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Telecom and Networking Industry Needs Attrition More than Mergers and Acquisitions
Over the past couple of years we've seen a tremendous amount of companies merge, be acquired or turn private in our industry. Alcatel bought Lucent, Siemens went private and will be merged with Enterasys, NEC acquired Sphere, Mitel purchased Inter-Tel and AT&T bought Interwise to name a few. Currently there is speculation around Silver Lake acquiring Tandberg and folding it into Avaya, raising speculation around Polycom's future. Typically, as markets mature, a logical market leader, number two and three vendors mature and the number of vendors eventually rationalizes down to a quantity that can be supported.
Over the past couple of years we've seen a tremendous amount of companies merge, be acquired or turn private in our industry. Alcatel bought Lucent, Siemens went private and will be merged with Enterasys, NEC acquired Sphere, Mitel purchased Inter-Tel and AT&T bought Interwise to name a few. Currently there is speculation around Silver Lake acquiring Tandberg and folding it into Avaya, raising speculation around Polycom's future. Typically, as markets mature, a logical market leader, number two and three vendors mature and the number of vendors eventually rationalizes down to a quantity that can be supported.In the telecom industry, however, things are different. We have a situation were there's an overly crowded market and not enough business to support all of them. For years, the telecom industry stood still. We had about 400 million business desktops a number of years ago, and a bunch of companies like Lucent, Nortel, Siemens, Ericsson, Toshiba, etc that had proprietary systems that never really interoperated or really evolved, leaving the market to stand still.
Along came the IP PBX era and we added a number of new companies like Cisco, 3Com and ShoreTel, but we still had roughly the same number of business desktops, meaning the existing companies had to share the name market with a number of start up vendors; some of which were small but one of which, Cisco, has grabbed a huge chunk of the market. Now the industry is moving into the "Unified Communications" or more broadly, the software phase and we've added Microsoft, IBM and to some extent, Citrix along with call center companies, conferencing vendors and other companies in the UC ecosystem. However, we still have roughly the same size addressable market -- 400 million business desktops.
Expect over the next few years to see more of the mobile vendors throw their hats in the UC ring, creating an even more crowded market. We've doubled the number of vendors in this industry but the market is roughly what it was 10 years ago. Now, I agree that because of VoIP and UC there's more stuff you can sell a customer, but the cost of many of the things that can be sold has fallen as well (as it should if you believe in Moore's Law).
This is the main reason that over the past few years we've seen companies merge or get acquired. For some companies, the only way they're realistically going to grab any market share is for them to acquire another company and wind up with increased share, albeit less than the sum of the two original companies.
So this, in a way, solves our industry problem of too many vendors, not enough market, correct? Well, not really. There hasn't been a ton of product integration, channel integration or really innovation done when these mergers occur. A few made some sense though. For example, Mitel bought Inter-Tel and grabbed a decent US channel, but for the most part these acquisitions are more 1 + 1 = 1.5 more so than being two or even three.
What the industry needs now is for the market to consolidate the number of vendors through attrition, more so than acquisition. This means we need more vendors to go away and let that market share roll into another vendor's portfolio. Ericsson has already decided to get out of the enterprise telephony market and more will follow. The reason it hasn't is that companies can exist on their installed base for years. They continue to get smaller but they can exist. Ericsson did this for a while, Extreme and Enterasys are currently doing that in the networking space and that will become more common.
So who are the most likely winners and losers? Cisco and Microsoft will eventually be the top two vendors in this market. You can argue about who will be one and two but these will be the top two -- Cisco because of its tie into the network and Microsoft because of its Share Point and Exchange integration. I believe Avaya will be a strong number three in the market and other vendors that will have an impact will be Nortel, IBM and Mitel with NEC and Siemens having regional impact. In my opinion, the vendors "on the bubble" are companies like Samsung, Aastra, and even well known brands like Toshiba and ShoreTel have a doubtful long term outlook.
So, going into 2009 and I certainly expect to see more M&A activity but I do think we'll see many of the smaller vendors continue to get smaller and eventually see those companies (or business units of larger units) shut down, which is exactly what this market needs to remain healthy.