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Market Consolidation Elevates the Importance of Portfolio Breadth and Geographic Reach
UCaaS providers are responding to industry challenges by engaging in M&A activity that aims to address varying needs and objectives, including the following:
Continued market consolidation at the top will create greater challenges for existing competitors, but is unlikely to prevent the entry of innovative new providers with highly differentiated solutions. As businesses increasingly seek to integrate communications with other software to realize more tangible gains from their UCC and IT investments, UCaaS providers, particularly those managing proprietary platforms, will become primary acquisition targets for larger software and IT companies.
Common success factors in the UCaaS market include speed of innovation, service reliability, efficient provisioning and billing systems, attention to customer needs and effective customer support, market reach (geographic footprint, channel network) and financial stability. Eventually, all providers will also need to support an end-to-end digital customer journey from online marketing to e-commerce to multi-channel customer care.
However, success factors vary based on the target customer segment. Going forward, providers serving SMBs must offer competitive prices, all-inclusive solution packages, and greater ease of use and solution management. They will also need to leverage digital marketing and e-commerce especially well to match SMB solution evaluation and purchasing patterns and to reduce customer acquisition costs, which in this segment are typically very high compared to customer lifetime value.
In the mid-market and enterprise customer segments, providers will garner greater success using a more consultative approach. From needs assessment to solution design, custom application development and integration with existing solutions, providers need to work hand in hand with various stakeholders within the customer organization to ensure broader adoption, better solution performance, and greater return on the customer's technology investment. To effectively serve more demanding customers with complex communications environments, providers also need to streamline and enhance internal processes that enable more efficient response and better customer support throughout the entire customer engagement lifecycle. Other capabilities that determine provider success in this segment include an advanced admin portal, robust analytics, and an integrated contact center.
Currently, the market is relatively untapped and can support a large number of providers with a diverse background and skill set. Eventually, as the market matures, highly diversified telcos and SaaS providers are likely to dominate the market.
Which Company Will Win the Beauty Contest?
Important to note is that potential buyers/investors focus on slightly different criteria from the customer criteria discussed above. Private equity investors are much more likely to focus on provider long-term growth potential, sustainable competitive advantage, profitability, stable cash flows, low capital expenditure requirements, and a strong management team. Buyers from within the industry (e.g., other UCaaS providers) or from adjacent industries (e.g., SaaS), on the other hand, are looking for complementary and/or differentiating capabilities (e.g., unique technology) and/or existing UCaaS customer base or even premises-based users that can be converted to UCaaS.
The good news is that there are plenty of potential buyers in the UCaaS industry. Many successful UCaaS providers are reviewing potential acquisition candidates and are likely to make a move in the near future. Based on Amazon's recent launch of Amazon Chime and Connect, SaaS/IaaS companies are clearly vying for a share of the rapidly growing UCaaS market and are likely to explore opportunities to enter the market via M&As.
8x8, BroadSoft, and RingCentral are particularly well positioned in the UCaaS market. RingCentral remains the market share leader among North American service providers with 8x8 a strong contestant for a leadership position. BroadSoft, on the other hand, powers one-third of the hosted IP telephony/UCaaS seats in North America, as well as millions of feature-rich VoIP lines and SIP trunks, making it the leading VoIP platform vendor in the region. All three companies can easily thrive on their own in the next few years. However, M&As can help these companies boost growth rates and, more important, extend their longevity as part of larger and/or more diversified entities.
In summary, there's no telling which company wins the beauty contest, because this is not a winner-take-all type of scenario. However, the competition among UCaaS providers to prove their customer value and long-term viability will be fierce.
