Travel starts early this month, but it won’t be as hectic as February. Today, I’m flying - again - to San Francisco, this time for RingCentral’s analyst event. They’ve been a client off and on, and they continue to post solid growth in the very competitive UCaaS space. I’ll certainly come away with a better understanding of why they’re successful, along with what’s coming for the rest of 2019. Not much else to say for now, and I’ll share what I can on social while there.
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It’s easy to understand why the only way to go is up for providers in the hosted UC space. By nature, cloud is a business of scale, and the upsell opportunities are far greater as the size of end customer gets larger. Many hosted providers are big to begin with; while others start as small players, but out of necessity they need to go upmarket to support their growth plans. This pattern certainly mirrors what the incumbent telcos have been doing for years, as their high operating costs make the lower end of the business market less attractive to support.
Not much more needs to be said about why hosted providers want to chase bigger customers, and nothing is going to change that for now. Of course, the Tier 1s are already there, so the competition is bigger too. Some newer players will do well, and capture new customers, but the Tier 1s will generally remain dominant, so while the opportunity is undeniable, the returns may not be so great.
Going upmarket certainly makes good business sense, but there’s no denying the size of the SMB opportunity. In telecom terms, this generally means 100 lines/employees or less, but that tends to oversimplify things. The upper end of that range gets businesses close to PBX territory, but as you go smaller, phone systems are more basic – but the communications needs are no different. As such, these businesses are looking for good value, and beyond that maybe some features from the UC stack, but generally not a full-scale collaboration platform.
So, is this a small market or a big market?
I’ll stop talking for a moment, and let the numbers tell the story. Based on the most current U.S. Census Bureau statistics (as of December 2018), in 2016 there was just shy of 6 million firms, with total employment of 126.8 million. In terms of business entities – firms - 88% of that 6 million had fewer than 20 employees – roughly 5.3 million businesses. Within that group, the vast majority – 70% - had fewer than 5 employees.
While the number of U.S. firms skews heavily to the low end here, the mirror opposite, not surprisingly, holds for employment. Of those 126.8 million employees, 83% are in 20+ sized firms, with the largest concentration at the top end – 500+ firms. This segment alone accounts for some 67 million employees, and that represents 53% of the total U.S. employment market.
In short, the bottom end of the SMB market – under 20 – accounts for 88% of all firms, but only 17% of all employees. First and foremost, hosted providers define their market in terms of how many businesses they can sell to, and after that, how many lines or subscribers this represents. On the first count, the under 20 market is clearly a very big target, and that’s where providers like Phone.com do very well. While this only represents 17% of employees, in absolute terms, that’s roughly 21 million workers, subscribers and endpoints. Quick math – at $20 monthly per subscriber, that makes this a $5 billion opportunity. That’s what the numbers tell me – so SMB is both small and big. Let’s get back to the analysis.
I’d be oversimplifying things by saying that hosted providers are abandoning the SMB market, but for the most part, they’d rather be elsewhere all things considered. A key reason is the high cost of customer acquisition, and it’s not unusual for hosted providers to spend 30% of revenues on this line item, and often quite a bit more. Compounding this is churn, a risk factor that never goes away given how hosted services don’t lock businesses in with long-term contracts. That’s the downside of the SaaS model, but it sure keeps providers honest since businesses are free to switch any time.
Given all these factors, plus the fact that most hosted providers are under pressure from investors and/or shareholders to sustain unsustainable double-digit growth rates, it’s no wonder why SMBs represent more risk than reward. In terms of checking all the right boxes, a handful of enterprise wins goes a lot further for them than a few dozen or hundred new SMB customers.
So, what’s a Tier 2 or 3 hosted provider to do?
Those who cannot successfully move upmarket are likely looking for a rollup exit, and with consolidation being an ongoing trend, the solid providers will find their takeout partners in due time. Others will continue for as long as the customer base can support them, and then look for a partner of some kind. Still others will smartly pivot and find more lucrative offerings for their customers, or enter new spaces altogether. Following that, many will move on due to attrition, mainly when the business is no longer financially viable. Nothing unusual here given that the barriers to entry are low, making it relatively easy to leave when market conditions are just too difficult.
Then we have hosted providers like Phone.com. Technology has always been Darwinian by nature, and the above scenarios are not inclusive for all providers who fish in this particular pond. Generally speaking, the strong do survive, but you don’t have to be the biggest. A more valuable trait is adaptability, and when it comes to supporting SMBs, Phone.com does this better than pretty much any hosted provider I know of.
For me, the starting point is focus – knowing your market, and having a vision for serving it. Once you start serving the market, you need to keep adapting the offerings to keep the value proposition fresh and to retain your customers. In spite of all the risks touched on above, Phone.com has done these things, and done them well enough to survive and even thrive. I’ve followed the company and known the leadership team since inception, so I can attest to this first-hand. Without going into detail, just consider the following touch points about the company, and consider how this contrasts with what I’ve been talking about so far.
· Company is profitable – need to start there given how many providers – including much bigger ones – are not making money
· Continuous growth – for nine straight years, and six on the Inc. 500 for growth – this is a sustainable business
· Stable management team – they know the market and are committed to the business – founders still run the business and are pioneers from VoIP’s earliest days
· Financially stable – no debt, and almost entirely self-funded – not beholden to outsiders
· Great name for branding – this is no small thing in today’s web-centric digital economy, especially having a name that describes your core business and is understood by everyone – can you think of a better one?
· Critical mass – over 30,000 customers and 400+ channel partners
· Happy customers – loyalty is hard to come by in this space, and I’ll take their word about churn being low, and that very few customers port their numbers to a competitor
· Clear value proposition – easy to use and affordable for SMBs – plain and simple
· Low cost for customer acquisition – most customers sign-up online - the company does have a network of over 400 channel partners to accelerate growth, but only a small portion of new business comes from indirect selling
· Service is very reliable – this has long been the knock against cloud services, but they partner with AWS, and haven’t had a service outage in three years
Going down this checklist, you see a picture that’s very different from how I’ve outlined the broader SMB marketplace above. When you add it all up, this is a pretty good profile of how to be successful serving this space with hosted services. Of course, it’s not an easy business – otherwise, all those other players would stay – and the challenges are familiar. First off, SMBs are price-driven, not that tech-savvy, and don’t show much loyalty when a better offer comes along. Phone.com itself is a small business, they understand that in spades – and that’s actually helped them in knowing how keep these customers happy.
As such, the business grows slowly and steadily. Growth is mostly organic, as it’s not easy to raise money to expand the portfolio or make acquisitions. On the other hand, Phone.com knows what the market will buy, and the cloud allows them to partner with AWS just like all the Tier 1 players, putting them on an even playing field for hosting.
Why Phone.com has the right stuff for this market
That brings me to the core element – what exactly are they selling? Their namesake is reasonably accurate, and when Phone.com started out in 2007, hosted telephony was the business. Back then, there were plenty of VoIP providers, and it was still a growth market. The cloud has effectively commoditized voice, so you need more now, and most providers have added UC, which has now become UCaaS.
Phone.com is now a UCaaS provider, but it’s not as full-featured as what most others offer. This isn’t to say it’s a lesser service – rather, it’s the right amount of service that smaller SMBs need and are willing to pay for. Again, this comes from knowing their market. Most of the core features are there – video, messaging, mobile apps, CRM integration, and lots of voice features like call recording, VM transcription and 1-800 numbers. Customers can easily self-provision features, add devices, create an IVR, set call handling rules, etc.
There are plenty of value-added features and applications here for SMBs, especially since many are still telephony-centric, and mainly interested in a less expensive phone service. That said, even these businesses will need richer capabilities at some point, and building on a solid track record and a strong value proposition, Phone.com is well-positioned to take them there. Riding with AWS, scale isn’t a problem, and with a team of developers, they can quickly bring new features to market. They have embraced the API model for driving innovation, bringing programmability to their offering, and now offer over 50 customizable features and integrations.
As long as they keep the price point attractive, and make it easy to extend beyond VoIP to collaboration and customer support, they should continue retaining their base, growing share of wallet, widening their margins, and giving customers less reason to go to bigger, better-known competitors. Phone.com may not be a threat to the big OTT players like Vonage, or even the BroadSoft universe, but at this end of the SMB market, they can more than hold their own. There are many models for success in this space, and if you’re looking for one that’s a bit under the radar, you’d be hard-pressed to find a better on than Phone.com.
“I like our poker hand.”
That’s the main message Vonage’s CEO Alan Masarek conveyed to our tribe last week at their first-ever analyst event. For a change, this was an analyst-only gathering, and you can’t beat that for listening and learning from each other. Maybe 20 analysts and Vonage’s brain trust going over their roadmap and vision for the road ahead. Some analysts there also took in a bit of the massive AWS re:Invent event that overlapped Vonage, and I have no doubt it was a very different experience. I couldn’t manage to attend both, but in terms of spending quality time with the right people, I’m happy with my choice.
I’ll explain here why I agree with Alan – along with some points of caution to keep it real – but there’s more to explore to understand why Vonage is well-positioned in a very crowded and messy market. Much of our time in Scottsdale was spent getting updates on how their three major pieces fit together – both in terms of the offerings and the entities that came via recent acquisitions.
In a nutshell, that’s Vonage Business Cloud (VBC) for UCaaS, CPaaS – driven by Nexmo, and CCaaS – driven mainly by NewVoiceMedia. There’s more to it, but the main idea is that their portfolio has three distinct pieces, with One Vonage being the roadmap to tie them all together. That ground – and beyond - has been covered very well (and faster than me!) by colleagues Blair Pleasant and Dave Michels, and I would encourage you to check out their reviews here and here.
So, forget about the details for now. Based on last week’s event, I’m seeing two basic things that Vonage has done very well – at least so far – that lead me to like their poker hand as well. Simple things, but they go a long way sustained success – pivot and acquire. Let me explain.
Pivot – from whoo hoo to workflows and CX
Remember those goofy ads when Jeff Citron was running the show? I go back to Vonage’s early days, mainly through the other Jeff – Pulver – one of the company’s co-founders, whose VON conferences were the epicenter of VoIP when it was truly disruptive and dangerous to the status quo. That’s ancient history, and while Vonage didn’t kill off AT&T (it almost did, but that’s for another time), they knew residential VoIP was a race to zero. Their pivot to the business market began in 2013 via acquisition, first with Vocalocity, followed by Telesphere in 2014.
Of course, what’s interesting is how Vonage kept going with residential, and that has served them very well. Most people in our circle gave up home phone service ages ago, but there’s still a big market out there, and by virtue of Vonage’s strong brand, they remain a strong player. One comparable is 8x8, who has a similar early-days pedigree to Vonage, and while they started out in residential, they pivoted entirely to business some time ago. They never had Vonage’s name recognition in VoIP, so that was probably the right move for them.
And then there’s magicJack, perhaps the greatest gadget play in VoIP lore. To this day, I’ve never understood how they’ve managed to survive, and I’m sure Vonage is thankful they don’t have to compete at the end of the market.
Anyone can pivot, but it’s all about timing and execution. Vonage certainly pivoted at the right time for business, as cloud was maturing to the point where OTTs could offer much more than VoIP. First-generation UC was premises-based, and limited the playing field basically to the telco vendors. Cloud gave rise to hosted options, and now those vendors can’t migrate there fast enough. Being cloud-native, OTTs could move faster, and now the race is fully on for anyone with a platform.
That’s where execution comes in, and we got a good sense of that at the event for how they’ve parlayed many moves into a successful portfolio both for SMBs and enterprises. The proof is in the pudding, and this slide below from Alan’s presentation says it all. Within four years of entering the business market, those revenues have caught up to residential - $499M and $503M respectively in 2017. Clearly, residential is a sunset business, but it’s highly profitable, and that margin subsidizes their push into business.
I can’t think of anyone else who has this luxury, and as pivots go, it’s a pretty good game plan. As mentioned, 8x8 exited residential early, and their other main OTT competitor – RingCentral – was never in the residential market. It’s also worth noting that this pivot is paying off on the top line. As the slide shows, combined residential and business revenues now make Vonage a billion-dollar sales machine. That’s impressive in its own right, but also in competitive terms. RingCentral and 8x8 are their main OTT rivals, and Vonage’s revenues are roughly the equivalent of these two companies combined. That’s a strong poker hand.
Acquire – the right pieces for the right reasons
I have less to say here, but with Mitel just going private – again – it made think differently about Vonage’s moves. For a while now, CEO Rich McBee has positioned Mitel as a consolidator, acquiring both competitors and complementary pieces. That strategy makes sense given their market standing. Mitel will never become a Tier 1 player like MSFT, Cisco and Avaya, but could certainly become the leading Tier 2 player, and acquisitions were the way to do that. There were plenty of other Tier 2 competitors to choose from, along with an ocean of Tier 3 trying to hold their own.
Mitel has had a rocky history being both public and private – not just themselves, but also via the companies they’ve acquired. Going private again with Searchlight feels a bit like Avaya going private to restructure and later go public again, but it’s more about financial maneuvering than responding to changes in the marketplace. Nobody is perfect, but they needed two tries to take arch-rival ShoreTel, and going for Polycom seemed like punching above their weight. Mavenir never made sense, and there isn’t a desk phone vendor out there they didn’t like. Don’t get me wrong – Mitel is a major player with a solid cloud portfolio, but there sure is a lot of hardware in their asset mix.
Most people think of Mitel when talking about consolidators in our space, but it seems to me that Vonage has done a better job with acquisitions. Everything happens faster with cloud now, and it’s almost impossible to have sustained success now just with organic growth. Under Alan’s vision, all their moves make sense, especially for the trifecta he talked about and Blair covered in her post. For UCaaS, they have mix of customers on BroadWorks and VBC, their proprietary platform. With BroadSoft in Cisco’s tent now, that’s going to present some challenges, but they plan to keep supporting both indefinitely. However, the future will be VBC, and as Alan explained, this is part of their “own the stack” strategy.
For the other two parts of the trifecta, they smartly acquired Nexmo, the next biggest CPaaS player after Twilio, and then NewVoiceMedia to take their CCaaS play to the next level, namely beyond their partnership with inContact. It might be enough to view these as standalone pieces, but the real end game is One Vonage, where the entire portfolio is integrated, with a heavy emphasis on programmable communications via APIs.
As Alan noted, over half their pipeline is for combined UCaaS and CCaaS, so there’s a strong rationale for this end game. More importantly, it’s been driven by market forces, not financial forces, and that’s why I think Vonage is holding the hot hand right now for being a consolidator. I say that in particular because Vonage’s moves haven’t been to consolidate the supply side by acquiring competitors. Rather, it’s been to acquire pieces that consolidate a value proposition that the market is buying now. I’ll take that scenario over the challenges Cisco will face with BroadSoft, or even Genesys and their play with Interactive Intelligence. Every scenario is different, but Vonage looks to be moving and executing with purpose.
3 things that could go wrong
I concur with Blair and Dave – and others at the event – that the candid nature of the Vonage team gave us a close look at what they have, and it was hard to come away not feeling good about their chances. They seem to have the right mix of technology, innovation, culture, leadership and financial strength to stay in the game for years to come. Many new players won’t make it, and others will be acquired or exit as the barriers to entry get higher and the remaining competitors get stronger. I believe Vonage will hang with whoever’s left, and as Alan says, at this point it’s all about execution. That said, I’ll balance things out with three wildcards that could make things much harder if they don’t execute to plan.
Costly S&M and branding
While residential VoIP is a race to the bottom, cloud offerings for the business market are an expensive undertaking. Currently, Vonage is spending 30% of revenues on S&M – Sales and Marketing. That may seem really high, but OTTs don’t have an installed base – those new customers have to be taken from someone else. Getting customers and keeping customers are two different things, and with Vonage telling us about their low churn numbers, they’re holding their own on the latter. The same actually applies to the former when considering S&M for their OTT competitors. RingCentral currently stands at 44%, and 8x8 is a whopping 60%. Alan noted that in dollar terms, their M&S spend is comparable to RingCentral, but that’s not being reflected in name recognition, so there’s room to improve there.
2. Losing the golden goose
Another risk factor would be golden goose from residential that frees up cashflow to maintain that spend level for S&M. Their business revenues may be growing at a faster rate than the YoY declines in residential revenues, but clearly that free money will be harder to come by. If Vonage wants to stay in both lines of business, at some point, they’ll need to up their investment to keep the residential business going. I’m sure they’ve thought this through, and the implication would be the need to complete their trifecta One Vonage integration ASAP. If that somehow gets bogged down with technology issues, GTM execution or culture clashes, the pressure will be on to somehow keep the business growth coming on its own merits.
3. What everyone else is doing
State of the competition. CPaaS is central to Vonage’s API-driven value proposition, so Twilio is the main target there. Having recently attended their SIGNAL event, I understand why their momentum is so strong, but it remains to be seen how deeply developers can take them into enterprises. I agree with Alan that Vonage is better equipped end-to-end to serve enterprise customers, but Twilio is hitting its stride now, and they want to succeed as badly as Vonage. For better or worse, I’ve long said that Vonage is the Kleenex of VoIP, and I would say the same about Twilio for APIs. They have great brand recognition, and Vonage is still trying to migrate upstream to enterprises, so the road won’t be easy. Finally, there are those pesky Tier 1s to worry about. If Cisco gets it right with BroadSoft, they’ll be even stronger, and Microsoft has its mojo back in enterprise. Trust goes a long way when picking a cloud partner, and Vonage will have to earn that to grow at the expense of those players. If they’re holding a full house, they’ll be fine, but if just two pairs, they’ll have to play the game more carefully.
Lots of travel in November, but also pretty busy on the writing front. Here’s what was keeping me in print, both here and elsewhere.
Follow Generational Clues to Collaboration Success, No Jitter, Nov. 27
BroadSoft Connections - Thoughts on Being Better Together with Cisco, BCStrategies, Nov. 16
TMC’s Future of Work Expo - My Thoughts Via Q&A, Part 2 - via my blog, Nov. 16
Death of PBX- 3 Reasons, but it’s Complicated, Toolbox.com, Nov. 14
3 Reasons Google Assistant Duplex Raises Security, Privacy Concerns, TechTarget, Nov. 9
Opentalk18 Wraps Up - Takeaways for Success, GetVoIP.com, Nov. 9
3 Things to Remember About Amazon Mayday, Toolbox.com, Nov. 9
Collaboration - The Next Generation, BCStrategies - for AT&T, Nov. 7
The Importance of Bottom-Up Adoption for Collaboration, Toolbox.com, Nov. 2
As my catch-up day progresses, here’s my next post, and it’s a follow-on from the shout-out earlier today about tomorrow’s webinar with 8x8.
To support that, they did a Q&A with me, mostly about the state of collaboration, and what to look for in our upcoming webinar. If you haven’t seen that yet, here it is, and from there, I hope you make plans to join us tomorrow.