Can Mergers and Acquisitions Ensure Healthy Growth in the Hosted IP Telephony and Cloud UCC Market?
Apr 24, 2014
On April 21, 2014, Birch Communications Inc. announced its pending acquisition of Cbeyond Inc. for $323 million in cash. The combined entity will have 200,000 business customers US-nationwide and revenues of about $700 million. Cbeyond brings a strong portfolio of VoIP access, SIP trunking, hosted IP telephony and other services to Birch Communications.
This move comes after a slowdown in the merger and acquisition activity that started in the hosted IP telephony and VoIP access/SIP trunking market a couple of years ago. In early 2013 I was predicting accelerated consolidation in this fragmented and rapidly growing market, which did not really happen. Some of the consolidation activity that took place in 2012 and 2013 and involved North American market participants included the acquisition of M5 by ShoreTel, of Telovations by Bright House Networks, of Broadcore by Masergy, of Vocalocity by Vonage, of Callis Communications by C Spire, of European Voicenet by US-based 8x8, and of also European finocom and HIPCOM by BroadSoft. NextUC was spun off by CallTower and later acquired by Connect Solutions. Earlier this year, Arkadin acquired implement.com, including its hosted IP telephony division Chinook Communications. There were a few other mergers and acquisitions in other parts of the world as well.
This may seem like a lot, but the truth is—there are THOUSANDS of small hosted IP telephony providers in the world, many of which cannot compete successfully and sustain high growth rates on their own. Here are a few more reasons why consolidation needs to happen in the hosted IP telephony space:
- As the market matures, competition intensifies and providers with more substantial resources—R&D, marketing, sales, support, etc.—will be able to develop new capabilities faster, reach more customers, and provide greater customer support
- Businesses are increasingly aware of the benefits of cloud and hosted services but are still confused about the multiple options available in the market today. Market consolidation can help reduce these options to fewer, but more viable and visible alternatives. Also, customers are likely to increasingly choose their providers and solutions based on market share, geographic reach and overall financial stability.
- Market participants have all focused on certain aspects of their business and have neglected others for lack of sufficient resources.
o Some have focused on enhancing the features and capabilities of their hosted IP telephony and UC solutions (e.g., by adding IM and presence, video, contact center, analytics and integration with Lync, various CRM platforms and other applications).
o Others have focused on rapid growth, geographic expansion and customer acquisition.
o Still others have enhanced their backend systems and gained considerable operational efficiencies in provisioning, solution management, customer support, and so on.
o Some have invested in data center reliability and efficiency; others have focused on the end-user interface and the overall customer experience.
o Some have strong applications development capabilities; others have a large channel partner network that helps scale the business. Potential mergers of providers with synergistic capabilities can create stronger and more viable entities.
- In spite of the compelling benefits of hosted/cloud solutions, many businesses will continue to deploy premises systems in the foreseeable future due to security concerns, customization or integration requirements, greater return on investment (ROI) or other reasons. Providers that are able to offer a choice of a premises-based and a hosted/cloud solution, and especially ones that can tightly integrate the two types of architectures within the same organization and allow cost-effective migration from the one to the other, will be better positioned as customers explore different options, including hybrid (cloud and premises-based) implementations.
Many system vendors have developed cloud versions of their existing communications technologies, but few have truly cost-effective multi-tenant solutions. On the other hand, the majority of hosted IP telephony and UCC services providers do not have any premises-based solutions to offer. Similar to the acquisition of M5 by ShoreTel, a merger of a premises-based vendor with a cloud provider can create a new entity with a more diversified communication solutions portfolio and a stronger value proposition for customers that wish to have the flexibility to switch among the different delivery models.
- Mergers and acquisitions provide a convenient way for small providers to expand their geographic reach including the opportunity to tap into international markets.
In spite of the compelling reasons for potential market consolidation, the hosted IP telephony and UCC market remains highly fragmented with many providers looking for merger and acquisition options. My analysis and conversations with market participants revealed the following reasons for the slowdown in consolidation activity:
- Besides the larger telcos, which have considerable financial resources, but also fairly diversified portfolios, few providers have the financial means to acquire other market participants of relatively equal size. Many are small companies with less than $50 million in revenue and little free cash to spare on an acquisition.
- Executive leadership of private companies is frequently intent on growing the business organically in order to maintain control and potentially gain greater returns over the long term. Since the market is relatively untapped, this option seems appealing and could be viable, but is also quite risky.
- Some privately owned hosted providers are looking to take the companies public and thus gain access to larger resources needed for growth. Except for the recent RingCentral IPO, there hasn’t been any other activity on this front due to multiple factors including continued economic uncertainty, limited provider profitability and lack of strong differentiators and competitive advantages.
- Private branch exchange (PBX) vendors have either chosen not to be service providers themselves (e.g., Cisco) or have developed their own cloud solutions and are delivering those through data center partners and their dealer/reseller networks (e.g., Mitel, NEC, Toshiba). As a result of this trend, few premises-based solution vendors have sought to acquire hosted providers.
- Even though many hosted providers are using similar technologies (e.g., BroadSoft applications servers), some of the merger and acquisition candidates have different platforms that will present challenges for the new entity to consolidate the infrastructure and rationalize the services portfolio.
As the market continues to grow and mature and competition further intensifies, hosted IP telephony and UCC providers will find it imperative to scale up their business in order to survive and remain competitive. Consolidation activity is likely to continue in 2014 and beyond. Thorough competitor analysis and due diligence will be required for providers to identify the best merger and acquisition targets with the most synergistic portfolios, markets and operational capabilities.
Please share your thoughts on the challenges and potential benefits of further consolidation in the North American hosted IP telephony and UCC services market. Is more consolidation needed, or will the market sort itself out through more natural attrition?
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