The numbers are in and they aren’t good.
Based on data provided by the leading enterprise system suppliers, 1Q09 North American line station shipments were down significantly from the previous quarter, 4Q08, and from the previous year, 1Q08. Line station shipments for the top six system suppliers were down about 26% between consecutive quarters and about 22% on a year to year basis.
These were the worst shipment results I have personally seen during my three decades tracking the data. The only system supplier to buck the trend was Cisco Systems, as it shipped more line stations this past quarter than a year earlier, although it experienced the largest quarterly decline of the leading suppliers.
The declining economy began to have a serious effect on enterprise communications system line station shipments during the last half of 2008, with significant declines during the last quarter of the year. It is estimated that total line station shipments last quarter were 2.24 million, and unless the economy turns around, annual shipments for this year are forecast to be about 10.5 million, almost a 25% decline from last year.
When economic times are bad, customers delay purchasing new enterprise communications systems or adding line stations to their existing systems. A few customers may also be placing their purchasing plans on hold while they wait for Microsoft’s Office Communications Server (OCS) offering to be ready as a full-function replacement vehicle.
From a competitive perspective Cisco Systems is comfortably in first place with an estimated 21% market share of total line station shipments (see above diagram). Cisco's large quarterly decline, greater than any of the other leading suppliers (see chart below), may be interpreted as a signal regarding Cisco's long term growth trend. Cisco's strong double digit annual growth (typically between 25% and 35%) lasted several years, but was not expected to last as its installed base grew larger and its total number of shipments increased. Based on overall market activity, Cisco's 2009 results may be stronger than the competition’s, but will decline compared to last year.
Avaya is in second place with an estimated 14.9%. Its consecutive quarter and year to year declines were in line with the competition, but the market share gap between Cisco and itself widened compared to last year. Avaya has established itself as a very strong number two, especially with Nortel’s financial difficulties, but faces a future competing against another system supplier, Microsoft, who has the potential to follow in Cisco’s footsteps and change the competitive market landscape. Avaya did not take the threat of Cisco seriously until it was too late, and cannot afford to do the same with the software giant as Microsoft slowly, but surely, enters the market. Avaya needs to develop and execute a defensive game plan to retain its very large installed customer base before Microsoft can make a significant move.
Nortel is third place with an estimated 11.3%, its lowest market share in more than 20 years. Its declaration of Chapter 11 bankruptcy has certainly been a major factor for its overall results being worse than most of the other leading suppliers. Nortel was the only supplier with a decline greater than 30% both for consecutive quarters and year to year. The outlook for Nortel looks grim and it is likely that the Enterprise Solutions unit will be acquired by a competitor, such as Siemens Enterprise Communications or Avaya; HP is a dark house candidate if they wish to enter the enterprise communications market. Despite claims to the contrary, Nortel customers are beginning to leave for less risky suppliers, and many potential new customers are reluctant to purchase a system from a supplier with an uncertain future.
Mitel Networks and NEC Unified are situated in fourth and fifth place, separated by less than one-quarter-percent market share. Mitel’s consecutive quarter decline was greater than NEC’s, but NEC had the greater year to year decline. Mitel’s shipment total includes former Inter-Tel product, the Mitel 5000 Communications Platform and Axxess. NEC is threatening to pass Mitel this year based on full year availability of its new generation of SME and enterprise Univerge SV8000 offerings. Mitel is now a company with revenues on the order of $1 billion following its Inter-Tel acquisition, but is still considered small compared to most of its strategic competitors with revenues in the multi-billions. NEC may be a much larger and stronger global competitor than Mitel, with greater resources, but the Canadian company has proven itself to be a tough competitor during the past few years. Mitel may be a fraction of NEC Unified’s size, but this may be advantageous if its strategic management decisions can be implemented faster in reaction to market conditions. I see Mitel and NEC continuing to battle for fourth place in the short term while closing in on Nortel, which is moving backwards.
Siemens appears to be doing better than the competition of late, but only because it was in sharp decline for about two years before its acquisition by Gores Group last year. Now that the system supplier is safely in the fold of its new owner it has reorganized its management structure and is placing a much greater focus on the North American market. It should be pointed out that, at about 5%, Siemens’ enterprise PBX market share is substantially greater than its overall CPE market share, which is reduced by the fact that it does not market or sell small system solutions, as do the five suppliers ahead of them. Siemens is a very strong global competitor with significant resources, but needs to once again grow its North American business. Its recent announcement at VoiceCon Orlando that is will partner with Amazon to offer its enterprise communications capabilities as a SaaS solution indicates that the staid, conservative competitor may be changing its ways and intends to put up a fight to achieve future growth in nontraditional ways.
For those who have been tracking the market for a number of years, it may be noticeable that the collective market share of the leading system suppliers appears to be declining and that the Other category is increasing. The major reason for this is that open source systems, particularly Asterisk from Digium, are making an impact in the market.
Digium’s Asterisk is easily the popular open source PBX software solution and is backed by the company with packaged turn-key small system solutions, hardware peripherals (media gateways), contact support, documentation, and training/certification. Based on data provided by Digium, it is estimated that last year Digium shipped about 116, 000 line stations of its Switchvox appliance-based SMB/SOHO offerings and almost 200,000 line stations of its Asterisk Business Edition (ABE) enterprise-grade software version of open source Asterisk PBX. If it were categorized as a system supplier, Digium would have had an estimated market share of slighly less than 2.5% for 2008. Digium also claims that Asterisk downloads totalled about 1.5 million last year. Digium estimates that about 5% of the downloads result in a deployment, but using a more conversative estimate of 2% (the target percent for direct mail responses), the estimated number of line stations behind deployed systems would have been about 1 million (approximately 33 line stations per system, a number derived from the findings in the recent Eastern Management Group study that was the highlighed in the No Jitter feature story written by John Malone. Most of the download deployments more than likely replaced traditional Key/Hybrid systems, although it is likely that a few systems above 100 line stations replacing digital PBXs were also deployed.
Absent from the market share leader chart are two system suppliers with significant global presence: Alcatel-Lucent and Aastra (including systems originally sold by Intecom, Matra, and Ericsson). Alcatel-Lucent and Aastra each had North American market shares below 1% during 1Q09, and face uphill struggles to match their success overseas, particularly in Europe. Alcatel-Lucent has never achieved North American market success, while Aastra’s Intecom and Ericsson businesses were third tier North American competitors (market share in the very low single digits) for much of the 1980s and 1990s. Alcatel-Lucent and Aastra both need to strengthen their distribution channels if they are to have any chance at North American market success (or at least move above the 1% market share level) and also increase their profiles with potential customers.
It is likely that 2Q09 results may be worse than 1Q09 numbers and that 2009 may be the first year ever to see an annual decline of line station shipments greater than 15%, perhaps 20%. Many economists believe that the recession will peter out by the end of this year, but my 2010 forecast remains downbeat, because next year’s budgets are developed and finalized this year during an uncertain economic outlook. During past recessionary periods, CPE market turnarounds usually occurred a year after the general economy improved, and I see this historical trend continuing.
