In 2022, the UCaaS Market Will Belong to the Chimps

In the tech classic book “Crossing the Chasm” Geoffrey Moore details the stages a disruptive technology goes through in transforming a major market. In his book, crossing the chasm to the bowling alley is the beginning of a tornado of adoption resulting in the technology being commonplace and on Main Street. In his book, ‘crossing the chasm’ refers to pushing a new technological innovation from early adopters and visionaries to a wider market characterized by pragmatic users who want to see proof of effectiveness — these initial successes in crossing the chasm lead to a tornado of adoption that results in the new technology being a core part of the technology landscape and usage.

 

Moore’s model of market adoption has been guiding light of technology innovators for many years. Further, if a technological transformation requires new technology displacing an installed solution, then the existing vendors of the installed solution may or may not be part of the transformation (see “The Innovator's Dilemma”). The market shifts a technological transformation presages is the opening for new players to enter and existing mature industry. This transformation played out in smartphones (where Apple and Samsung replaced Nokia and Motorola) and in VoIP Premises PBXs (where Cisco replaced Nortel and Avaya). Even if the existing players can maintain a market position, often, new major players emerge (as we are seeing with Tesla in electric cars).

 

At the end of a technology/market transformation when use has moved down to even the late adopters, there are always winners and losers in terms of both market share and market capitalization evaluation. He identifies three classes of competitors when a technology gets to Main Street; sometimes there is a “Gorilla” - a single company with 50%+ market share (think Google in search/advertising, Salesforce in CRM), there are generally one or multiple “Chimpanzees” – companies with 15-40% share, while the rest are “Monkeys” – smaller players with 10% or less market share (typically 5% or less). The market value (capitalization, stock price, income) accrues at much higher rate to the Gorilla and then the Chimpanzees, while the Monkeys are generally left to struggle. So, a 50% market share Gorilla will have 70-90% of the market evaluation of all the vendors. A 5% share Monkey may have a valuation that is a fraction of a percentage of the Gorilla, even though they have 5% of the market share and a billion-dollar revenue stream.

 

In the venture capital market, so-called “unicorns” are pursued as it is believed they can develop dominant Gorilla or Chimpanzee market positions (Uber, Airbnb, etc.). It is often much better financially to be the Gorilla in a smaller market than a Monkey in a larger one. If we define UCaaS as IP/Internet cloud communications and collaboration services for general employee use (not CC), it is ultimately a 450+ million seat potential global market with a total potential value of about $65B annually (at a $12/mo. average spend). This a large – even huge – market. In such a large market, being a Chimpanzee is not necessarily a bad goal. Gaining a 20-30% market share results in a $15-20B annual revenue cloud company, and a complementary market evaluation. But getting to a 30% global market share means getting to at about 135 million active UCaaS subscribers, a challenge for most of the current UCaaS vendors.

 

The pandemic of 2020/21 has driven a tornado of UCaaS adoption. This adoption appears to have driven UCaaS rapidly through the tornado and it is rapidly approaching (or already at) a Main Street adoption level. So, as 2021 comes to a close, is the UCaaS market already approaching Main Street? And if we are on or approaching Main Street adoption of UCaaS, have the Gorillas and/or Chimpanzees that will be dominant on Main Street and for the rest of this decade already emerged? And are there emerging technology or convergence disruptions that have the potential to change the market structure once again. As we have seen in successive waves of change, transformation has often introduced a new Gorilla in our space: VoIP – Cisco, Knowledge Worker UC – Microsoft, Video Collaboration – Zoom. Is there another disruption on the immediate horizon?

 

Observing the communication and collaboration market going forward, it would appear that the pandemic has accelerated the adoption of UCaaS by at least three to five years. The result is that UCaaS has both crossed the chasm and accelerated to Main Street. Further it would appear four large UCaaS vendors that have come through that tornado of adoption to be positioned for Main Street Success: Cisco, Microsoft, RingCentral, and Zoom.

 

The logic for choosing these four vendors as the potential Gorilla/Chimps is based on the unique position each has in the market and the core advantages that company has over other similar competitors.

 

 

Based on these four companies’ positions, it is becoming increasingly challenging for other players to develop into a major UCaaS market shareholders. This is not to say that UCaaS vendors like 8x8, CoreDial, Dialpad, and others will go away; they will become more niche or market-focused, using vertical or geographic focus to maintain a market position. In 2022, the UCaaS move to Main Street adoption will drive significant consolidation—both between the monkey-level companies—and as other traditional players absorb smaller UCaaS offers in an attempt to shore up their overall market position. The recent acquisitions, including Vonage by Ericsson and Fuze by 8x8 are indicative that the maturing market will drive acquisitions and consolidations as both management teams and investors look for exit strategies when they realize they do not have an achievable path to the scale required for an IPO.

 

The acquisition of Vonage by Ericsson is a clear example of how companies get acquired in a maturing industry. Ericson needs a cloud solution for businesses to maintain leadership and compete for the mobile business market, while Vonage had fallen out of UCaaS leadership position—both in the scale of business UCaaS seats and on the Gartner Magic Quadrant. The Mitel/RingCentral relationship is another indication that investor and management teams are now evaluating the potential of long-term UCaaS success with a much more critical eye.

 

A second key question for 2022 is whether a new disruptive technology or adjacent market convergence will emerge that has the potential to upend the market structure and company market share going forward. While new technologies in the UCaaS space itself do not appear to be disruptive, some major adjacencies and convergences will drive change in the market.

 

For example, there is a major focus on how to use the UCaaS technologies for the frontline workforce. While there is much activity from UCaaS vendors in this space, the adjacency of players like Amazon and Twilio and CRM vendors like Salesforce could present major changes. These could impact the UCaaS market for companies that are highly frontline oriented.

 

A close adjacency is how UCaaS, CCaaS, AI, and the emerging customer data platform markets emerge. These convergences may generate new players, as did VoIP and UC.

 

A third adjacency is a migration to mobile. While RingCentral has a strong position with existing mobile players, a movement to technology transformational mobile-based business communications could create a new competitive player. And new technologies like augmented reality (AR) and virtual reality (VR) could be disruptive as well.

 

As 2022 moves forward, keeping an eye on how these markets are emerging and how the four large UCaaS players are responding will give a good indication of whether the current market maturing will last. It is important to remember that from 1990 to 2000, the North American market share split did not vary significantly with Nortel and Avaya each retaining 35-40% of the installed base. They were the Gorillas of the pre-VoIP PBX world.

 

If the market has matured into a clear set of dominant vendors, this will impact customer buying decisions on one side and company investment and innovation on the other. As has been true in many markets in the past, the Gorillas and Chimps will dominate the market absent a transformation. Start-ups and their investors will increasingly be focused on acquisitions and partnerships with UCaaS platforms versus a stand-alone market position (witness the number of Teams partners). Investment in new start-up companies will focus on being complimentary to the large players versus a competitive replacement. In a mature market, users will increasingly make buying decisions based on scale, features, and market prevalence; the Chimps will create barriers to innovations, features, and partnerships that aren’t available to the Monkeys. Increasingly the exit strategy for monkey-level companies will be to join one of the Chimps.

 

2022 should be the year where the maturing direction of the market versus the potential of disruption becomes clear and should indicate how the rest of the decade will progress for UCaaS players.