Who is Making Money on UC?

28 Sep 2014

This month I had lunch with Bill Haskins, UC senior analyst and partner with Wainhouse Research. We spoke about a great many things, some of which will pop up in future blogs, but one particularly interesting topic revolved around the question of who was making money from UC. This was a question I asked Bill because I had recently delivered two consulting engagements with different European firms that were struggling to understand whether they could profitably enter the UC market. When they were running the numbers they just couldn't get to the kinds of returns suggested in IDC's market forecast.

As you might expect, there is not a lot of evidence attached to the actual monetization of UC. A number of vendors have commissioned analysts to make a business case for channel or systems integrator partners (e.g., https://partner.microsoft.com/download/global/40173188) but actual empirical data is scarce. The companies themselves know but most do not provide public financial results that are specific enough to show where and how in the value chain the profits on UC are being made.

Bill and I agreed that consulting firms focusing on UC seem to be doing well. Many of my colleagues here at UCStrategies own or are part of a UC consulting firm, and by most accounts they are healthy and growing. Similarly, consulting teams ranging from boutique-sized Implement.Com (recently acquired by Arkadin) to Unify2 to HP, Dell, and BT all appear to be thriving. That said, I don't have data on their actual results and Bill, who actually does know, wasn't sharing details. Consulting margins are usually in the low double digits, though, so as more firms enter the market margins will likely compress. Consultants usually make money but services are not the most profitable segment of most businesses.

The UC vendors seem to fall into three camps in terms of financial performance. Microsoft has a licensing model that generates revenue from Lync licenses even when the licenses are not deployed. By most accounts Microsoft is doing well and probably very well in terms of margins. Cisco does at times report by line of business in a way that allows you to estimate its UC revenues, and they appear to be mostly static - depending on how you count things; it isn't clear how healthy margins on their UC business might be. Some of the other big players are in rebuilding mode after shuffling their products and their organizations to find the right product and people mix for their offerings - and their current financial results speak for themselves. Some analysts are suggesting there is a slugfest for market share amongst the vendors and that, in general, vendor margins are declining.

Infrastructure vendors for UC (servers, routers, SIP trunks, gateways, etc.) are in a brutal competitive environment. Similarly, the trunking vendors are aggressively swinging at each other. Judging by everyone's stock prices it is pretty clear that margins are under pressure even where revenues are growing.

Service providers, both on-premise and in the cloud, seem to be struggling. At the UC Summit in the session I ran on the channel the mood was optimistic in public but privately folks were confiding that they were struggling to produce the returns promised to the market or to investors. Sales cycles were longer and more expensive than early market entrants had expected and there has already been a wave of consolidations as companies merge to find new synergies, products, and/or markets. Bill wasn't showing his cards on this particular sector either but he acknowledged that there have been bumps in the road.

The device vendors seem to be having mixed results. Room systems vendors such as Polycom and Smart Technologies are reporting financial challenges but it appears that headset vendors are thriving. Infonetics Research recently reported a 4% QoQ revenue growth in IP handset sales at the start of 2014 so by extension it is likely that all UC handset sales are growing, although margin results are unknown.

So we go back to the question - who is making money in UC? Love to hear your thoughts - please comment below.



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