Is 3CX the New Alternative for SMB?
I know there is a lot of talk about cloud in SMB, but using a standard Windows server (or VM) and running a VoIP/UC app may be gaining velocity in the SMB space as well. Some of the UCStrategies readers may be familiar with 3CX; I was somewhat, but saw them as just another of the many smaller VoIP-based players, consigned to the "other" category in analysts' reports. However, I had an interesting call with Nick Galea, 3CX CEO. The call was driven by some announcements that 3CX is making around UC features, WebRTC integration, and other capabilities. However, the real value of the call for me was understanding that 3CX may be a reasonably significant player in the SMB market, from 20-250 users.
That is where 3CX focuses, though their system can go larger. Essentially they sell a Windows-based communications platform. One interesting approach is that their licensing reflects the old key systems model of pricing based on concurrent use "calls." So a customer does not license end seats, but rather buys a 3CX license for a number of concurrent active calls/users (4, 8, 16, 32, 64 and so on). Licensing for basic telephony services starts at $895 for 8 concurrent calls/users and $4,995 for 64. So the list pricing for a concurrent call/user is from under $75 per concurrent call/user in larger deployments to as high as $100 per concurrent call/user for smaller installs. The pro version that includes UC features such as presence is about 35% more on average ($100-135). As this is concurrent use, the number of end user seats (or ports or lines or whatever term suits) is larger by a factor. If a 20% blocking factor is used, that means there are five times as many registered users as concurrent calls, so the 16 concurrent call/user system can support about 80 users. The resulting license cost per user is $15-27, significantly less than many other options, though this does not include the server, gateway or other hardware costs.
According to Nick, globally, 3CX has between 35,000 and 40,000 end customer organizations, with the average having somewhere between a 16 and 32 concurrent call/user system. With the blocking expansion, this would indicate an average system size of around 80-100 actual users or a total installed base of around 2.5 to 3 million users/seats. While this does not make 3CX a large installed base player, the 40% growth that Nick said they were gaining does mean that 3CX is winning a lot of new installs. With 40% growth, almost 10,000 of the current customers would have come in the last year, giving 3CX about 900,000 new users/seats in the last year. Assuming these are a little aggressive, let's use 600,000 new users. As Nick indicated that the U.S. is the largest market, if 300,000 of those were in the U.S., the result is that 3CX is probably growing to be significant market share. If we assume that the SMB installed base in the U.S. is about 25-30 million seats/users/ports and the annual transition churn is around 5-10%, the result is a range of 1.25-3 million new seats/users/ports installed annually. If 3CX has 500,000 seats, that makes the company somewhere between a 10% to 25% market share in new installs. Further, if the 3CX installed base is between 1 and 2 million users/seats as the volumes would predict, that makes the installed base very equivalent to RingCentral and 8x8 combined. If SMB cloud is growing at 20% -50% per year, the 40% claimed growth of 3CX as a premise solution is even more impressive.
One reason that this may not be highly visible in the market is that the primary channel for 3CX is through IT VARs and integrators for the SMB market. 3CX claims that they have 15,000 channel partners, which means that the majority have probably only done one (or none at all) end user install. The key point is that the average 3CX install is being proposed and installed as part of the IT infrastructure, not as a separate phone system. Another key factor is the relationship of the channel to the customer. As IT infrastructure is constantly changing (where the old key system may have been very static), the IT VAR/reseller may have a much stronger relationship with the SMB than the telephony VAR/reseller. If a reasonable percentage of the new 3CX channel partners that have done a trial install so far do a couple of deployments in 2015, it is easy to see how the ongoing growth can be at 40% per year.
In fact, it may be that many of these installs do not even get to the point of being a competitive bid against the traditional SMB telephony solutions. As discussed before, this may be due to relationship and timing, but pricing may enforce the decision. The 3CX license includes open SIP trunking and uses third-party gateways and phones. So, for a 100-seat deployment, a 32 Pro version concurrent call/user license is $3,350. Assuming that the VAR/reseller proposes SNOM phones at an average price of $120 each and the server is a VM and therefore has minimal cost, the result is a system "equipment" cost of about $15,000, or about $150 per seat. While this is not dramatically less than other options in this range, if the IP phones drop to 50% of the deployment and/or lower cost phones are used, the total equipment can come down to under $100 per seat. If the partner installs the phones and SW as part of a network and server deployment for the business, the cost of deployment is minimized, potentially resulting in a total cost per installed seat of $150 to $200. This compares to traditional telephony solutions that cost between $200 and $300 per seat for the equipment and another $50-100 per seat for the install on a VoIP system, resulting in per-seat pricing in the $250 to $400 range.
The result of both proximity of the IT VAR as well as the pricing may lead to a number of SMB phone solutions being installed by the IT channel. It will be interesting to see whether the IT channels that typically sell Cisco data gear will sell the Cisco VoIP solution or move to selling more of the 3CX system. It will also be interesting to see how cloud options like RingCentral, 8x8, and Switch are deployed in this channel. The key message is that we continue to be in a time of ongoing change and 3CX is an indication that a new entrant can make headway in the market with a combination of product innovation and differentiated channels to market.