimated shipment total. The typical ABE system is shipped with about 250 line stations; the smaller Switchvox solution ships with an average of 35 line stations. Not counted in the Digium shipment total are Asterisk open source downloads: Digium reported that there were about 1.5 million downloads last year, with an estimated 77,000 actual deployments.
A recent Eastern Management Group (EMG) report estimated that open source deployments of all kinds account for a significant percent of the total CPE market. I personally think the EMG estimate of 18% of the total market may be on the high side, but, nevertheless, no one can deny that customer acceptance of open source telephony software has found a sizable and growing customer market. The vast majority of open source deployments, however, are in the SMB market segment.
ShoreTel this year has edged ahead of Siemens in North American shipments, something that no one could have predicted a little more than ten years ago when ShoreTel was rolling out its early systems. I remember when ShoreTel did not have its own desktop telephone instrument to offer behind its system solution, and was forced to use an OEM product only. ShoreTel can be characterized as a very aggressive marketer for its size, receiving more media coverage than some of its larger competitors. Its distributed and highly modular IP telephony system is ideally targeted at customers with several small to intermediate sized locations. ShoreTel's portfolio, though, is not yet in the same league as the very top tier market leaders in terms of advanced contact center and UC applications, but it is making annual advancements.
Siemens found a new majority owner last year when Gores Group took control of 51% of the business entity; Siemens AG remains a very strong minority owner which must protect not only its name, but a customer base that depends on the corporate giant for a variety of industrial systems, such as energy and security. The recent shipment numbers for Siemens in North America are only slightly higher than those reported by its Rolm ancestor almost 30 years ago when market demand was a fraction of today’s levels. Siemens has slipped down the competitive ladder in North America for a variety of reasons, such as:
* The uncertain fate of the company for the two-plus years between Siemens AG's announcement of its intention to divest itself of its telecommunications businesses, and the final Gores Group transaction;
* Weakened market coverage through both direct and indirect channels;
* IP telephony system product delays dating back many years; and
* A Euro-centric strategy that did not devote sufficient resources to this side of the Atlantic.
While the Siemens market share in North America dropped significantly over a two decade period, its market share in virtually all of the other major geo-global areas has remained strong. It’s currently the market leader in both EMEA and CALA (see my No Jitter blog post Siemens Doing Well Globally Despite North American Market DeclineSiemens Doing Well Globally Despite North American Market Decline). After the Los Angeles-based Gores Group buy-in last year, it was speculated that things would improve in North America, but the sudden departure this year of CEO Jim O'Neill cast another cloud over the company. Mark Stone, Senior Managing Director with responsibility for Gores' worldwide operations group, oversight of all Gores portfolio companies and operational due diligence efforts, has since stepped in as the new Siemens CEO, and the market waits to see if he can lead the system supplier in the right direction back up the North American market leader ladder. If the company decides to raise Avaya's bid for Nortel ES it could dramatically change the outlook and fortunes of the system supplier here and across the globe.
Vertical Communications, the amalgam of Artisoft, Vertical Networks, Comdial and Vodavi Technologies, plays in both the SMB and larger enterprise market spaces, but is more successful in the former. Its current product portfolio includes a number of system offerings, too many to list here, and that is both an advantage, because it can satisfy a very wide range of customer system requirements, and a corporate problem, because it is difficult to continually upgrade/enhance, market, sell, and support such a wide range of core telephony system solutions. Several of its products are developed and manufactured by its strategic partner LG-Nortel (a joint venture between Nortel and LG Electronics whose future is in doubt based on the outcome of the current Nortel bankruptcy proceedings).
Before closing, a few words about two global market leaders who are not currently having great success in the North American market. Alcatel-Lucent reported improved sequential quarterly shipments, but its half-year total North American share remains under 1%. Like Siemens, its global shipment numbers are very strong, and were comparable to those of Cisco and Avaya for the first half of this year. Excluding North America, Alcatel-Lucent actually outships all of the competition, leading one to wonder what the problem is here.
Alcatel-Lucent has been sorely in need of a stronger North American distribution network for many years; though its dealer list includes Verizon, that carrier has stronger enterprise system relationships with several other suppliers, such as Cisco and Nortel. Alcatel-Lucent also has been very skimpy in providing the marketing and services support needed by its dealers to compete against the big boys at the top of the market share ladder in North America.
The recently announced strategic relationship with HP, however, may be the breakthrough Alcatel-Lucent needs to give it a major market boost. The agreement is binding for 10 years and will have more than 1,000 Alcatel-Lucent employees transferring over to HP. Through a series of partnerships, the two companies will offer joint telecommunications and IT solutions to customers worldwide.
Aastra Technologies is not as large as Alcatel-Lucent using any measurement metric, but it is still a leader in the EMEA PBX market. Its North America market share, though, is a fraction of 1 percent. The past quarter for the company was "tough and disappointing," based on the comments of Chairman and co-CEO Francis Shen to financial analysts. In North America, Aastra Technologies has the difficult task of retaining both the Intecom and Ericsson PBX installed customer base. Though the system supplier acquired the MX-One IP telephony system as part of its Ericsson enterprise business buyout, they appear to be positioning the ClearSpan solution as the flagship offering.
ClearSpan is based on generic software from Broadsoft and is designed to carrier-class standards, but I don't believe it as strong an overall solution as the Ericsson product. The MX-One is a very strong migration option for customers with the the aging Ericsson MD110 system (classic LIM cabinets can be mixed with the new IP-centric LIM cabinets), whereas ClearSpan has little in common with the aging Intecom system installed base.
It's hard enough to effectively position one solution against a marketing machine like Cisco, let alone two solutions. Aastra, like Siemens and Alcatel-Lucent, needs to devote more of its enterprise systems focus to the North American market if it hopes to be successful in the future. In the meantime it will battle with Mitel for bragging rights to the mantle of largest Canadian telecommunications systems supplier in the wake of the Nortel dismantling.
I will be taking a close look at the flagship IP telephony systems from many of the suppliers discussed above as part of my half-dayVoiceCon San Francisco workshop and also further pontificate on market conditions and the competitive landscape during my traditional market update session. By then the outcome of the Nortel ES auction will be known and I can provide a clearer, more informed competitive assessment.
