The State of Hosted UC

Hosted VoIP has been around for about eight years. A fairly simple concept--Centrex meets VoIP. Centrex, though, was largely geographically limited, and VoIP is not, thus most VoIP service providers offer a national and often international footprint. Hosted VoIP brought many advanced features such as unified messaging to organizations unable to purchase and implement premise based systems, or or uninterested in doing so; and hosted VoIP also offered feature consistency to distributed organizations.

Over the years, VoIP expanded to unified communications with increased features and complexity. Simultaneously, there were huge improvements in the availability and performance of broadband networking, the acceptance of cloud services, and increased needs for mobility--both for mobile and remote workers. The service providers improved their operational stability, customer support mechanisms, and pricing models. Today, hosted UC is one of the most popular topics at industry events, benefiting from spiking interest in unified communications, the cloud, and mobility.

What follows below is a virtual panel consisting of senior executives from three leading UC service providers: 8x8, Fonality, and Thinking Phone Networks.

Bryan Martin has been with 8x8 for nearly two decades and became the CEO in 2002, the same year 8x8 got into VoIP, which now represents its core business. 8x8 is a fast growing California based public company. 8x8 recently announced record financial operating results for the fourth quarter and for the year of fiscal 2011, ended March 31, 2011. Total revenue for its fourth fiscal quarter was $18.2 million, up 14.6% from $15.9 million for 4Q fiscal 2010 and up 2.3% sequentially from $17.8 million in the 3Q fiscal 2011.

The company offers voice, video, mobile and unified communications solutions for small-to medium businesses, and increasingly to large distributed enterprises. Bryan holds 35 US patents in the fields of semiconductors, computer architecture, video processing algorithms, videophones and communications.

Wes Durow is Fonality's Chief Marketing Officer. Based in Texas, Fonality has delivered more than two billion cloud-based calls. Some will associate Fonality with Trixbox, an Asterisk variant for on-premise call control. The on-premise solution was enhanced with hosted services, and about a year ago Fonality relaunched with a hosted UC focus. Fonality offers a unique hybrid solution with premise and cloud together in some situations. The company was founded in 2004 and is backed by Draper Fisher Jurvetson, Intel Capital, and Azure Capital Partners. Customers range from single-site businesses with basic needs to multi-location corporations with distributed call centers.

Prior to Fonality, Wes was the General Manager and Vice President of Global Marketing at Avaya, and prior to that he held several senior roles at Nortel. He came to Fonality in 2010 along with its new focus (and funding) in the hosted space.

Steve Kokinos is a co-founder and CEO of Thinking Phone Networks. Previously, Kokinos was involved with large scale enterprise data centers. He combined that knowledge with a successful career providing large enterprises with various hosted services, leveraging this twin focus into Thinking Phone Networks, a UC service provider. Thinking Phone Networks is one of the early hosted providers that targeted the enterprise via an indirect channel.

The company, founded in 2005, serves hundreds of enterprise customers--many globally--with its hosted UC solution from its Cambridge, MA headquarters. Thinking Phone Networks offers its customers various integration tools such as Web services APIs and connectors over an open-architecture to enable them to communications-enable business practices.

In a recent Gartner Inc. research report, a Magic Quadrant report on hosted UC, Thinking Phone Networks was identified as a "Visionary" company. The companys ThinkingSuite solution combines an analytics engine and application integration with unified communications capabilities on a single hosted platform.

All three service providers develop their own patented technology and are experiencing rapid growth. All three individuals believe on-premise solutions are relics from a bygone era.

Michels: Hosted UC has seen significant success in SMB and is now gaining enterprise interest; what has changed or needs to change for more enterprise adoption?

Durow (Fonality)

: Two factors, the economics made possible through SIP and the inoculation of consumer technology into the enterprise have driven this change. SMBs typically have a more homogeneous network environment, which made the adoption of UC type solutions much easier. The transformative economics of SIP have made the price point and deployment cycle across enterprises far more palatable. Further, consumer use of Skype video, instant messaging, text messaging, visual voice mail on cell phones and other similar advances have accelerated the expectation and adoption of UC.

Durow (Fonality)

Martin (8X8): When you look at it, the hosted UC offerings to SMB were built around the same advanced mobility and messaging feature set that has always been part of legacy enterprise offerings: web conferencing/collaboration, call recording/archiving, video support, mobile access, and global directory/messaging, so it makes sense that the same feature set is still appealing to the enterprise customer. The IT professionals at these enterprise accounts are being forced by budget cutbacks, both in capex budget and the IT personnel to manage and run these services, to get much more creative with how they deploy these services (particularly to mobile and distributed workers), so the traditional heavy capex approach is no longer the preferred path. A subscription model with the mobile and multimedia communication capabilities is very appealing to these accounts.

Kokinos (Thinking Phones): Cloud unified communications represents a paradigm shift, in terms of both cost and technology. What we see accelerating adoption is a message that speaks directly to the pain enterprises are feeling from their current communications systems. One that focuses on both dramatic ROI and immediate payback, but also a tool to help enterprises improve efficiency and business processes while gaining critical visibility into workforce behavior. Our customers benefit from a true enterprise-grade cloud communications solution. We enable them to unify voice, video, UC, and business applications into a single, cloud-based platform designed and built specifically for large enterprises. Finally, enterprises increasingly recognize that unified communications is a strategic business technology that impacts the entire company and can significantly improve business process. Increasingly, cloud communications buying decisions are being driven as the result of strategic decisions from C-level executives.

Michels: Hosted service providers blur the distinction between equipment resellers and carriers; what are the characteristics of a great hosted service provider?

Martin (8X8)

: The hosted service provider model is really combining three different functions of the legacy way that telecommunications were sold into one vendor: the sale of equipment (PBX gear), the interconnection of that equipment to the network (dial tone/long distance), and the often overlooked fees paid to a (typically 3rd party) consultant to administer the solution (provisioning/training/moves-adds-changes). So a great hosted service needs to fulfill all of these requirements in a superior way: 1) utilizes state-of-the-art Customer Premise Equipment (CPE) that supports high definition full duplex voice, QoS mechanisms, mobility, call center, video, etc. ; 2) brings reliable, quality "dial tone services" with 4-9s or 5-9s uptime/availability with an SLA; and 3) empowers the end customer to provision/install/administer the network via simple-to-use web portals that are backed by fabulous customer support. A great hosted service provider will also take the time to get to know the customer and the customer’s business, so that the right set of hosted solutions can be provided, not a "one-size-fits-all" approach to telecommunications.

Martin (8X8)

Michels: Most hosted providers offer highly distinct packages in terms of features and prices. Is this the new reality or will the various bundles become more standardized over time?

Kokinos (Thinking Phones):

: By their very nature, enterprise solutions require customization in order to meet business requirements. This is especially true when you talk about application integration. Proprietary platforms make integration cumbersome and complex at best. Our open-standards platform provides our enterprise customers web services APIs and connectors to allow for rapid integration of virtually any critical business application, ranging from CRM systems to the custom-built applications virtually every enterprise maintains.

Kokinos (Thinking Phones):

Durow (Fonality): Bundles and offers will likely become less and less standardized. The advent of the kindle, iPhone and android type devices from a consumer technology standpoint has brought the expectation and desire to be able to personalize one’s experience through specific applications and content. The move to personalization will demand that a base offer or offers be established, but such an offer can be quickly transformed to the unique needs of businesses of all sizes.

Michels: Much of the original hosted voice services were sold over the phone--no on-site sales. Does that model work with broader hosted UC offerings? How about with larger businesses? Is a distributed sales force (direct or channel) needed?

Martin (8X8)

: Over-the-phone sales are a great way to reach the small (1-50) person business, and I think that applies to hosted UC, as well. We just introduced an "Internet sales only" UC service called Virtual Office Solo which will be sold to the one- or two-employee segment of this same audience electronically. As the size of a prospective deployment increases, however, the need to sell on-site also increases. We see all of our sales to 100+ phone/seat deployments occurring with an on-site visit, and a partnership with the channel is needed to get in front of and win these opportunities in a scalable manner.

Martin (8X8)

Kokinos (Thinking Phones): We are selling enterprise software delivered via the cloud. That requires a high-touch, enterprise sales team that can help enterprises both understand and build requirements. A distributed sales force is effectively a requirement, as are strategic partners that share a common vision. Enterprises are looking for solutions that are both aligned with their strategic vision, and long term partners that will be there to stand behind that solution. Our customers are looking to save money, no question, and we deliver on this. But they are also looking to solve often age-old problems associated with proprietary systems, silo-based applications, and a lack of visibility into business processes and workforce behaviors. The channel is critical to that effort, which is why we work with firms that are strategic business and technology advisers to their clients. Selling unified communications is about business value, not the number of phones an organization needs.

Michels: What impacts do you expect from the larger vendors getting into hosted UC?

Martin (8X8)

: None. The business communications market is already so fragmented and confusing to the end customer, that the added noise from big hosted UC offerings cannot possibly confuse a prospective customer any more than they already are!! Our customers read every day in articles appearing in places like The Wall Street Journal that business offerings from companies like Skype and Microsoft are supposed to be helping their SMB communications, but no one tells them what they are supposed to do. We push deployment of hosted communications forward. The FCC just published data in March that shows that less than 6% of the U.S. business access line market is utilizing VoIP technologies; all of us in the industry have a massive project ahead of us towards educating the portion of the market that has not yet adopted IP communications in business. [See FCC Report, Figure 4]

Martin (8X8)

Michels: When customers have both hard phones and soft phones, which gets used more? Are you seeing a decline in hard phones?

Durow (Fonality)

: The question is less about hard phones or soft phones but more about the advent of the smartphone. It is estimated that 70% of cell phone calls take place indoors. As smartphones increasingly add presence and base UC features, the need and desire for advanced hard phone features is likely to decline. In North America the demise of the hard phone will take time, but in certain markets that trend is already under way.

Durow (Fonality)

Michels: What types of organizations really benefit from hosted services? What drives hosted adoption?

Kokinos (Thinking Phones):

: We are seeing interest from enterprise companies in a range of vertical markets--including but not limited to, financial services, manufacturing, health care, legal, professional services, and the like. There is no question that economics play a critical part in the initial interest on the part of most, if not all, of our sales prospects and customers. For example, we have seen significant growth in the past 24-30 months in a generally poor economic climate because companies were looking for more efficient service delivery models and cloud communications provides this. What we also hear is significant frustration with legacy hardware providers who offer expensive proprietary systems that lock companies into a single vendor with little ability to integrate other enterprise applications. We've addressed this by developing an open standards-based platform that readily integrates a range of applications, from off-the-shelf CRM software to home-grown applications developed in-house by our customers.

Kokinos (Thinking Phones):

Martin (8X8): The true fact of the matter is that everyone in any organization can benefit from hosted services, because they can be deployed right alongside an existing set of services without having to jump off a bridge and do a complete rip-and-replace, and they can be accessed from any location. Organizations of all sizes and shapes can deploy hosted services as a point solution, or deploy them in a regional/branch/home office, or across their entire organization; they can deploy them in just their conference or meeting rooms, or they can deploy them just as a mobile application; they can deploy them to augment their web meetings or videoconferencing, or they can deploy them just to accomplish a disaster recovery goal. The “legacy” phone system or messaging applications or mobile phones can continue to work right alongside the new hosted services. What we see over and over, however, is that once those hosted services are in use anywhere in an organization, they tend to spread and multiply over time. I think that almost every one of our enterprise deployments started with just 1-6 phones/seats being sold initially.

Durow (Fonality): Our focus is on bringing speed and simplicity to growing small and mid-size businesses. These businesses rely on the ability to minimize capital expenditures, the desire to avoid lengthy technology transitions and still retain the customer intimacy that their business was built on. We do particularly well with technology firms who want to move their business to the cloud and we do very well with professional services firms who want Fortune 500 features without the cost or complexity. In most instances, a Fonality customer can realize a savings of 50% or more versus a legacy IP-PBX solution.

Michels: As hosted offerings mature, what appears to be the key areas for differentiation?

Durow (Fonality)

: The answer is both marketing and technology, as they will go hand-in-hand execution-wise. Specifically, differentiation will come on three dimensions. First, the ability to personalize the offering to a segment (vertical) or challenge (e.g., manage field service staff). SaaS companies like NetSuite have done a great job of personalizing the use experience and they set a great template for those in the hosted UC space. Second is the drive toward collaboration and the ability to aggregate and disaggregate features into not only your base UC offering but into other business applications. And finally, the move toward mobility. At what point do UC providers begin building their UI for mobile devices first and desktop/laptops second? The tipping point is near if not here already.

Durow (Fonality)

Kokinos (Thinking Phones):: I think we will be educating people for a long time to come about what cloud communications is and the value it can provide. And this is understandable when you think about the strategic nature of bringing together historically disparate systems onto a single, open platform. In our case, we can demonstrate business value in a traditional ROI way that also includes a discussion of how our analytics capability can allow companies to baseline business process and workforce effectiveness and measure improvements. This process visibility is new to communications and we believe an important driver of UC adoption.

Michels: What are the common characteristics--if any, of your most successful channel partners?

Durow (Fonality)

: The very best channel partners have two primary characteristics. One, they are well trained and educated on the value proposition of our solution and the specific benefits it offers end users. Second, they help bridge the relationship with Fonality to ensure we are able to drive exceptional customer satisfaction. That said, it is imperative for us to make sure our channels are equipped with the tools and resources they need to be effective and that we can ensure they make a fair profit in doing so.

Durow (Fonality)

Kokinos (Thinking Phones):: As I mentioned previously, our channel partners understand strategic selling and are educators. They have taken the time to understand how their clients view technology as a means to solve business problems. They bring this knowledge to us and we work collectively to develop solutions that meet the needs of their clients. And because they are solution sellers instead of order takers, they understand the often phased nature of unified communications deployments.

Michels: Can you defend the combination of being a service provider and software developer?

Kokinos (Thinking Phones):

: From our perspective it’s a requirement for anyone serious about addressing the enterprise market. Enterprises are looking for partners that can deliver on their unique requirements. As the world continues to move more toward the cloud, the concept that an organization is either a service provider or technology company is becoming increasingly dated. Our customers are coming to us for both our experience providing scalable infrastructure as well as the UC applications that are deployed from it.

Kokinos (Thinking Phones):

Martin (8X8): Absolutely--by developing our own software, we accomplish two very important things for the end customer: 1) we can offer features/capabilities/customizations that would otherwise be unavailable in an "off-the-shelf" offering, and 2) we can pass the cost savings of our own technology (since we do not have to share our revenue stream with other technology or platform vendors) to our customers. 8x8 has always done its own internal research and development--last year we spent more than $5 million on R&D--but the results of that development and not being at the mercy of someone else to control our own destiny were worth every penny spent, and we will continue to push the industry forward through our future R&D efforts.

Michels: What do you feel is most commonly misunderstood about hosted UC?

Martin (8X8)

: I hate the term "Unified Communications" because it means nothing to the end customer. A more descriptive, functional term might be something like "Mobile Access from Any Device to Multimedia Messaging and Communications," but I doubt that is going to catch on anytime soon!

Martin (8X8)

Kokinos (Thinking Phones):: We see a lot of confusion in the market. Legacy vendors have consistently pushed a hardware centric definition of UC, which focus on features and functions. What we hear from today's CIOs is that they are struggling to manage disparate voice, video, data, and collaboration applications. Unifying those applications and networks is something that can't be done by a traditional hardware or software vendor. We see a cloud based service as an opportunity for CIOs not just to add bells and whistles to existing systems, but bring all of these different areas together in ways that provide for transformational end-user experiences while at the same time delivering visibility and analytics to management that simply wasn’t possible in the past.

Michels: Many hosted providers rely on the public Internet for end to end communications, but this precludes the ability to provide QoS. Is this a problem and if so, how do you address it?

Durow (Fonality)

: Public network or private network, the acceleration of bandwidth hungry applications can severely disrupt the end user experience of real-time communications. We work proactively with our clients to ensure that they take steps to ensure QoS not only on day one but every day. This can mean proactively monitoring the network capability and capacity, proactively planning for growth and ensuring the devices they put on the network are not disruptive. Take the NCAA basketball tournament--many companies lack policies for YouTube or streaming video and for the first two weeks the tournament is on, it is not unusual to get a client call who has a quality of service degradation all because their employees are following their favorite team. That is a whole different type of March Madness.

Durow (Fonality)

Kokinos (Thinking Phones):: We are delivering primarily private-cloud solutions to our customers. In an enterprise deployment, QoS, security, and scalability are all critical concerns that we address. Part and parcel to that we deliver end to end service level guarantees. A solution delivered over the public Internet can never deliver that.

Martin (8X8): We offer both: most of our small businesses utilize their existing high speed Internet connection and the public Internet to reach our data centers. For those that have requirements for private networks or end-to-end guaranteed QOS (mainly government and distributed enterprise customers), we work with several nationwide network providers, including Earthlink Business, to provide a private MPLS network connection right into our server cages. Most of the problems related to QOS that we see in practice are on the customer premise LAN, and can be solved immediately with no extra cost by changing settings on the customer's local router; rarely are they caused at the ISP or public backbone layer. The public Internet is an amazingly robust and quality network these days.

Michels: In an increasingly crowded market, how do you distinguish your services? Kokinos (Thinking Phones):: We focus on three key areas. The first is on providing a great communications experience, whether voice, video, mobile, tablet, or desktop. We deliver a 5-nines SLA and are focused on the needs of our enterprise customers. The second is standards based application integration via web services APIs. Easy integration allows enterprises to quickly and easily communications-enable their business applications. The third is around visibility and analytics. Providing visibility across applications and presenting that to management via a set of easy-to-understand dashboards, we are able to deliver a truly unified view of workforce activity and ultimately help our customers make better business decisions. From our perspective that’s what Unified Communications is all about.

Durow (Fonality): At Fonality, differentiation happens on three dimensions. First, set-up and support; second, quality of service (QoS); and third is enabling advanced features. Much of our fast growth has come when customers switch over from their local telco. These customers benefit from the QoS of their current solution but suffer from lack of features and being just a number among millions of customers. Nobody wants a one-size-fits-all solution or service. We make sure our customers have a personalized set-up to ensure satisfaction and that the customers know who their Fonality representative is for post-sale needs. 99% reliability just isn't good enough from an SLA standpoint--that's 21 hours of downtime each year. Our portfolio offers include SLAs for 99.99% reliability--or just 17 minutes during business hours each year. Legacy solutions speak to 99.999% reliability, but you have to take the system down for upgrades which impacts total availability. Finally, Fonality's been a foundry of innovation specific to ease of use, simplicity to manage and affordability to deploy. For example, customers may not ask for contact center features but when we show how easy it is to use, deploy and benefit from tools like skills-based routing, they are absolutely hooked.

Martin (8X8): I think that uptime and reliability are a given--no large player left in this market is providing anything less than four-9s. To give you some color on how 8x8 is driving differentiation, last month, we demonstrated a new video cloud service that extends the ease-of-use of 8x8's unified communications and meeting services to support room videoconferencing equipment commonly used by these larger enterprise customers. We are offering a new flat-rated model whereby an enterprise pays a low-per month price for unlimited video usage. This offering, which will also be sold via 8x8's new channel partners, combines the ease-of-install, easy-of-use and cost effectiveness of our current services with traditional videoconferencing and telepresence equipment already in place at these enterprise and government customers.

At the other end of the customer spectrum, we launched a new Virtual Office Solo service last week for one-person businesses, or any business that wants its mobile or travelling professionals to access 8x8's award winning suite of Unified Communications services, including Virtual Meeting, call recording, Internet FAX and a web telephony client. We will be launching new services soon. Innovation is how we have stayed in business, listed continuously on the Nasdaq since 1997.