Acme Packet's Analyst Day - Clarifying the SBC Opportunity and the Death of Telecom

Lately I've been writing about vendor events that I've attended, and this time it's Acme Packet. Their first-ever analyst day was held last week, and enough dust has settled since for me to write about it for our readers.

I realize that SBCs are not top-of-mind for followers of UC, and maybe that's the point. I'll back up a step just to be sure we're on the same page here. SBCs are session border controllers, a little understood next-gen network element that addresses complex problems with complex technology. As you may know, I'm not a technical analyst, but I've covered the SBC space since inception, and understand it well enough to share some takeaways with you here.

Acme Packet was an early entry into the nascent SBC market, which started to take shape around 2004. There were plenty of other interesting vendors, but Acme Packet has outlasted almost all of them, and in the case of Covergence, acquired them. While not the only game in town, Acme Packet has emerged as the clear market leader, a fact that the financial community has recently woken up to. Acme Packet's 2006 IPO was somewhat successful, and has puttered along rather quietly until 2010. Since January, however, their stock is up five fold, and if you know of a hotter stock, I'd like to hear about it.

A key factor driving this zooming valuation is their ability to dominate a growth market and sustain very high gross margins. Investors love this, but more importantly, Acme Packet's technology brings critical value to service providers, and increasingly, enterprises. During the analyst day we learned what the value was from the various presentations, but for me, the key takeaways came from their CEO and co-founder, Andy Ory.

Andy takes the big picture approach by talking about the "death of telecom," which is music to many in IP, but more of a throw down to the legacy crowd. Either way, telecom - as we know it - is radically changing and incumbents are struggling - thrashing perhaps - with IP if just to hang on to what they have. You don't hear legacy carriers talking about growth any more - it's just about customer retention and trying to replace legacy revenues from declining lines of business. The growth story is largely being driven either by mobile operators or new competition that been quicker to adopt IP.

Whether protecting the installed base or capturing new customers, all operators need SBCs to some degree for IP services. There really are two markets here for vendors to address. First is helping carriers bridge the transition from TDM to IP, and this is where most vendors focus. TDM will be with us for some time, so there is a large market to address here. The second market is looking one step ahead, where carriers have moved on from TDM altogether and are living in an all IP world. Very few carriers are there today, but this is the end game for all of them.

In Andy's view, telecoms don't do innovation or competition very well, and many are dead and just don't know it. The bigger game for Acme Packet is with carriers who know that telecom is dying, and are ready to embrace the technology to get them to the next curve. We all know that story by now, but hearing Andy's take makes you realize just how far most telcos still have to go. His main theme is that SIP is a big driver of all things IP, and in this new world, there is a great deal of new value to be created. This isn't about cheaper minutes or free video calls. It's about - well - things like UC, which is why I'm writing about this here.

UC can be done in a limited way with TDM, and pretty well in a hybrid TDM/IP environment, but with all-IP, it really delivers value. SBCs play a key role here because they establish trusted connections at both ends of the IP session. In this regard, Andy talked about how the new value is coming from applications, not the network. As such, what matters most is what happens at each end of the connection rather than in between and over the pipes.

Most people do not/cannot understand Acme Packet's technology, but they do understand trust, security and identity protection, and that's really where Acme Packet provides value. I commented half tongue-in-cheek to Acme Packet that WikiLeaks was good for business, and there certainly is truth to that. When you can establish secure borders in the network along with authenticated identity for end users, a lot of friction is removed from the communications process, at which point IP-to-IP works just as well as people talking face-to-face. Isn't that really what we're striving for with UC?

For service providers to get full value from these applications - and solutions like UC - their networks must become session aware in order to manage and integrate all of these real-time, multimodal streams of communications. There is little doubt that all of us will be much more comfortable sharing and collaborating when we know we're working with trusted partners. For those in attendance, you'll remember the personal banking example cited by Acme Packet's other co-founder, Pat MeLampy. Underlying this is the simple idea that it's very easy to be anonymous over the Internet, and for carriers to transition to an all IP world, they're going to have to address these issues definitively.

Otherwise, as Andy noted, they will be displaced by others who can. He reminded us that companies like Prime, DEC and Wang seemed like unstoppable market leaders in their heyday, but hardly anyone remembers them now. Incumbent telcos - and certainly telecom vendors - could go the same way, especially if IP-savvy disruptors like Skype or Google get there faster.

In that regard, moving to an all IP world is as fundamentally game-changing as the Internet itself, and the market finally seems to be catching on. Acme Packet has been out in front here for a long time, and I think everyone attending last week now knows how to connect these dots. If Acme Packet is new to you, then you'll do well to stay close to this portal and our ongoing coverage of enabling technologies like SBCs.