Device as a Service: Re-evaluating a Traditional Need in a Cloud World
Apr 10, 2017
Advancements in software development and cloud architectures are driving a profound shift towards communications technology delivered as a service. Double-digit user and provider revenue growth rates in the hosted Internet Protocol (IP) telephony and unified communications as-a-service (UCaaS) market clearly show growing demand for call control and collaboration capabilities delivered as a service. Similar trends in adjacent markets—data center, networking, business and productivity software, etc.—are driving demand for infrastructure as a service (IaaS), platforms as a service (PaaS) and software as a service (SaaS). Overall, key technology workloads are shifting from hardware to software platforms and from the customer premises to service provider facilities.
Benefits of Technology Delivered as a Service
The benefits of communications delivered as a service are multifold. Cloud communications solutions provide faster and more economical access to advanced functionality and technology expertise. Ongoing cloud solution updates and upgrades significantly reduce technology obsolescence risks and enable business users to leverage cutting-edge communications tools for greater efficiency and productivity. Cloud solutions deliver proven cost savings as well. Many businesses are adopting cloud communications to reduce the significant upfront hardware, software and services costs required to stand up sophisticated UC infrastructure delivering a broad set of applications, including: telephony, voicemail and unified messaging, chat/ instant messaging (IM) and presence, audio, video and web conferencing, mobility, contact center, industry -specific integrations, and more. In addition, cloud solutions deliver operational efficiencies—by outsourcing their UC operations, businesses can become more agile and responsive to changing market and customer trends.
Vendors and service providers are rapidly embracing the on-demand, as-a-service communications delivery model to enhance customer value and address evolving customer preferences. However, there are other factors motivating providers to adopt services-based technology delivery. Recurring revenues are typically favored by investors as they provide greater financial stability at times of market uncertainty. They help reduce the impact of cyclical/seasonal demand fluctuations and often provide higher margins. Market valuations are, therefore, greatly impacted by a company’s ability to generate recurring revenues.
Trends in Device-as-a-Service (DaaS) Adoption
The as-a-service trend is spreading further to more extensively affect device manufacturers and their strategies. Device monitoring, maintenance, replacement, and updates have long been part of managed telephony services. However, now, vendors are introducing even more comprehensive as-a-service plans to shift all associated device costs to OPEX.
Communications hard endpoints—such as desktop phones, digital enhanced cordless communications (DECT) phones, WiFi phones, and headsets—have traditionally accounted for a substantial portion of a new communications solution deployment. Cost scenarios vary, but phone terminals and peripherals can easily make up 30, 50 percent or more of the solution’s total value. Device costs are declining along with declining hardware and software prices, but businesses often seek to further reduce infrastructure refresh costs by re-using phone terminals with new call-control and UC solutions. Cash-strapped businesses, especially very small ones, often choose a solution or provider that offers free phones as part of the deal. Free and freemium models are becoming increasingly common in business communications markets leading to expectations that certain types of hardware (such as low-end phone models) will be provided free of charge.
The DaaS model is gaining renewed traction in the hosted IP telephony and UCaaS market, but penetration is not as high as one might expect. Industry observers sometimes assume that businesses looking to outsource call control and collaboration functionality are eager to move all costs from CAPEX to OPEX. However, a survey of the providers accounting for 44 percent of the installed base in 2016 revealed that only 35 percent of their installed users did not pay upfront for their phones. This portion of the installed base is comprised of phones acquired as part of free-phone promotions, as well as phones leased or rented by the customers (with or without the right to own at the end of the contract/lifecycle). By definition, a DaaS model implies more than just CAPEX avoidance in device acquisition and usage. In a true DaaS model the provider assumes full responsibility for device installation, maintenance and management. A DaaS arrangement would also cover firmware upgrades, as well as parts and device replacements. Few providers offer fully managed solutions with a DaaS component. In many scenarios, the device cost is simply distributed over the monthly payments throughout the duration of the service contract. The key benefit of the latter scenario is in avoiding CAPEX, but there is little added value in terms of additional services and/or risk reduction.
Both demand-side and supply-side trends determine the penetration of free/leased/rented phones among hosted IP telephony and UCaaS users. Approximately half of the surveyed providers lead with a lease/rent model, which helps increase the solution’s appeal among more cost-conscious businesses and accelerate customer acquisition. Such providers report lease/rent penetration of 70 to 90 percent of their installed base. Quite interesting, in the scenarios whereby providers do not promote lease/rent options aggressively, but make those available upon request, customers have demonstrated lower propensity to choose this model, with device lease/rent penetration ranging from 5 to 30 percent of installed users.
Similar to others in the industry, device vendors are looking to increase recurring revenues, exercising pressure on and offering incentives to their provider partners to promote the OPEX model. Greater vendor/provider push is likely to drive broader penetration of the device lease/rent model among business users adopting hosted IP telephony and UCaaS solutions. However, a considerable number of businesses will continue to purchase their devices upfront. Larger businesses typically receive substantial volume-based price discounts, which make equipment purchase options more economical than lease/rent options. Also important, device ownership can provide investment protection, if the business eventually chooses to switch providers, but wishes to re-use the phone terminals.
Going forward, the DaaS model in all its permutations (free/rent/lease) is likely to become more common in both cloud and premises-based communications deployments for the benefits discussed above. However, both vendors/service providers and customers need to watch out for potential pitfalls. Managing profitable recurring revenues is no easy task and may require a steep learning curve. Getting channel partners to embrace the model is another challenge. Vendors/providers must ensure that partners receive appropriate education, training, and incentives to promote recurring revenues.
Businesses adopting various as-a-service solutions, including DaaS, must consider various factors before making a final choice. For example, a long-term commitment to a certain solution and provider might favor a DaaS option. Limited capital availability is also a major driver for the switch to an all-OPEX technology consumption model. However, business must also calculate the net present value of available deployment options to make the right decision. Overall, a thorough due diligence process can ensure that businesses gain sustainable value from their communications investments.
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