Pursuit of Recurring Revenue & Three Views of the Cloud: Page 3 of 5

 

MRR is the driver that we believe should and will influence what Avaya, Mitel, and NEC begin offering for their large deployment customers. These three companies are the other large installed base telephony players.

 

In its recent financial analyst session, Avaya claimed it has 145 million installed base seats. Mitel claims about 70 million seats, including the large installed bases it acquired over the years from Aastra, ShoreTel, and others. Based on market share data over time, NEC should be somewhere in the range of 120 million seats. And, don’t forget Cisco’s approximately 100 million seats. Combined, these companies represent 435 million installed base endpoints!

 

The opportunity for each of these vendors is to provide a compelling cloud transition offer that can become the path of choice for their installed bases. This is how the financial markets are viewing these companies. For example, in initiating coverage of the new Avaya stock in December 2018 with a Neutral rating, Goldman Sachs said, “While we are encouraged by the stabilization and early evidence of top-line improvement, we remain on the sidelines until we get more comfortable with the growth trajectory and see evidence of an acceleration in customers’ cloud migration” (emphasis is ours).

 

If Avaya really has 145 million active endpoints, then with the right cloud business model offers, some percentage of those would see logical value in retaining their Avaya solutions but under an MRR business model. For example, Avaya did a deal with Bosch in 2017 for a five-year managed service “cloud” offer that works out to between $6 and $8 per month per seat. If Avaya can transition 20% to 30% of its existing base, this represents 29 million to 43 million cloud seats. At an average revenue of $8 per month, a 30% transition generates an annual recurring revenue stream of $4.2 billion. Cisco, Mitel, and NEC are sitting on similar multibillion-dollar annual recurring revenue opportunities. For each company, the opportunity is huge. For Mitel, a transition of 30% of the installed base would be 21 million seats.

 

The emerging challenge in cloud is increasingly going to be one in which the incumbents transition their existing installed bases to their own clouds versus the rip and replace required to move to a competitor’s cloud. If Avaya, Mitel, and NEC can transition 40% or 50% of their existing installed bases to their cloud solutions, the annual recurring revenue for each would be larger than the current annual sales from their on-premises businesses. History will be an interesting judge of the ability of the incumbents to transition their installed bases.

 

In recent vendor mass migrations, first to Cisco with VoIP and then to Microsoft for collaboration, the companies’ adjacencies outside telephony drove their market moves. Cisco leveraged its data network adjacency to win in VoIP transitions and Microsoft leveraged the Office software with its collaboration and UC functionality to drive personal productivity. In each case, the adjacency led to about 60% capture of the transitions (based on analyst market reports and data). From this we can assume that the maximum churn during this type of transition is 60%.

 

However, the transition to cloud is complicated because all the premises-based vendors still have significant numbers of both TDM and pre-SIP IP phones in their installed bases that customers will have to replace in a cloud migration. This will reduce competitive advantage for these legacy vendors among these customers. Mitel, however, should have an easier transition since it is sixth globally in cloud telephony subscriptions, according to Synergy Research, and it provides CloudLink, which enables any of its existing telephony platforms to work with the new functionality in its cloud service.