Premises-based UC had a great run, starting with the explosion of communications innovation in the wake of the 1968 Carterfone decision. It flourished through the '80s and '90s. In fact, many major companies are still acquiring premises-based solutions. Despite a major disruption in the 2000s with VoIP and UC, premises-based solutions will very likely keep offering lucrative revenue for at least another decade.
So how can something that is still bringing in revenue be dead?
First, while you can still dump money into premises-based UC, innovation has moved to the cloud. Moving forward, the vast majority of R&D spend, cost savings, and new features will be realized from cloud-delivered solutions.
So What's Driving the Ongoing Premises-Based Revenue?
Inertia! The industry hasn't yet rebooted or redefined itself, and vendors are struggling for a bigger slice of the shrinking pie. This is particularly painful for the channel partners with smaller pies that are shrinking faster. The vendors also have a serious retention problem. The vast majority of the platform managers have flown the coop -- even the investors are flipping.
All products have life cycles, and premises UC equipment is transitioning from mature to declining. Customers have had their fill of absurd, esoteric features and are gravitating to a model that allows them to pay just for what they use. No longer is the system upgrade the default and most financially attractive option – especially now that a system upgrade is often a bigger and longer commitment than switching everything to a cloud-based model.
The data demonstrates this trend in stark numbers, as described by Diane Meyer at Infonetics: "In CY14 we are forecasting [the] worldwide hosted PBX & UC market to grow 13% while the premises-based PBX and UC market is forecast to be flat over CY13 (0.01% growth)."
Modern UC premises-based solutions are too complex. Products reached a point of containing too many features years ago. Vendors couldn't upgrade what was already overdone, and so instead, they turned to complicate the periphery. This means that instead of appliances, systems are virtualized. Instead of endpoints, they are client-based. UC complexity has spread like a cancer across IT. To troubleshoot a call, the modern telecom/IT professional is expected to be savvy with a series of UC applications, firewalls, SBCs, SIP, IP, virtualization, VLANs, wireless, and more. Troubleshooting gets in the way of actually adding value, and IT pros know what happens when they fail to add value.
Managers and organizations are facing complexity and price pressure in every facet of their business. This isn't just about UC. It applies to servers and key applications such as CRM and HR. When the price becomes too high and products become too complex, organizations flee to the cloud. The smart ones flee to business-class clouds.
Ah, the simplicity of the cloud, where IT (and user) needs are met in the blink of an eye. Unlike that equipment in the closet that depreciates in more ways than one, cloud services continue to update – passively and automatically. Software maintenance costs and hassles vanish. Cloud-delivered services let organizations and end users use what they have. Sure, premises-based systems can be upgraded too – for a price. Organizations get to purchase the systems upfront, pay recurring maintenance, and implement all the changes themselves – and when it's all said and done they get to pay disposal fees to repeat the cycle.
Premises-based revenue keeps flowing in – but revenue and profit are two different things. The big UC premises-based vendors are not exactly paragons of profitability and growth. All of the major purveyors of premises-based systems are reassuring their investors that their future is solid – thanks to their cloud strategies.
Another bit of evidence of the death and decline of UC premises comes from Gartner's premises based Magic Quadrant for UC. In 2011, the report featured 15 vendors. In 2012 it had 14 vendors. In 2013 it included 13 vendors, and 11 in 2014. Compare that to its sister report on UCaaS: 12 vendors in 2012 and 21 last year. The 2014 report would have been even larger, except Gartner added a multinational component to its inclusion criteria presumably to filter the list down to 21.
Despite the fact that premises solutions are heading downhill, the death throes will last for years. Premises-based solutions will always make sense for some, just as mainframes and locomotives are still built, distributed, and sold.
Don't Get Too Comfortable
Why is revenue still realizable at all in these obsolete industries? Frankly, some enterprises aren't eager to roll the dice on the cloud. Premises solutions remain comfortable. After all, even though TDM is for all intents and purposes obsolete, many organizations remain hesitant to abandon miles of T1 and copper. It works, and for some it feels relatively simple to maintain.
The modern telecommunications center, then, is becoming an oxymoron. You won't find much technology over 10 years old in the data center outside of telecom. Perhaps organizations stick to what they know, no matter how non-strategic, because upgrading to the latest premises-based UC solution – let alone a cloud transition – can be quite intimidating. These organizations don't want something new.
Yet once you get past premises-based solutions and look to the cloud, a blue sky opens up to healthy opportunities, with tremendously exciting new companies, applications, and investments. With this view before them, most analysts are predicting significant growth. Cloud-delivered solutions enable organizations to realize all the benefits of UC without the upfront investment, complexity, and risk of revamping their antique PBX rooms.
Dave Michels is Contributing Editor and Analyst at TalkingPointz
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