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A Look Behind the CPE Market Shares
My recent No Jitter enterprise communications system market share and line station shipment article revealed little in the way of surprises, because the ranking of the suppliers did not change from last year and the double digit shipment decline was expected due to the recessionary economy. I thought it would be interesting, however, to discuss some of the results from a historic perspective and show how competitive market dynamics change over time.Looking back 20 years, AT&T General Business Communications Systems (now Avaya) was the leading system supplier with a market share percent in the low 20s. Northern Telecom (now Nortel) and IBM Rolm (now the major component of Siemens Enterprise Communications North American business operation) were battling for second place with market share percents in the high teens. NEC (now NEC Unified) and Mitel (now Mitel Networks) were in fourth and fifth place, respectively, with about 7% market shares (some things never seem to change). There was no Cisco Systems entry and Microsoft was selling Windows V2.1--neither company thinking about getting into the telephony market at the time.
A few comments regarding each of the leading suppliers over the years may be appropriate at this time.
The leading suppliers of 20 years ago continue to be among the leading suppliers today, although Rolm/Siemens has seen a major decline in its market share. Since Siemens acquired the company's manufacturing arm in 1990 and its sales/marketing arm in 1993, the supplier has steadily seen its market share erode year after year. There are several reasons for this, including: late product introductions, a global-market focus to the neglect of the North American market, and erosion of third party distribution channels (particularly Norstan, now part of Black Box). Siemens is now owned by Gores Group, a Los Angeles-based private equity firm, and its new CEO, Jim O'Neill, has told me that one of his primary objectives is to place far greater corporate focus on the North American market and recapture lost market share. If it acquires Nortel Enterprise Solutions Siemens would significantly increase its market share and installed base, while dramatically improving distribution channels.
Twenty years ago, Cisco was still getting its feet wet in the emerging router market. Cisco has since become the telephony system market leader, slowly building its market share in the early part of this decade and accelerating during the past few years. Cisco took everyone by surprise with its rapid rise to the top by leveraging its dominant data communications networking presence and market prowess. Cisco has continued to improve its product portfolio, once limited and weak, to the point that it is currently competitive with any of the older suppliers' portfolios.
AT&T/Avaya, the market leader since time immemorial, has dropped to second place despite its many competitive advantages (customer recognition, installed base, product portfolio, distribution channels, services support, et al). Avaya did not adequately defend itself against the Cisco invasion and has lost several market share points as a consequence. It has also lost market share in the small-systems market, as it has focused more on its enterprise business the past few years. Avaya and Nortel market shares were very close for a few years, but Avaya is now separated from its Canadian competitor by several points. Avaya is a strong number two in North America and will be in a close race against Cisco for the leading global supplier ranking this year. Last year, Avaya announced it will significantly change, again, its distribution strategy by shifting sales from its direct channel to third party dealers based on the Cisco model (no big surprise, since Avaya's then-CEO Charlie Giancarlo is a former top Cisco executive). The number of strategic accounts handled directly by Avaya is shrinking, as more customers are being supported on a daily basis by Avaya's dealers. Whether giving up unencumbered account control will help or hurt Avaya in the long term is something that will play out the next few years, but it is certain that Avaya needs to put strong defensive measures into place to ward off continuing Cisco attacks and future Microsoft incursions into its installed customer base if hopes to remain a strong market player five or ten years into the future. Its survival as a company may depend on it.
Nortel is currently reorganizing under the protection of bankruptcy laws, but is hemorrhaging badly. Its product offerings remain strong, but its once-vaunted marketing capabilities and distribution network have weakened over the years. Many longtime Nortel top-tier dealers now view Cisco as their primary system supplier, and other competitors have been making strong in-roads as well. Nortel's market share in the enterprise segment has tumbled badly the past few years, although small-system sales remained strong. Nortel's current problems can be traced to overextending itself during the boom years of the late 1990s. Nortel's carrier business was hit hard when the Internet bubble burst early this decade. The financial scandal a few years ago under CEO Dunn accelerated Nortel's decline and since then things have gone from bad to worse. R&D budgets were cut, marketing resources diminished and public perception of the company declined. I doubt Nortel Enterprise Solutions can emerge from Chapter 11 and ever regain its former glory, given Cisco's current market coverage and Microsoft's slow expansion of its market presence with its OCS solution (which Nortel itself heavily promoted as part of its ICA venture with the software giant).
Mitel Networks' acquisition of Inter-Tel doubled its corporate revenues and greatly expanded its direct distribution network with the capability to market and sell managed services. Although it is a smaller company than its strategic competitors, Mitel has managed to retain its market share throughout the years. Mitel has gone up-market the past few years, significantly increasing the line size capacity of its 3300 platform and also placing greater emphasis on peripheral applications. Its executive management team, with few exceptions, has been in place for many years and it operates under the watchful eye of corporate founder Terry Mathews. This should not be discounted in a market era when most of its competitors have been hiring executives with no enterprise communications market experience. The lack of executives who know the market's history and have yet acquired a gut feeling for decision making has probably hurt Mitel's competitors more than these firms will ever admit.
NEC was gaining market share during the 1980s since its NEAX2400 introduction in 1983, but things stalled during the 1990s and for much of this decade. NEC ranks among the global market leaders and is probably the strongest competitor from a technology resources perspective, but did not learn the value of marketing in the North American marketplace. Its current market share is based strongly on its small system, not enterprise-level, sales. The SV7000, poorly introduced to the market, did not provide a good migration for NEC's large NEAX2400 base, because it did not support digital telephones. The new SV8500 is an improvement, but came to market at least one year later than it should have. NEC has a good mix of direct and indirect sales channels, a competitive product portfolio, and strong corporate resources, but needs to change its culture to accept the role marketing plays in positioning and promoting. Some recent management changes appear to be addressing this issue, but it is too early to judge the results.
Current market conditions and dynamics at times closely resemble those at the beginnings of the open interconnect era. The old guard at the time, represented by suppliers AT&T, GTE and ITT, began losing market share to a host of new upstart competitors, such as Rolm and Mitel. Note that GTE and ITT as telephony system suppliers have faded from memory and AT&T as we knew it is gone, broken up into several parts. Can a new competitor such as Microsoft change market status to such an extent that more than a few current leading suppliers will slowly decline and disappear from view? The likelihood of this happening is something an Avaya or Siemens must consider in its strategic plans or be prepared to be the next GTE or ITT.