Session Border Control Market Really Hurting

Just wanted to comment quickly on this space. I've been close to the session border controller (SBC) market from the beginning, and still feel an affinity for the vendors. It's not an established or clearly defined market segment, but we more or less know who the players are. There have been a couple of recent body blows to this space, and it's not getting a lot of attention from bloggers. So, for the record, I just want to draw attention to what's going on, as I believe it has wider implications for both vendors and the financial community.

Most recently - Monday - Juniper announced it was withdrawing its SBC offerings, which are based on their acquisiton of Kagoor last March. This was a well-received exit, as Kagoor got a decent valuation, and Juniper got a solution to give them a leg up on Cisco. Things were looking good for the other SBC vendors with similar exit aspirations.

Then we had Netrake's paltry acquisition by AudioCodes last week. Netrake had raised some $70 million, but wasn't coming up with the big wins to justify this kind of investment. Looks like the VCs had had enough, and AudioCodes probably got a good deal. They're continuing along the consolidation path, and if you ask me, are on their way to being in a league with Sonus, which not too many nextgen vendors get to. Tekelec also comes to mind - also via acquisition. In the present climate, it's becoming the norm for vendors to get big or go home. It's getting more difficult to remain small and independent, especially if you have aspirations of selling to Tier 2 carriers or higher.

Netrake may not have had much choice in taking the AudioCodes offer, and while it spares them a possibly worse fate, it's got to be cause for concern among those left standing in the SBC space. Way back, Jasomi got taken out by Ditech for a fairly small payout, and Netrake did not fare much better (but at least Jasomi was self funded, and nobody lost any money). And there's Newport Networks, who went public in the UK. They raised a lot of money - without any customers or revenues to speak of. Their valuation has gone down significantly since then (much worse than Vonage), and I really don't see things changing in a big way there.

So, on that level, the Netrake deal is a continuation of a scary trend that basically says the market doesn't value this space a whole lot. At the end of day, there's something to be said for exiting early like Kagoor. Translation - get out while the going's good.

That said - I still think the SBC segment has merit on its own, but it's looking like there may only be room for a couple of players. When I was at Frost & Sullivan, I wrote a report on this space when it was just getting hot, and concluded that the market for standalones would peak and then go down as exits and acquisitions occurred - and when vendors start integrating SBC functionality into other network elements. As it turns out - that's exactly what Juniper is doing with Kagoor. As I recall, my conclusions were not well received, at least by some vendors who felt the market had much more life in it. Well, I'd have to say those conclusions turned out to be very true - and if memory serves, a good year or two earlier than I had predicted. If I was Frost & Sullivan, I'd be thinking about re-issuing that report with an update!

So, this one-two knockout punch of Netrake and Kagoor basiclly leaves us with two strong SBC pureplays - Acme and NexTone. Yes, there are several other vendors who now offer SBC solutions and/or functionality, like MetaSwitch, Tekelec and Quintum - but these are not pureplays - SBC is not central to their business.

Acme and NextTone look to be the long-term winners in this space, which validates that there's room for both an integrated big box platform - Acme, and a dis-integrated solution like NexTone's. Both are doing well, and have fairly different customer sets. NexTone got a nice funding round last year, and look to be in good shape financially for some time to come. Acme, on the other hand, has not taken any rounds for almost 3 years, and have been able to sustain themselves nicely from organic growth.

Of the two, Acme should be the most worried in the wake of the Netrake and Kagoor news. The low valuation for Netrake can't be good news for Acme's recently announced IPO, especially with Vonage's dark cloud hanging over the IPO landscape for anyone in the IP communications space. That said, Acme is a healthier company, and deserves a successful IPO. I hope they get it, but geez, early in the game this market was an Acme vs. Netrake story for the Tier 1s. Clearly Acme is coming out on top, and for their sake, let's hope the market sees them in the same light.

In the name of transparency, I must state that NexTone is a current client of mine. However, they're not the only company I'm saying nice things about!

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