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Show Me The ($59B) Money! A Surprise Behind the Curtain
Last month, John Malone of The Eastern Management Group posted a report headlined, "Global PBX Sales Surged to $59 Billion in 2010." The article is well written and has a lot of information. I'm sure the complete report has even more value.
However, the report has been bothering me ever since my first reading. The $59 billion may be the right number, accurately reflecting the surveys of 8,000 customers. But, that number definitely is not the product revenues of the vendors shown in the market share rankings (including "Other" at 13%) on page 3.
During my years as a corporate strategic planner, one very smart VP taught me that I should never quote to him the total revenue of a market unless I could prove that number by looking at the major players in that market. Right! That was the problem. The $59 billion doesn’t match the major players' revenues.
Three of the twelve companies listed in the market share report are pure-play PBX companies that are either public (Mitel and ShoreTel) or have published financials (Avaya--see “A Perspective on Avaya’s Public Stock Offering”). As you can see in the graph on page three of John's article, these three companies comprise 20% of the total market share (4%, 1% and 15% respectively). Now, if you study those three companies' financials, the approximate product revenue is $3.598B ($0.57B, $0.14B, and $2.88B). If this is 20% of the market, then the total market is $17.99B. Since ShoreTel and Mitel are small percentages, if you use only Avaya at 15% and $2.88B, the total market estimate is $19.25B. This would be only 32.6% of the total market represented in The Eastern Management report.
So, we're looking for another $40 billion of revenue that is not product shipments by the PBX vendors. Some of this might be explained by all the other vendors having much higher prices for their products, but that doesn't make sense when over half the new system sales in the enterprise PBX market are controlled by competitive RFPs.
Thus, the challenge here: Show Me The Money!
By looking at a number of recent PBX RFPs that we have seen in our consulting practice, the answer comes into focus. The graph below shows where that other $40B seems to be.
Our estimate would have the other 67% of the market in the following three categories:
* Vendor Services at 7%: This includes installation services performed by the vendor (assumed at 20% of installation services; other 80% by VARs); first year maintenance contracts (usually required by the vendor for the software licenses); and additional-year maintenance (the customers likely report this as part of the cost in The Eastern Management Group survey, but actually is amortized in vendor financials, so this is really maintenance sold in prior years' sales).
* VAR Services at 34%: It seems that the VARs are adding more value than the vendors in the global PBX market. In our estimate, their contribution comprises markup on the equipment (the service of selling the products); design and installation services (which are showing up as 40%-50% of the product values these days, since IP Telephony is so complex to deploy and install); the VARs' share of first year and additional year maintenance (help desk, local dispatch, on-site techs, Tier 1/2/3 services, etc.); services related to non-PBX Unified Communications products; and services for customization of contact centers, auto-attendants, call flows, and UC products.
* Other Equipment Manufacturer (OEM) Products at 26%: Every PBX sale is accompanied by many other hardware and software products that are required for a complete solution. Customers buy from OEMs because either the OEM has best-in-class or corporate standard products, or the required products are not sold by the PBX vendor. Examples include: IP network equipment, gateways, SBCs, wireless access points, etc.; application servers (Windows, Linux) or virtual machine servers; UC products beyond the PBX such as presence/IM, collaborative workspaces, web portals, advanced mobility products, etc.; video conferencing and video end points; mobile Wi-Fi or cellular devices including tablets; management software for operations centers, reporting, and billing; and supplemental applications such as E-911, notification services, call recording servers, etc.
Of course, others might analyze this $59 billion amount differently; our viewpoint is offered as a contribution to our clients as well as to VARs, vendors and investors in these markets.
What does all this mean? We’re not arguing with the $59B, right? Well, we think it has these meanings:
* For Enterprise Customers: Be well informed about the PBX market if you’re about to buy PBX products. First, don’t tolerate vendors saying, "We have xx% share of a $59B market," as a representation of their financial strength. Get more information about their actual revenues and their actual spending for ongoing R&D, which is always a small (10%-20%) percentage of product revenues. Also, be quite aware that the PBX "solution’"will be delivered with lots of services, sold through a VAR most of the time (so check the VARs' financials, too), and will involve integration of multiple OEM products.
* For VARs: You are now on the main stage in this market. You can expect your work to be increasingly scrutinized by the enterprise customers and they will expect you to be using well-defined, standardized, processes. You will also be examined for your track record and for your ability to meet the customer's requirements for regulatory compliance, for security practices, and for economical best practices. But the good news is that you have a lot of opportunity, including leading the way beyond the PBX into the worlds of UC, including collaboration, video, and mobility.
* For Vendors and Investors: Be real with yourselves. Don't think there is $59B to be had with one simple investment. The "total available market" (TAM in planning terms) is not $59B; rather there are many TAMs in this total (for example it seems contact centers are in this total and they have unique requirements). Also, 42% of the value is for services, not products. Note, too, that this industry is rapidly changing, especially as alternative solutions such as UC, Collaboration, and Social communications are bypassing or displacing voice communications, just as e-mail, instant messaging, and video have been doing for some time. Since many of these new communication methods are arriving as Cloud-based services, the financial models are also in flux.
This is a time of change. Even a large number such as $59 billion should not be a cause for comfort in the enterprise communications market. Attention and skillful planning are appropriate for all participants. But there is much to be gained by successful navigation. Best wishes as you sail on!