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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.
- Cisco is well-positioned in both products and market to compete and win a position as at least a Chimp in the space. The Cisco product offer has consistently demonstrated technology superiority. The combination of cloud innovation and premises device integration is delivering enhanced value. Cisco is also very aggressive in acquisitions and is integrating those into a complete solution that will have market appeal. Cisco has demonstrated its ability to rapidly and effectively integrate innovations from start-ups into the product offer. Cisco also has access to 140-160M current installed base seats, the majority in premises Call Manager, but 50+M in UCaaS through Webex and the Broadsoft acquisition. This access, combined with a strong customer relationship through the data solutions, and channels gives Cisco a clear path to success.
- Microsoft is positioned to be a significant player in communications going forward. Not only does Microsoft own the majority (85-90%+) of the knowledge worker productivity tool suite market, the adoption rate of O/MS365 is very high. This adjacency alone would make Microsoft and Teams a major player, just based on the percentage of the workforce (25% in North America) that uses these tools and the number of companies in which those employees will drive the UCaaS decision process (consulting, high-tech, etc.). But Microsoft is also pursuing a focus on the Frontline Workers, the other 75% of the workforce. This combined with a continued focus and improvement in the PSTN access offers positions Microsoft to be assured to be at least a Chimp, if not the Gorilla in the market.
- RingCentral is on this list as they have both a strategy to get to 15-25% market share and a record of success. RingCentral built its subscriber base through a long-term campaign of both lead-driven customer acquisition and a strong brand management; the company has consistently invested at least 50% of revenue in customer acquisition and brand marketing. That has resulted in a strong installed base as well as significant SMB and MM brand recognition as a cloud communications leader. Its partnering relationships are what positions RingCental to be a strong contender for an ongoing Chimp role. RingCentral has wrapped up four of the five remaining large premises PBX installed bases (Avaya/Nortel, Atos/Unify/Siemens, AL Enterprise, and Mitel) to provide a “preferred” migration path to a RingCentral based UCaaS. While the specific relationships vary, this gives RingCentral preferred access to over 200M existing installed base lines/subscribers, and, as important, access to the VAR channels those vendors have developed through the years. If RingCentral and its partners can migrate 20-30% of those seats to a long term UCaaS subscription, that is 40-60M subscribers or 8-15% of the market. A second facet of the RingCentral partner strategy is providing solutions to service providers, especially the large global mobile global service providers (GSPs). RingCentral has relationships with six major mobile GSPs, representing over 1B wireless subscribers. If 3-6% of those lines turn into mobile business lines, that is another 30-60M UCaaS subscribers for RingCentral. As five of those six GSPs are major customers of Ericsson, this may have been a major driver in the acquisition of Vonage. If RingCentral can deliver its strategy, it has a path through its partnerships to 80-120M seats or 15-25% of the potential UCaaS market. RingCentral is a Chimp over 8x8 due to these partnerships and the installed base access they potentially deliver.
- Zoom is on this list because they have become the UCaaS solution adopted by people that don’t know they’re buying UCaaS. Zoom is having success in the enterprise, that is dwarfed by the wide-ranging, almost consumer-driven adoption that happened during the pandemic. Based on the most recent quarter, Zoom had 2.5 times the revenue that RingCentral had. If the ARR per user is equivalent, that means Zoom has 2.5 times as many subscribers as the base that RingCentral has built over 12 years. Even assuming 30 or 40% are “hobbyists” Zoom is clearly a major business player. Further, the adoption of Zoom and its prevalence as a download application will be a strong advantage in 2022 and beyond. The challenge for Zoom is to translate this leadership into a long-term market position. However, the path to being a Chimp is clear. To continue and grow, Zoom must demonstrate that its solution provides not only the ease of use but also the rich features and integrations the business market demands. A key challenge for Zoom is non-organic growth, demonstrated by the unsuccessful acquisition of Five9 earlier in the year.
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.