Consolidation in the Hosted IP Telephony and UCC Services Market Continues
Nov 06, 2014
Market Impact of Vonage’s Acquisition of Competitor Telesphere
Yesterday, November 5, 2014, Vonage announced a definitive agreement to acquire privately-held Telesphere Networks Ltd., one of the top 20 hosted IP telephony ad UCC providers in North America. Here follows a brief analysis of the potential impact of the acquisition.
Vonage Background and Growth Strategy
Vonage is a leading provider of consumer and business VoIP services with approximately 2.5 million subscribers worldwide. Founded in 2001 with services officially launched in 2002, Vonage has a long track record in delivering residential Internet telephony services and a strong reputation for technology innovation. In fact, Vonage’s brand has become synonymous with next-generation, IP-based communications.
Vonage’s growth strategy is currently focused on two key areas: international expansion and entry into new services markets. About a year ago, it acquired a leading U.S. business VoIP services provider named Vocalocity, which has enabled Vonage to create the Vonage Business Services (VBS) arm and introduce a new hosted IP PBX service offering.
VBS, formerly Vocalocity, is one of the top five hosted IP telephony and UCC providers in North America. Created through the merger of the original Vocalocity and Aptela, VBS had an installed base of about close to 200,000 users in about 26,000 customer organizations at the end of 2013.VBS continues to report double-digit growth rates (51 percent in Q2 2014) as well as expanding customer size in new deals. VBS leverages a proprietary VMXL-based platform to deliver a package of cloud-based communications and collaboration applications targeted at very small businesses. After the acquisition, Vocalocity was interconnected to Vonage’s intelligent call routing platform, which resulted in significant cost savings related to domestic and international long-distance telephony services. VBS claims to have lowered termination costs by about 60 percent after connecting to Vonage’s network.
With residential VoIP services growth having slowed down, Vonage is looking to accelerate growth rates through greater focus on business VoIP, international expansion and aggressive marketing. While Vonage has launched residential services in several international markets, such as the UK and Brazil, its business VoIP services are currently available only in the U.S. with Canada and other international market launches pending. VBS is EBITDA-positive and is reporting improving quarterly financial metrics including lower churn and higher margins.
VBS Market Positioning in Hosted IP Telephony and UCC Services
VBS’s Business Phone System is a solution designed specifically for the needs of small and medium-size businesses. It includes a pre-packaged set of 40 features with more features and capabilities available as add-ons at an incremental charge. The core service bundles include full PBX functionality and key business telephony features such as call park, call hold, call forward, as well as admin and user portals, Microsoft Outlook integration, music on hold, voicemail, voicemail to email, virtual receptionist, simultaneous ring on multiple devices, a mobile app and much more. Additional capabilities available at an extra charge include call recording, voicemail transcription, conference bridge, call queue, call monitoring and others.
VBS continually enhances its service offerings by adding new features and capabilities. One of its differentiating features is a desktop plug-in that integrates with popular third-party apps such as salesforce.com and other CRM solutions. It is also addressing growing customer need to support mobile users by providing a mobile app for iOS and Android devices. It also offers basic ACD functionality, but is still lacking a full contact center capability. As it expands into larger accounts, VBS needs to be able to offer more advanced call center and analytics functionality required by such businesses.
Most of VBS’s customers deploy its cloud phone system services over the public Internet. A managed services offering is not currently available.
VBS focuses on making its solutions easy to deploy, manage and use. It prides itself on providing quality customer service and support, which enable it to more effectively acquire and retain customers.
Overall, VBS offers a very compelling solution for small businesses. Vonage’s network allows VBS to offer very cost-effective long-distance rates. The inclusion of a mobile app free of charge in the basic package makes VBS’s offering appealing to mobile users. International expansion will eventually enable Vonage to more effectively support larger, distributed organizations. Vonage’s financial stability and VBS’s improving performance metrics instill confidence and encourage long-term relationships. Expanding channel relationships will enable VBS to more effectively deploy and manage business solutions and will provide more options to customers.
However, Vonage, and more specifically VBS, is lacking some capabilities that can make it even more successful in the hosted IP telephony and UCC services market. For example, lack of a contact center solution may be an issue for businesses looking to outsource both their PBX/UC and contact center from the same provider. Lack of advanced web collaboration and video conferencing capabilities limits the value of VBS’s solution to distributed organizations looking to enhance collaboration among remote users. Lack of a managed option prevents VBS from offering strong SLAs and ensuring greater service quality and reliability for more demanding customers.
Telesphere Market Positioning in Hosted IP Telephony and UCC Services
Telesphere is a privately-held hosted IP telephony and UCC services provider with an estimated installed base of about 62,000 hosted IP telephony users at the end of 2013 and related revenue between $30 million and $35 million. The company anticipates to generate revenue of about $40 million in 2014 (according to the press release). Telesphere has reported accelerated growth in the second half of 2013 and the first half of 2014. It claims it almost doubled its monthly sells and installs in the second half of last year and almost tripled the monthly production of the last half of 2013 in the first half of 2014. It has also recently hired new people to enhance customer support and product management.
Unlike most of its competitors focusing on features and functionality or aggressive marketing, Telesphere has focused primarily on the operational side. Telesphere has invested heavily in infrastructure in order to be able to support larger businesses—an untapped market sector as most hosted IP telephony originally targeted very small businesses. It has also developed more efficient back-office systems (BSS/OSS) and created a management portal, which enables customers to more effectively manage and control their communications solutions.
Telesphere claims to be averaging about $3K monthly revenue per customer, with new customers generating between $5K and $20K per month. This is significant compared to market leaders 8x8 and RingCentral’s average monthly customer revenue of about $300. This is a direct reflection of average customer size, which averages 50 to 100 users in Telesphere’s installed base compared to about 10 users per customer on average in other leading providers’ implementations.
Telepshere also differentiates from competitors through its focus on service quality. Telesphere has its own national MPLS network. About 85 to 90 percent of Telesphere’s customers are on a dedicated circuit. Others are locations of customers that have MPLS in the main site, but have public broadband for remote users. Many of the competitors in this market including 8x8, RingCentral and VBS offer services over the public Internet, which provides customers with some flexibility, but makes it harder to guarantee service quality and reliability.
With the acquisition, Telesphere also brings some advanced features and capabilities to the table currently lacking in VBS’s portfolio. Telesphere has an advanced contact center capability, which is critical in larger customer organizations. It also offers call recording with a tagging and transcription service. Telepshere integrates with major CRM platforms such as salesforce.com and ACT. Telesphere also offers video bridging and virtual desktops, which are rarely found in other hosted telephony providers’ offerings.
Finally, Telesphere has been more successful than most of its competitors in developing a strong channel. About three years ago Telesphere sold mostly (80 percent) direct, but in 2013 an estimated 70 percent of its business was generated through the channel. Partners include traditional agents as well as small VARs. Telesphere’s channel will significantly enhance VBS’s capabilities, as it currently sells mostly direct.
The Vonage-Telesphere acquisition is an overall highly positive development. The fragmented hosted IP telephony market is in dire need of consolidation to improve overall market health and viability. There are also specific benefits for Vonage and Telepshere’s investors and customers, as follows:
With a combined share of more than 250,000 installed users as of the end of 2013, the new entity is now a strong contender for the third or fourth spot in North American hosted IP telephony and UCC service provider market share ranking.
As a larger and financially stable organization, Vonage provides greater stability and the ability to invest larger resources in R&D, marketing and sales, etc.
Vonage’s strong brand can help grow the business faster and instill greater confidence in existing and new customers.
With the existing VBS capabilities and the new Telesphere services portfolio and infrastructure, the new entity is better positioned to target a broader customer base from very small to large businesses.
The new entity will be able to offer a more compelling feature set including PBX, voicemail, voicemail to email, mobile clients, contact center, video conferencing, VDI, Microsoft Outlook and popular CRM platform integration, and more.
Through integration with Vonage’s network, Telesphere’s existing and future customers will be able to benefit from more cost-effective long-distance rates.
Existing and future Vonage customers can now receive a complete hosted telephony PLUS contact center solution.
A combination of strong direct sales with a larger channel network can help accelerate growth and enhance customer service and support.
As with any acquisition, portfolio consolidation and company culture differences may present challenges. The biggest concern is around platform integration and roadmap. VBS currently uses a proprietary VXML-based platform, whereas Telesphere licenses BroadSoft’s leading hosted IP telephony platform. Managing two platforms is a challenge for a smaller provider such as Vonage. Transitioning customers from one platform to the other, on the other hand, could be disruptive.
As always, the jury is out until the acquisition is complete and the new entity has had sufficient time to execute on its vision and strategy. However, as the market continues to consolidate, a larger and stronger VBS will be able to compete more effectively and boost overall market growth.
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