Cloud-based UC market pits VoIP players against IT, carrier behemoths

While UCaaS has been primarily deployed by SMBs, larger enterprises are starting to notice
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The market for cloud-based unified communications (UC), also known as unified-communications-as-a-service (UCaaS) or hosted UC, is a new battleground pitting smaller VoIP turned UCaaS providers, such as ShoreTel (Nasdaq: SHOR) and 8x8 (Nasdaq: EGHT), against IT behemoths, such as Microsoft (Nasdaq: MSFT) and Cisco (Nasdaq: CSCO), and larger carriers, including Verizon (NYSE: VZ) and AT&T (NYSE: T).

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UCaaS is the virtualization of unified communications, with the UC functions supplied by a third-party provider as a cloud-based service rather than by equipment located on the user's premises.

UCaaS provides the same functions as premise-based UC, including voice services, email, messaging, instant messaging and presence, audio and video conferencing, mobile client and contact center functions.

The UCaaS market is expected to be worth $1.9 billion this year, up 15.8 percent over the previous year, according to research firm Frost & Sullivan. The market is "very dynamic and vibrant" in the hosted and managed business applications industry, although there are "varying levels of maturity" depending on the applications and the geography, the research firm noted.

Benefits

UCaaS is an attractive option for small and medium-sized businesses (SMBs) because it does not require investment in equipment, services are managed by third parties and technology is updated by the UCaaS provider. At the same time, interest in UCaaS is growing among enterprises as well, particularly those with geographically dispersed locations, because services are deployed through the cloud rather than by investing in infrastructure and equipment.

"If you are a company with 2,000 to 3,000 endpoints and highly distributed, those are the companies we usually recommend go with UCaaS," said Daniel O'Connell, research director for CSP enterprise markets at Gartner.

Diane Myers, principal analyst for VoIP, UC and IMS at Infonetics Research, agreed that companies with many locations, such as retail chains, would benefit from UCaaS because it enables the company to provide the same capabilities and features to all sites without having to deploy equipment at each site.

In contrast, with a premise-based UC product, a company would have to deploy voice lines at each of their locations. "I might have to deal with a different provider at each location. With UCaaS, I collapse it all down. I have one provider, one point of contact, one billing source, one person I am negotiating with and trouble shooting with…. We see that as being a real sweet spot for UCaaS," Myers said.

It's about flexibility

Dan Bieler, principal analyst with Forrester's Business Technology Futures team, said one of the positives he hears from companies implementing UCaaS is that it is much easier to set up communications facilities for new staff because the cloud-based product is scalable and flexible. "It is easier to move people, either separately or within a group. It is easier to adjust to a scenario where people are leaving the company," he explained.

"If you talk to end users, they don't always see a cost savings from cloud deployments," Bieler observed. "Cost is not always the main driver; it is the flexibility element in terms of having a more scalable solution, one that can be upgraded, rolled out quite easily and adjusted to the user interface and policies. These are more important elements than just the cost factor," he said.

UCaaS flexibility enables companies to accommodate a wider range of devices, including tablets, laptops and PCs, through an easy-to-manage interface. It also is able to accommodate a company with a fluctuating workforce, such as a seasonal retail chain, Bieler noted.

He also explained that with UCaaS, "IT managers are dealing with fewer fixed factors because the PBX is no longer on premise. This helps the IT department to have a better return on assets, which some companies are looking at in terms of KPIs [key performance indicators] that they need to work against."

Another benefit is that UCaaS providers have an incentive to offer the latest and greatest features in order to make their product competitive in the market place, observed Elka Popova, industry analyst at Frost & Sullivan. Companies with premise-based systems have to invest in new licenses and new systems in order to upgrade their capabilities, she added.

Challenges

At the same time, large companies tend to prefer premise-based UC because the technology is mature, UC products can be customized and the choice of vendors is larger, O'Connell explained.

The Gartner analyst noted that UCaaS has not proven itself for companies with more than 5,000 employees.

Larger enterprises do not want to be the "guinea pig" for wide-scale UCaaS deployments, Myers noted. "Voice is still the face of a company," she stressed.

Bieler agreed that companies do not like to take risks with their voice service reliability. "Communications is one of most business critical IT functions. People absolutely scream if they can't communicate by voice," he observed.

In addition, larger companies tend to have unique UC requirements, including customized applications, and most cloud-based providers are not able to accommodate those requirements. "Most hosted providers are set up to sell the same service to any company all day long without deviation," Myers said.

O'Connell said customization requires the degree of control that premise-based UC provides: "If you want a lot of specific things or integration with legacy systems, or applications that your organization has, it might be better to go with a premise-based UC solution."

Popova is not convinced that large enterprises necessarily need to go with premise-based UC. "Nowadays, companies are looking to integrate all of the users with a common dial plan and to deliver applications based on users' needs, not their location…. Depending on the setup and how the service provider is deploying the service, a hosted solution may turn out to be more economical and beneficial even for large organizations and their larger sites," she judged.

CIO mindset

Another UCaaS challenge is the "mindset" of the chief information officer (CIO), opined Bieler. "The top three fears for CIOs [are] losing control over certain processes, being locked into a certain vendor and things costing more than they should," he said.

Security is also a CIO fear when it comes to UCaaS. "For some reason, the fear is out that UCaaS or the cloud in general is a more insecure environment…. I don't share this concern. I think the cloud can offer more secure options than on-premise based solutions," Bieler said.

Bieler also noted that it easier to install security patches through a UCaaS product than through a premise-based system. "A cloud-based solution makes it easier to ensure that security patches are up to date because you simply roll them out across the network and devices via the cloud." By contrast, patches have to be applied at each location for a premise-based product, he added.

In addition, there are some hidden costs CIOs do not necessarily weigh when considering UCaaS. "Very few true UCaaS providers are prepared to give you a completely pay-as-you-go model without any type of baseline commitment. So that is an upfront charge. For many CIOs, this is a major stumbling block… because it is not a model they are used to. They are used to license fees or equipment purchases," Bieler said.

Bieler noted that UC solutions, whether CPE or cloud-based, require network upgrades because of the greater traffic volume, which he estimates increases 30 percent to 50 percent on average once UC is adopted. "These costs… can come as a nasty surprise if it is not addressed early in the strategy development process," he observed.

Another big impediment to UCaaS expansion is the large amount of premise-based UC infrastructure already deployed, Popova said. "These systems are at various stages of their useful life in accounting terms and how they are meeting the organization's needs," she said. Switching to UCaaS is often hard to justify in terms of return on investment (ROI), she explained.

Phased approach

For large organizations, migrating to UCaaS should be done in a gradual way. "In general, you can't expect a business to move all of its users to the cloud solution overnight. That will be a natural barrier to rapid conversion of all users," Popova said.

Bieler explained that many companies "take the first step toward UCaaS by moving toward a VoIP-based solution. As a second step, they embrace UC features. The time between the two steps could be a few weeks or even years," Bieler said. "A sweeping migration to UC in one go, we see as the riskiest option, with the biggest potential for hiccups," he added.

A challenge for smaller UCaaS providers is they do not have much brand recognition among larger customers, so this poses a challenge to their expansion into the large enterprise market. The larger UCaaS providers, on the other hand, have to demonstrate that they can provide products that scale, O'Connell said.

In addition, the bring-your-own-device (BYOD) to work trend is fueling the use of cloud-based over-the-top (OTT) providers such as Microsoft's Skype, Google (Nasdaq: GOOG) Talk and Apple (Nasdaq: AAPL) FaceTime, explained Bieler. "They are beginning to make in-roads [into the enterprise]. Usually they are coming in through BYOD. People just begin to use them without official sanction from the IT department, but nonetheless they are emerging as communications features in the enterprise environment…. They need to be integrated into the official UCaaS setups provided by Cisco or Avaya, for example," he said.

"If you look at a scenario where a salesman on the road is arranging a videoconferencing session with his colleagues and a client and uses Skype video to uplink to a Cisco videoconferencing environment, he needs to be able to link into the videoconferencing session. So you can't ignore the Skypes of this world as part of the UCaaS scenario," Bieler said.

As UCaaS is tested on companies with larger numbers of employees, enterprises are likely to sit up and take notice. They will want to benefit from the increased flexibility and lower equipment costs cloud-based UC provides.

These larger firms are likely to gravitate toward providers with name recognition such as Microsoft and Cisco. This is bad news for smaller providers who will likely be relegated to the SMB market. At the same time, these smaller providers could easily be the target of acquisitions by the larger providers looking to expand their UCaaS offerings.

All of this activity in the UCaaS market is likely to provide more choices at lower prices for companies of all sizes.