Is it Industry Consolidation or Industry Expansion?

9 May 2019

In this Industry Buzz podcast, Jim Burton hosts a conversation with the BCStrategies Experts about industry consolidation, and changes in the industry particularly due to the explosion in the video market. Contributing Experts include Dave Michels, Michael Finneran, Roberta J. Fox, Sara Uzel, Tracy Venters, JR Simmons, Blair Pleasant, Joseph Williams and Phil Edholm.

Transcript

Jim Burton: Welcome to BCStrategies Industry Buzz. This is Jim Burton. I'm joined today as usual by our group of experts and our topic is industry consolidation and some of the changes that have gone on in our industry.

Two things prompted this. One was the Wall Street Journal article about the potential merger of Mitel and Avaya. That's an important area. If I follow that, we also know there are a number of players like RingCentral and 8x8 who have publicly stated that they're looking to be acquired.

The other piece of news is the big Zoom IPO, and that's going to be followed by Slack, so we're going to divide this call into two pieces. We're going to start off with the industry consolidation, the Mitel and the Avaya merger.

I think we're going to call on Dave Michels first, because Dave has been spending a lot of time with Avaya. I'm not sure that makes a lot of difference, according to Dave, but we're going to hear from him first on his concepts and ideas about where our industry is headed. Dave, over to you.

Dave Michels: Hi, thanks, Jim. Yeah, I just attended two Avaya events. Obviously, the questions came up around the Mitel rumors. There wasn't a whole lot to be said. Neither company will confirm the rumors. There's not much really to say other than what the Wall Street Journal already reported.

I don't know if I have any particular insights. I will say that nobody seemed to really care. I was at a Partner Council, and it didn't really affect the mood or change the conversation. I was at the APAC event for customers and that really didn't really affect anything.

Now, you titled this the topic around industry consolidation. I don't really know what industry consolidation means. I mean, in the last few months, we've seen Google Voice get launched as a brand new service. We saw Amazon launch Chime as a UCaaS service.

Zoom launched the Zoom Phone as a new service. That doesn't sound like consolidation to me. That sounds like a growing industry. In fact, Enterprise Connect had 91 new exhibitors this year. I think that's a much higher number than usual.

If anything, I think we see industry expansion going on. Now, there's some confusion around the UC part of the broader communications industry. That seems to be more or less commoditizing. That's probably what has fueled some of the valuation in Zoom.

We're seeing companies like Microsoft focusing on Teams, which is much broader than UC; and Cisco focusing on WebEx, which is much broader than UC. There's a broader story. We've got Slack coming up with their, not IPO, but their direct listing. And so Enterprise communications is certainly getting broad; so what's happening to UC? Well, that's kind of commoditizing. That's just a reality, right? Or, that's just what it's doing, and so the vendors are all looking to make their offers broader and more complete; everything from contact center to CPaaS plays, to other kinds of video, and other kinds of bundles.

That's one reality. The other reality is, if you've got Microsoft, Cisco, and Google all offering enterprise licensing agreements that basically include video and offer UCaaS as an option. It's pretty hard to compete enterprise licensing agreements because that positions everybody else as an additional add-on, presuming most customers already have some sort of enterprise license with at least one of those major vendors; so, a lot more pressure in this space.

The Mitel/Avaya partnership, I wrote about that on a post. There are some synergies. It's an interesting combination. I don't really understand the motivation necessarily for Mitel. I mean, Mitel has gone through and bought a bunch of undervalued companies. I think Avaya fits in that category. But, one of the first things they do is they cut all of the fat out. Avaya has been cutting fat out, particularly Chirico, its operations-oriented CEO, they have been cutting fat out for years.

There's going to be some synergy when you consolidate companies because of some redundancies that are naturally created. But, there's just not a lot of fat left in Avaya to cut out. Then, the obvious opportunity is to convert some of that base from premises to cloud. Avaya has been slow to public cloud offers. But, Mitel is no better a position to migrate premises-based enterprise contact centers to the cloud than Avaya is. I'm not really quite sure. I mean, there are some UC. There are some small business or VEN [PH] market opportunities, but not enough necessarily to drive, or justify the combination. But, I'm not necessarily opposed to the acquisition, either. I mean, Mitel has been very successful at M&A. A lot of companies aren't. Avaya is not. There might be something very good that comes out of it. But, I guess I'll turn it back over to you.

Jim Burton: Great, thanks, Dave. Yeah. One of the things that you commented on is their ability to convert their base. One of the challenges both Avaya and Mitel have, they've had channel partners. So they don't necessarily know who that end customer is. As they move to the cloud, and it's something that some of them will be selling directly, the channel partners are the ones that are still controlling those accounts.

Our next person to talk about who always has an opinion is Michael Finneran. Michael?

Michael Finneran: Hi, Jim, yeah. I'm not too sure exactly how to read this. I mean, really we're talking about the companies like Mitel, and Avaya, and our rest of these. Essentially, they're in two businesses. It's business communications and contact center.

They're really driven by completely different forces. I will constrain my comments just to the business communications market. There, I've just got to look at this as the consolidations, the market desperation. You either have a constant, or a consistent, or a shrinking market for the traditional product, which is PBXs.

Of course, they first got banged with Cisco going into the market and then Microsoft. But now, even more importantly, they're being faced with this Uber-like competition. I mean you've got guys like Zoom coming in for video; and Slack coming in for the Team collaboration thing.

The way I look at it, the traditional PBX guys just stole the idea that Team collaboration from guys like Slack, and of course, the entire mobile market for voice.

As Marty Parker always likes to point out; the fact that we just build in a lot of the same capabilities into applications, so what are they going to be left with here? My big question to all of these guys would be, and particularly to McBee at Mitel, because he seems the one of its most aggressive about this. What's the strategy? I mean, are we building something stronger? Or, are we getting more ideas? Or, are we getting better products? Or, we just like making a pontoon boat out of the Titanic and the Lusitania here?

I don't know. I'm trying to figure this out from a business standpoint. All I see thus far is desperation. Back to you, Jim.

Jim Burton: Great. Thanks, Michael. Roberta Fox, I'd like to call on you next. You've got that ability to look at what end users are thinking and doing. What is your observation based on, particularly what Mitel and Avaya have been announcing? Or, at least what's been in the news?

Roberta Fox: Yeah. There are a couple things. I actually agree with some of David's points and Michael's points about enterprise. But, I think the thing that's really interesting is they both have very different architectures and portfolios. Avaya has sort of been the gorilla in contact centers. But, they also have very different human capital of skills and impacts. For those of us, who like the rest of the team that works with these vendors.

That's going to be two different culture fits; which I sort of go, "oh my gosh." The channel concerns, a bunch of the channels have said, "We've already been dropping Avaya." Or, we've been changing here and changing there. What does this mean?

The thing my clients are worried about is the continuity of the expertise. Are they going to keep the brainpower of how to design and support these technologies? As you said, Dave, it's slash and burn.

One of the things I thought about having worked on the distress center stuff the last few years, and also working on the 9-1-1. Worldwide, there's about 35,000, public service access providers that are heavy duty, robust contact centers. That hasn't been Mitel's space. That has been Avaya's space. They all have legacy infrastructures that have to be replaced to move to NG911. That's a big market that nobody else; the other enterprise communication vendors haven't really tapped out.

When I wear my analyst hat, that's the only thing I think could be the secret crown jewel. I don't know if McBee thought about it? But, I sort of went, "Why the heck would you do it?"

The same as some of my other peers; I've got a bunch of clients that are going, "We're going to hold off for a little while, and wait to see, if it goes through, and if it settles." There are a bunch of big acquisitions that have been put on hold since the Wall Street Journal (article).

I just hope they don't get rid of the expertise. Because the clients need it. Then, we'll see what they're going to do with the PSAPs.  Back to you, Jim.

Jim Burton: Great. Thanks so much, Roberta. Since we're on that vein, Sara, you deal with end users as well. What are you seeing?

Sara Uzel: Actually, I got a call from one of our clients that we're in the process of moving forward with an Avaya upgrade. They have put that on hold to determine what this means.

One of the concerns I have is with this announcement, leak, whatever you want to call it, is that Avaya was finally starting to see the train moving again. I'm afraid that will put a halt to that.

Then my perspective from an end user, the areas where I think the merger, or acquisition, Mitel could benefit… One, I think Avaya's call center contact center platform – platforms, I guess I should say – is an area that Mitel could help fill their product line.

I think the DOD and government market is something that Mitel is putting their toes in. I think Avaya has a huge market there, especially in the DOD space. My third area is in the E911 expertise there.

Those are some of my thoughts on the Avaya and Mitel acquisition, whatever we're going to call this. Whether it's true or not.

Jim Burton: Great.

Sara Uzel: The last thing actually, with Mitel, they've gone through so many mergers and acquisitions. At this point, I think that's an official business unit of Mitel.

It seems to me as they buy one, that spins up. It spins down. They start a new one. They just move people from one acquisition to the next.

Jim Burton: An interesting observation. Thanks, Sara.

Tracy, welcome back, by the way. What are your thoughts?

Tracy Venters: First of all, talking about just the business communications market. If we talked about voice, I have to agree with what Michael said. Just, as like industry desperation, and yeah, what is the strategy?

Because at this point, what I see from end users. They don't really care about plain voice anymore. Okay. I know, it's still important. But, they're really looking at things like applications that help make it better. Whether it be collaboration, video, or whatever.

Or, whether it be IoT. Can you build IoT into my platform, things of that nature?  I do think, with the Mitel/Avaya, that it's probably just desperation. I don't know what McBee has in mind. It's almost like he's out shopping yard sales, right, to consolidate.

I think any type of acquisition really needs to be bringing in some very special applications other than just voice that is going to get somebody excited.

As far as keeping the headcount, or keeping the talent, I don't necessarily agree. From what I've seen from Mitel, that they've been very good at that. That's all I have.

Jim Burton: Great. Thanks, Tracy. Why we're still talking to people that deal with end users, J.R. Simmons, what are your observations?

J.R. Simmons: Thanks, Jim. I have got a lot of different thoughts on this because I've been looking at it from that sort of, what would it mean to the industry sort of view? Backing up a little bit to the reference, and Michael, bringing up the, "Is this an act of desperation?"

You had also mentioned before, 8x8 and RingCentral up for sale as well. If I remember correctly, rumors of 8x8 looking for a buyer go back all the way to February of 2017. RingCentral was, I think, August of 2017. Nothing has happened yet with either one of those. Are they just merely toe in the water? Or, are they really actively looking? Is the Avaya thing real or not? It's really hard to say when you're not truly on the inside.

But, all of this tends to have a disruptive feel to the clients like Sara and Roberta mentioned. Clients that would prefer to have a more stable background to make their decisions within rather than jumping forward.

I think there are a couple concerns with the Mitel side. The fact that they have bought out several different product lines from several different providers only means that in some respects, they've got a very diverse portfolio, and sometimes it's hard when you're talking to one of their resellers to know what platform really is the best fit? Or, are you just going to get that sales person's favorite because maybe where they used to work? Adding an Avaya product line to that mix would just further complicate all of the different things that Mitel is trying to support and where they're going for.

I don't know that it would be a positive for the customers, and certainly with the Avaya debt load, I wrote about that recently as well. With that being a three billion dollar anchor still, is that really going to help Mitel any to add still another product line, and all of the extra debt, and end up in a position that is less favorable?

Certain clients are already questioning whether or not Avaya investments in a solution makes sense because of some of that uncertainty. I think a lot of this has to do with the fact that the cloud industry has so many players, that some consolidation is needed. But, when companies as well known and as successful on the surface as 8x8 and RingCentral still have never produced a positive annual net income; Vonage has by acquiring several different companies. But, they also have their residential business to prop them up.

It's not an automatic that you go cloud and you have suddenly this wonderful cash flow balance sheet and income statements that just magically turned around. It's a tougher deal than that.Otherwise, some of these successful companies wouldn't even be for sale in the first place. It definitely has a feeling of uncertainty. Although, some consolidation is probably needed, a little bit more clarity would really help the end users as they try to make decisions. Thanks, Jim.

Jim Burton: Great, thanks a lot, J.R.

Blair Pleasant, what are your thoughts on this?

Blair Pleasant: Thanks, Jim. I think there has to be a real compelling reason for an acquisition. Why do companies do acquisitions? Mainly to gain market share or to get access to a technology; maybe an adjacent technology, or to get the talent, and for economies of scale.

If we're looking at Mitel, clearly their strategy has been to go after market share, and to get a customer base to migrate to their cloud solutions. Frankly, this has worked for them for the most part. Is acquiring Avaya the right move?

No, I'm not sure. We're not going to know. I do like the idea of acquisitions to get access to technologies. We have definitely seen that be successful for a lot of companies.

We've been talking about Slack and Zoom. They're way too expensive, as we said for most companies. I'm not sure, if they would get acquired, except for the usual list of suspects, Oracle, Amazon, Google – and well, unlikely Microsoft at this point.

But, I think what it comes down to, do customers want best of breed or a total solution? Because that kind of would have impact on what these companies are going to do. Now, if I'm the customer, do I need Slack and Zoom to be one company? Do I need RingCentral and Zoom to be one company? Or, is it okay to work with two separate companies, or more than two?

I think more and more enterprises are willing to work with multiple vendors. The need for a single vendor to own all the different types of technology isn't as important and isn't as compelling. But then, you have the issue of is a competitor going to buy up a company that you're partnering with?

We've seen that happen. That of course, it limits your options. Sometimes defensive acquisitions makes sense. We haven't talked too much about contact center.

But, I think we're going to see a lot more consolidation when it comes to that. Who is going to acquire Talkdesk or Five9? Is Verint going to acquire a contact center vendor like what NICE did with inContact? Is Microsoft ever going to acquire a contact center vendor?

That's unlikely, but you never know. I expect to see Zoom maybe do more in the contact center space, and maybe do an acquisition there. Then, for companies that do want that Zoom-type of capability, but there's the price tag, there are other companies like Highfive that they might want to look into.

I think we're going to see a lot more consolidation as far as acquisitions. I totally agree with Dave that the market is growing. But, we are going to see a lot more acquisitions.

But, I think it has to be for the right reasons. Unless there is a real good reason, just doing an acquisition for the sake of it doesn't really make sense.

I think, as I said before, companies are more open to doing best of breed-type solutions, and working with more and more vendors; and maybe having the VAR, or the system integrator do some of the internal work, or some of the integration work.

I don't know what's going to happen. Obviously, none of us have the crystal ball as far as that goes. If you're not doing it for the right reason, then don't do it. That's kind of my two cents.

Jim Burton: Great, thanks, Blair.

Joseph Williams, I'm going to turn over to you. I'd like you to give us your thoughts on industry consolidation that we've been talking about. But, help us get into the discussion about what's going on in the video market? What's going to happen there, and now that Zoom has gone public? Somebody that, as many of us thought in the past might be acquired by someone, probably out of the market for being acquired at their current cost.

Joseph Williams: Hey, Jim. First of all, to the topic at hand, which is Mitel/Avaya. If you guys actually pay attention to Avaya, their board is not a particularly strong board. They've had trouble attracting any kind of heavy hitters to help them through these times, which have proven to be very challenging for them.

Mitel doesn't have a particularly strong board, either. But, if you look at the respective board compositions, I can see where Mitel at this point is going to end up being more aggressive.

Avaya hasn't done anything since they acquired the Seattle-based Spoken Communications company. And the word about how that integration is going is…you know, odd.

So Zoom’s last round was a very impressive round. But, honestly, Jim, were we any more surprised than we were when Fuze did their big round? Suddenly they leaped out of nowhere into being a big company.

We have been in a situation where we've had these D rounds that have been hard to justify by macroeconomics. But apparently, investors see something there that maybe we as industry analysts who are feet on the ground, don't quite see yet in terms of equity and return to equity.

But, you asked about the video industry. The last time I checked, and it has been a while. But, there were over 500 companies worldwide that have received some kind of venture backing in the video space. This is a very crowded space.

Video is very exciting for a lot of reasons. I would argue that they're not as exciting as smart speakers now, but they're still very exciting.

The Zoom round seemed to show that private equity thinks there's a lot of upside here. Does that portend good things for BlueJeans and other kinds of companies in this space? Probably, I mean, one of the things I've learned over the years is that private equity money tends to follow other private equity money.  I think we're going to see more investment and more consolidation.

It actually would make a good article. I should get with Dave on this. Right up, the last five years, how much M&A activity have we actually seen in this segments of unified communications. I think the numbers would be startling. It's good work that needs to be done. That's my take, Jim.

The other side of video I think is really interesting is that we're getting to a point where the Internet of Things is starting to really bleed into this space. I was at Mobile World Congress this year. I saw an awful lot of IoT things that had a video component to them. It didn't go through any service like Zoom or anything like that. That may be also an area that we should pay attention to. That's my nickel's worth.

Jim Burton: Thanks a lot, Joseph.

Dave, I'd like to circle back to you and get your thoughts on the video space and what we can expect to see now that Zoom has gone public?

Dave Michels: The video space is absolutely the hottest sector of the enterprise communications. I did my Enterprise Connect research note, and I actually went through all of the press releases. I tried to categorize them all and try to figure out what was going on.

Contact center got a lot of noise, but there really wasn't much announced. It was that everybody was doing the same chatbots and augmented AI, augmented agent stuff. It was almost, everybody was dancing around the same thing.

But, the amount of innovation and announcements around video were phenomenal. I mean, everything from the device makers, Poly, and Logi; I mean, both BlueJeans and Lifesize hit, and was it 100 million in ARR now, something like that?

Every keynote at Enterprise Connect was basically highlighting video conferencing in one way or another, every enterprise vendor keynote. The space is absolutely on fire. Then, after Enterprise Connect, comes Zoom's IPO. Absolutely, it's the space that's very interesting right now.

There are a lot of reasons why. I'll be talking a little bit about this at the UC EXPO coming up. I'm doing a session on video first communications, but the paradigm has just tremendously changed. I mean, the barriers to entry or the barriers to using video are all disappeared. The vendors are just prioritizing video so heavily right now in their solutions. Just a lot of excitement, and I suspect we're going to see a lot more video news throughout the year.

Jim Burton: Thanks a lot, Dave.

Phil, we haven't heard from you today. What are your thoughts?

Phil Edholm: Thanks, Jim. It's an exciting topic. But, before we talk about consolidation, I think we should talk about convergence. Because I really think convergence still is the thing driving our industry.

Convergence started with IP convergence in the transport back 20 years ago. It went forward to convergence with personal productivity software; i.e., Outlook, and the conversion with Outlook and Office. Now, it's convergence with business process and application, the new transformation.

I think what you see very interesting. You often see, and though we think of this as a singularity industry. Depending upon where your company is focused in those layers of convergence, you're at different points on the maturity curve. Where we're seeing consolidation in the convergence and the transport level, because of the entry of people like Microsoft and Cisco into the marketplace, we're not seeing the same convergence and the same consolidation up at the top. The convergence that's happening up at the top where the applications are converging, that's where new opportunities are being creating.

If you look at the startups that we saw at Enterprise Connect, the vast majority were focused on really one of two areas: their application convergence or on customer experience management. I'll talk about that just briefly in a second.

I think that's the first thing to think about. The second thing to think about, and we have talked very specifically about Mitel and Avaya. Mitel has had an avowed strategy to change the industry or position themselves in the industry. That has been Rich McBee's position, that consolidation and what he has called rolling up the category is actually a great way to move forward. I believe that you combine that with two fundamental strategic elements.

The first is having a cloud based hybrid solution that allows you to sell additional value functionality to those premise install base customers. That's why Mitel has built CloudLink. It is really focused.Now, whether they will be successful there, obviously is another question. But, they're definitely focused. It is part of where they're going.

Essentially what that does, CloudLink allows you to offer the same services from the cloud, and have it consumed by different platforms by having a standard, common abstraction, and interface layer. They're building that.

It's very similar to things that were built like ACE, which is now at Avaya. The reason that's really important is that they have a huge install base. Mitel claims 60 to 70 million. If we assume 60 million install base seats in Mitel, Avaya is 100 to 120 million.

If we add those together, we probably have 180 million seats of the 550 million global seats of business communication that are using either Mitel or Avaya today. That's a huge install base to be able to sell things into. In fact, it's a great opportunity for cloud migration, too.

That's really the second part of the strategy, is to be in a position to have an advantageous proposition to those 180 million seats to move to the cloud. The reason this is so exciting in the financial community is moving to the cloud or moving to an MRR business model could potentially be hugely profitable in this space.

If we take 180 million seats; let's just take Mitel, for example. With 60 million seats and 1.2 billion in revenue, that means on average Mitel is getting about $20 per year or about $1.70 per month from their install base seats that are in the market today. If those are translated to a 15 to 20 dollar UCaaS cloud monthly MRR, you can clearly see. That's a 10x increase in revenue. Because the margins will be fairly similar in the cloud service, potentially and slightly lower because of the PSTN access costs. But, if we look at that, the net result is a dramatic increase in business value. That's really the second strategy, that movement to the cloud.

I personally think there is a great opportunity. I think Mitel has shown that they understand how to begin to build for this future. But, both companies continue to face the challenge of an eroding install base and major competitors with adjacencies in Cisco, and Microsoft, and their IP, and personal productivity adjacencies.

The last comment I think that's really important, and one that we won't have enough time to really talk about today: while Mitel and Avaya on the UC telephony side potentially could merge together in a fairly smooth way because of Mitel's view of keeping platforms and adding value on top of them. The contact center business that's the large dedicated contact center business where Genesys and Avaya compete, and are the primary players is, I believe, a very different market. I think to succeed in that market long-term, Avaya will have to move to be more of a customer experience company, not a contact center company.

Again, if you think about consolidation, or convergence, they're still focused out at the contact center layer. Clearly with workforce automation, and analytics, and AI, more and more has been added on top of that.

But, the real big transformation and convergence, I believe that's coming is convergence between the contact center and the web front-end that does web self-service. I believe Avaya has to become much more effectively engaged in the complete customer experience model to make the migration from where they are today as a leading contact center player in those large contact centers to be a more complete CX provider.

Finally, services is a huge area for Avaya. It's half their revenue. That's very unusual in high tech for companies to have both product and services revenues at that scale. I think that will be something that has to be watched. Because clearly, if you look at Mitel, Mitel has a channel service based model. As you bring those together, I think it will be challenging. It would not surprise me, for example, to see the services business actually be sold off as part of this, a potential acquisition or merger strategy, to essentially clear the way to have a company that has commonality across all of its channels and all of its capabilities. Anyway, back to you.

Jim Burton: Thanks a lot, Phil.

Thanks, everybody. This is a wrap. I'll look forward to our next podcast. Again, thank you for your time today.