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Communications Adjacency: Networking Out, Productivity In

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Abstract technological background
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In a No Jitter article posted last week, Brent Kelly, of KelCor, posed the question of whether Cisco should divest its collaboration business unit. As I read the article, I mused on how that might happen.
 
While spinning out the unit as a standalone entity could help Cisco forge a new path forward, selling it off also has potential. My mind went to a few logical suitors. Google has been trying to get into the enterprise market in a larger way for years. Could integrating the Webex solutions (and the PKE estimated 130 million Cisco telephony/collaboration users) into its cloud infrastructure be a good move? Or would Amazon, with its AWS platform, make a better suitor? In either case, bringing on the Webex unit would be about more than merely buying revenue. Google and Amazon each have adjacent businesses that could benefit from the integration. Could Webex better prepare Amazon and the AWS platform for the emerging cloud business process battle where Microsoft Teams and Azure seem to be generating some new advantage?
 
How such potential adjacencies might reshape a future market is unclear, but we do know the historical and current impact of adjacencies on our market.
 
Consider that business communications itself started long ago as an adjacency to basic telephony services provided by incumbent monopoly telephone companies. Likewise, as the concept of the PBX emerged in the ‘70s and matured through the ‘80s and ‘90s, the major players came from the adjacency of public telephone systems. In North America, Nortel and Avaya (formerly AT&T) were the adjacent business ventures of their parent telephone companies. In 2000, Nortel and Avaya had over 70% share of the North American market for PBX systems. According to analyst firm MZA, Cisco, with its strong network adjacency, was number one in the North American PBX/IP-PBX market share, with a 38% share, by 2012. Even acquiring the Nortel share, Avaya could not avoid bankruptcy as this adjacency upended its market. As the industry matured, the PSTN carrier adjacencies that drove Nortel and Avaya vanished. Does the same sort of situation apply today? Has the value of the Cisco network adjacency faded as new market adjacencies come to the forefront?
 
Shifting Markets
In business communications, we’ve seen three waves of convergence and technology change over the last 20 years: VoIP, UC, and cloud. Each of the first two generated a major new enterprise communications player.
 
Chart showing three market waves: networking, UC, cloud
Let’s take a close look:
 
The VoIP Adjacency – While we generally think of VoIP as having been a new technology back when Cisco started hyping it in the early 2000s, it was really a convergence of telephony into the IP/Ethernet data infrastructure of the day — infrastructure that Cisco dominated in the enterprise. Cisco had over 80% share of routers and over 60% share of campus Ethernet deployments.
 
Cisco made a compelling argument for having a VoIP solution from the same vendor as your data network because VoIP adopters needed to design and operate a network that could carry this new kind of real-time traffic, and that was a major challenge for early systems. In addition, Cisco was able to drive strong advantage in offering aggressive bundle discounting and other business measures through the VoIP adjacency to routing and switching. In fact, PKE Consulting analysis shows that Cisco has won over 60% of the North American VoIP premises transitions so far. The result is that Cisco has held dominant market share from that late 2000s to today in premises VoIP telephony, and currently has the largest enterprise telephony installed base share in the North American market, estimated by PKE Consulting at 35% or more.
 
The UC Adjacency – The next market adjacency, UC, came in integrating communications into the personal productivity tool suite of knowledge workers. Knowledge workers, as defined in this PKE whitepaper, manage their own personal business processes, set their own meetings, and manage other activities primarily using the Microsoft Office 365 application suite (calendar, email, editing, slides, etc.). Making UC an adjacency of productivity tools was a clear mandate for Microsoft going back to Messenger in 2004. If Microsoft could integrate contacts, applications, and communications, including messaging, directly into the knowledge worker tool set, users would greatly benefit — and it could capture an adjacent market. While the Microsoft adjacency took a decade to build, by 2016, as revealed in a No Jitter study of enterprises, over 55% of organizations with over 2,000 employees had committed to Microsoft and its UC offering at the time, Skype for Business.
 
The tighter integration of Skype for Business’s successor, Microsoft Teams, into the fabric of the O365 suite has proven compelling for many users. At the end of 2019, Microsoft reported that it had over 200 million active O365 subscribers, the majority of whom have unlimited access to Teams capabilities (without PSTN telephony). The impact of this adjacency is being seen in the explosive adoption and use of Teams during the pandemic. Microsoft reporting having had over 200 million active users of Teams in a single day recently. While the numbers are not well defined at this point, all indicators are that Microsoft, through Teams and the adjacency to O365, will secure a major portion of the UC/knowledge worker market.
 
The Cloud Adjacency – The third wave is happening now as providers migrate their communications solutions to the cloud and make them available everywhere through the Internet. Adjacencies are critical here too, and will drive this technology/market transition as well. A clear adjacency is the big three (or four) cloud computing platforms: AWS, Microsoft Azure, Google Cloud, and IBM Cloud (maybe). The natural cloud adjacency for communications services may lead each of them to a significant focus on such services. Microsoft has a unique position in the O365 user base combined with Azure, but AWS has more components with which to build business processes, including Amazon Chime, for meetings and chat, and Amazon Connect, its CCaaS offering.
 
While the adjacencies in the cloud of Microsoft, AWS, Google Cloud — and even Cisco — are clear, a new adjacency may have emerged from the COVID-19 experience. The explosive consumer adoption of video conferencing for a range of activities and pursuits has created a new cadre of video-aware consumers. Zoom has enjoyed unprecedented growth with this cohort, essentially achieving status as the consumer go-to collaboration platform. As we emerge from the pandemic, this new adjacency may result in a strong market position in the SMB/mid-market, where broad usage may impact buying decisions and where consumer interaction is critical. Clearly for Zoom, cultivating the consumer preferences and adjacency may be a potential strategic advantage. The final outcomes of the cloud migration of communications is still being written.
 
The Cisco Challenge
Back to Cisco and the new market adjacency challenge. The convergence of communications with personal productivity software appears to be a major challenge for Cisco, as many customers seem committed to O365 with its Teams integration. This has resulted in relatively low levels of adoption of the new Webex Meetings and Teams solutions by the existing premises telephony base. Just as the adjacency of Cisco Call Manager to the Cisco data network became a powerful marketing tool in selling VoIP, the adjacency to personal productivity software has become a significant advantage for Microsoft today. While Webex is equivalent to Microsoft Teams, and in some ways even a superior product as a teams/meetings/calling solution, the adjacency of Teams to the market-leading O365 suite is enabling integrated features, operations, and management, just as Cisco did for VoIP.
 
While Cisco was only able to use traditional discounting in the VoIP transition, the subscription model of UCaaS has allowed Microsoft to bundle Teams with the rest of the O365 suite. This has increased pricing pressure on IT to adopt Teams since it comes with the O365 suite. As the value of personal productivity adjacency for communications has emerged for knowledge workers, the Cisco network-to-VoIP adjacency appears to be losing value. Based on daily numbers from Microsoft, Cisco, Zoom, and others, PKE Consulting estimates 300 million to 400 million people are now using online Internet-based communications. With this ongoing migration to cloud-based video services, the network is increasingly seen as an independent highway with sufficient capacity and quality, resulting in a significant reduction in perceived value of communications applications and network integration.
 
While the cloud migration is well underway and the current adjacencies are defined, an emerging technology application user case — firstline workers — may have an impact on the cloud and post-cloud business communications market. Firstline workers are the 75% of the North American workforce that are not knowledge workers. This group includes information workers who use technology to structure their jobs; these are people such as contact center agents, bank tellers, and field service technicians. This group also includes service workers who do not use a technology-based process; this segment includes delivery drivers, hotel attendants, bus drivers, refuse engineers. While some firstline workers do use some technology tools today, they are generally limited to basic processes and use cases. With firstline capabilities, the handheld device that is used today for basic information entry and retrieval can become a valuable tool for work processes by enabling communications/collaboration with supervisors, team members, experts, etc. as the business process requires for success.
 
Emerging firstline solutions use meeting and team technologies to enable work process transformation for Firstline workers, but we can expect these to evolve over time with addition of other technologies and innovations. I believe that 2021 will see the emergence of this new adjacency along with strategies and partnerships from the vendors to define their position. This new convergence of human interaction with the firstline business process will create a new range of market adjacencies that may impact the final outcomes of the cloud wave and which providers end up being dominant.

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