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The RingCentral Deal: Potential Revenue Impact on Avaya
As discussed in the previous articles in this RingCentral-Avaya series (here and here), the final conclusions of the Avaya strategy appear to be clear. By partnering with RingCentral to deliver the Avaya Cloud Office (ACO) UCaaS solution to the SMB/midmarket base, Avaya appears to be ending any speculation about an internally developed SMB UCaaS offer. This, in turn, enables Avaya to narrow its focus on optimizing the value of its large enterprise installed base in employee communications and focusing on the exploding opportunities in customer experience (CX).
A question that arises for Avaya stakeholders is whether these strategic moves will finally drive an increase in Avaya revenue going forward. Unfortunately, Avaya has had a record of decreasing revenue for a number of years, making this is a top-of-mind question for most stakeholders.
Based on the analysis in the earlier articles and projected market conditions, each of Avaya’s three major business areas can be evaluated on the potential of increasing revenue/margin/profit in that segment. To do this, I’ve graded each area on the outlook for growth from A to F, where a C grade means there should be zero impact on growth/revenue and an A is a new revenue rocket ship (and F is receivership). While none of the businesses has 30% annual revenue growth in the foreseeable future, each has clear opportunities for some revenue growth or at least a high probability of reducing the revenue declines.
In the SMB/midmarket, this deal should minimize further revenue erosion or even increase revenue by providing a viable UCaaS migration path for existing IP Office customers and channel partners. As the overall IP Office premises base does not appear to have grown in the last few years, this could potentially be a positive revenue impact. Depending on the rate of the IP Office-to-ACO transitions, there could be overall revenue growth in this segment. Beyond new revenue in ACO, overall revenue should be enhanced by stability in the channel and the customers clarity and comfort with IP Office and ACO direction.
Both premises and ACO should benefit from the focus on contact center as a service (CCaaS) that comes with ACO. There are clear indications that growth in the contact center space is primarily based on new seats in smaller organizations. While UCaaS and CCaaS seats are sometimes purchased separately, they are often purchased together, to gain the benefits of integration as well as for pricing and support. While many UCaaS vendors have an internal CCaaS solution, partnering has become common. As examples, look to Microsoft’s partnership with Genesys and Fuze’s with Five9.
There is clear opportunity for Avaya to use its contact center leadership as an ACO migration tool (by delivering CCaaS as an overlay to the current IP Office base) and selling contact center seats into both the emerging ACO base and potentially larger RingCentral subscriber bases. This could increase overall average revenue per user (ARPU) in the premises installed base incrementally. This is mitigated by the uncertainty of the volume of ACO migrations and the ability of an Avaya CCaaS offer to compete effectively with current RingCentral CCaaS offers.
One further area of concern is ownership of the customer contract. 8x8, Poly, and ScanSource just announced a VAR offer that appears to position a resale model for 8x8 against the agent model in the RingCentral/Avaya relationship. This may offer some of the Avaya channel partners an alternative that retains their “reseller” business model instead of using the ACO option.
While the potential for growth in the SMB/midmarket market is probably the lowest overall due to the uncertainty of the transition rate to ACO, it still has a C+ value of potential revenue increases. Three factors — clarity in the channel; installed base reducing churn and increasing ARPU; and the potential of a market-leading UCaaS offer packaged in ACO driving cloud migrations —combine for a positive outlook. It is also important to remember that this market is the smallest part of the overall Avaya revenue.
In the large enterprise space, where Microsoft Office 365 is so prevalent, Avaya can now focus more energy on key strategic options: integration/interoperation with Microsoft Teams, contact center/CX enhancements and innovation, an enhanced CCaaS solution, and transitioning the existing premises telephony/PSTN base (Aura and Call Manager) to a cloud-hosted offer. Transitioning large customers from a traditional premises model to a cloud-hosted solution can increase Avaya revenue by two to four times product revenue while decreasing overall operational costs for the end customer (see related story, “What Massive Bosch Deal Says About Avaya Cloud Goals”).
The potential of embracing Microsoft Teams for the large enterprise could be an opportunity for Avaya. In a 2016 No Jitter survey on Skype for Business, 60% of large enterprises had decided on Skype for Business as their UC/collaboration solution (excluding telephony/PSTN). While there are challenges in the migration to Teams, this survey accurately reflects the level of commitment to both O365 and the included UC/collaboration suite. This means the majority of Avaya large customers are not looking to Avaya for the UC/collaboration solution but retaining Avaya for their general telephony solution that serves 70% to 80% of the users. The movement of the base to a cloud-hosted business model for telephony, combined with extending the life of that base through integration with O365/Teams, should increase long-term revenue and duration.
The potential of contact center opportunities in the Avaya/Teams space could be a significant uplift opportunity. It could be a major component of integration between Teams users and Avaya contact center agents. And, while there are no specific disclosed plans, focusing on added-value cloud UC services for this base could have an upside. This could be especially true of frontline worker integrations that exploit the majority of telephony endpoints not associated with knowledge workers.
Finally, together RingCentral and Avaya may enhance the ACO offer to be attractive to large enterprises as a UCaaS solution. As in the SMB/midmarket space, delivering a market-leading UCaaS offer packaged in ACO could have great upside in the large enterprise space, especially if the partnership can deliver unique values in this market.
With a focus on cloud hosting, O365/Teams integration, and scaled ACO deployments, there are real opportunities to both reduce the churn rate and increase the ARPU, resulting in an evaluation of B- for revenue growth potential. As this is both a billion-dollar plus business for Avaya and an area that has seen consistent revenue declines for many years, stemming that flow to neutral or an increase would be a major win for Avaya. For the scale of the installed base and the ability to transition from decline to flat/growth, this space has intriguing opportunities.
Last, but not least, in the contact center and the emerging customer experience market, Avaya now has the focus and increased resources to invest to compete in what is an exploding space, both in scale and innovation. As with the large enterprise comms market, external analysis indicates the overall size of the Avaya installed base of contact center seats has not increased in the recent past. While about 40% of contact center seats are deployed in dedicated contact center locations, the majority are purchased and deployed as part of an overall communications solution. Clearly, Avaya has a larger percentage of large dedicated contact centers as it and Genesys have been the traditional major players in that market space.
The RingCentral relationship enables a focus on CCaaS and the innovation that is rapidly changing the market. The transformation is from the traditional call center to an integrated omnichannel business process-integrated customer interaction solution that includes a range of new innovations to enhance the experience and companies’ ability to manage those relationships effectively. For Avaya this investment should have three returns: increased ARPU in existing customers, decreased churn through innovative solutions, and the ability to provide a world-class CCaaS solution deliverable to the SMB/midmarket, large enterprise communications, and the large dedicated customer experience solutions segments.
While Avaya has often demonstrated innovative solutions in the lab, many, or seemingly most, never led to market leadership in emerging areas of UX. With this focus, Avaya should be able to leverage its customer knowledge, innovation engine, and the installed base for additional revenue while decreasing churn. Assumedly, this will include a renewed focus on communications platform as a service (CPaaS)/APIs and creating a platform for both CPaaS and CCaaS that can compete with the existing and new players in this space.
Based on these moves from the financial market perspective, it would appear that in the future, Avaya will be increasingly evaluated on the existing contact center business and how it is growing its position in the exploding CX and CPaaS marketplaces. The focus on contact center/CX inside of Avaya that this deal brings should increase the probability that Avaya will be successful, resulting in a rating of B.
Overall, this deal should open the door to increased revenue in all three of Avaya’s markets. Looking forward, the probability of Avaya increasing revenue is in the B-/C+ range, a huge improvement over the last few years when the churn and ARPU decreases have driven consistent revenue declines. While this may take a few quarters to have a visible impact, with this relationship, the Avaya management team has opened the door to revenue growth. How fast Avaya moves through the growth opportunity door is dependent on clarity and execution.
Based on the outlook of this deal, it should be worth seeing what comes next.