Is Microsoft Becoming a Serious Cloud Telephony Player?

Since 2000, the enterprise communications market has gone through an incredible transformation. The first wave of change, VoIP, transformed the market in incredible ways. From a technology perspective, nodal PBXes gave way to centralized solutions and Commercial Off The Shelf (COTS) servers, now leading to virtualization into both private and even public cloud servers. The pre-2000 world where every device was a 12-key phone gave way to today's environment, where there are more non-phone endpoints (PCs, tablets, mobile) than phones in the typical telephony system. And while technical advances like these were amazing, the business change was even more dramatic. Cisco, who was not even a telephony vendor in 2000, has emerged to become the largest VoIP and business telephony vendor! In fact, Cisco stated at their 2015 Collaboration Summit in December that it has shipped 85 million phones (of which more than 90% are probably still in service). This makes up about 15% of the worldwide installed base (based on the 480-500M global business telephones that PKE Consulting estimates are currently in use). How did they go from zero to 15 percent in a little over a decade? Cisco was able to leverage its strong position in data networking and strategic account relationships to win the transitions to VoIP and dramatically grow its market share to become the largest vendor of business telephony (by revenue) on the planet.

And it seems like Microsoft is taking a page out of Cisco's playbook.

Like Cisco, Microsoft has a strong foothold in a market adjacent to the UC market - in this case, desktop productivity tools (e.g. Microsoft Office). Microsoft has been leveraging this position to win share in the enterprise conversion to UC. In fact, according to Zig Serafin of Microsoft, 79 percent of U.S. enterprises are currently using or planning to deploy Lync/S4B for telephony. While the Lync/S4B products often started as an IM/Presence deployment, many enterprises migrate to more advanced features over time. In 2014, this resulted in a dramatic increase in companies looking to Microsoft to provide an on premise telephony solution. According to MZA Ltd., Microsoft increased its share of the shipped telephony lines in North American systems from 12% in 2013 to 15% in 2014. Assuming a similar increase in Microsoft and decrease in Avaya in 2015 as happened in 2014, Microsoft and Avaya will probably be similar in market share when the 2015 results come in.

Now here's where cloud companies should be paying attention - all 400 of them that are selling cloud telephony and video solutions. Microsoft has made it clear that it is going to offer communications services through the Office365 (O365) cloud offering. So, are Microsoft and O365 potential challenges to this emerging market and the range of cloud communications suppliers that exists today? The cloud market continues to grow. If you add up the cloud vendors based on their subscribers, there appear to be about 15-20M true cloud (off-site with a monthly fee) seats deployed globally - 10M on BroadSoft, 2.9M on Cisco HCS (according to Cisco at a recent Collaboration Summit), and PKE Consulting estimates 2-3M on RingCentral/8x8. This market is clearly growing. The general estimates of cloud telephony growth from a number of analysts is between 20 and 40% annually through 2020. Thus, barring any unforeseen major disruptions, it is reasonable to assume that the overall cloud market should grow to about 21M by the end of 2016, and reach 27M in 2017.

Whether or not you think Microsoft is a threat to cloud vendors, there is no denying that it is heavily focused on the cloud. However, the primary focus is on moving Office users to Office 365. Microsoft appears to be rapidly moving a large percentage of Office users to a cloud business model with O365. In fact, in February 2015, Microsoft watcher Tony Redmond said he believed there were about 42M O365 subscribers at that point, and predicted that they would grow to be around 60M by the end of 2015 (note: Microsoft does not publish specific data, though many remember that Microsoft CEO Satya Nadella said in the June earnings call that there were 15M O365 consumer subscribers at that time, growing at about 1M per month. This would mean that about 66% of the 60M users predicted by Redmond would be business users). Assuming a continued O365 subscriber growth at about 70% annually, there will be about 100M O365 users by the end of 2016. With the new cloud S4B offer that Microsoft is putting in place, all of those subscribers (starting in North America first) will be able to upgrade their cloud O365 to be their complete telephone service - typically for a list price point of around $20 for unlimited domestic calling or $32 for unlimited international calling (includes $8 for S4B enterprise telephony functionality and $12 or $24 for PSTN access).

A critical point is that Microsoft does not have to incur the cost of customer acquisition that other cloud companies like RingCentral and 8x8 do, as they will already have 100M O365 customers to offer the new service to. With customer acquisition accounting for about 60% of most current cloud business models, this is a huge advantage for both pricing and profitability for Microsoft in the telephony cloud.

This means that if only 10 or 20% of the O365 customers/subscribers move their telephony to Microsoft by the end of 2016, Microsoft will have a range of 10 to 20M subscribers to its telephony service at that time. Assuming those are all net new telephony cloud subscribers, Microsoft market share would be 33-50% of the cloud telephony market at that point - with minimal effort. If 50% of the new Microsoft cloud telephony subscribers move to O365 telephony from an existing cloud telephony service, Microsoft share will be even larger at 50%-66%.

As a point of differentiation, let's look at what Cisco is doing - in its recent announcement of the Cisco Spark Cloud Services, Cisco decided to partner with third party IEC vendors for PSTN access. Cisco indicated a key factor in its decision was to not be a regulated company. The challenge for Cisco is mushing multiple SIP providers together and still hoping for a seamless integration from an initialization, billing, support, and troubleshooting perspective.

On the other hand, Microsoft's commitment to the cloud can be judged on the fact they have bitten the figurative bullet and have made efforts to be a single source cloud communications provider. Some challenges that remain ahead for them is how they will roll out these new PSTN services across the full range of regulated markets that are critical for enterprise offerings. The question is not whether Microsoft is moving to be a major cloud communications player (it was proven above that it is), but whether the O365 Skype for Business offer will become the dominant subscriber shareholder (or one of a very select few). Will the O365 user base see Microsoft as a viable and trustworthy telephony vendor? Will Microsoft succeed in weaving together the necessary regulatory compliance to offer phone numbers and local access in the range of countries required for success? How long will this take? For example, Skype has already had issues with regulatory compliance in Belgium.

All that said - assuming that Microsoft can resolve the compliance and delivery issues - a communications offering integrated with O365 at the right price will be compelling for many of the companies subscribing to the Microsoft cloud service for their productivity software. For all of these reasons, it is clear that Microsoft intends to be a major cloud telephony/communications/collaboration player and all strategies in this area need to factor Microsoft in the market. The company's focus on O365 and commitment to becoming an Interexchange Carrier to assign and manage phone numbers demonstrate its commitment to the market.

Update, March 15, 2016: At Enterprise Connect last week, Microsoft announced it will offer a preview of PSTN support in the UK starting in May. There was no roadmap for additional countries. Cisco, on the other hand, will work with telecom partners to offer the Spark solutions with PSTN connectivity. Cisco said it would be "available now" and listed some price indications. This confirms the approaches: Microsoft going direct and Cisco working through telco partners.

By Itay Rosenfeld, CEO of Voxbone