Metaswitch would describe it as a move into a rapidly-growing market where customers are asking for choices. According to Infonetics Research, service providers are spending $350 million a year buying SBCs. By 2015 (just four years) they will be buying $1 billion a year worth of SBCs.
Acme Packet furthermore reports gross margins of about 82 percent. Huge gross margins
“Candidly, service providers are asking for alternatives,” says Patrick Fitzgerald, Metaswitch Networks VP.
Acme Packet has for years pointed to its dominant market share. Infonetics estimated that Acme Packet had 52 percent of the SBC market in 2009, almost four times that of any competitor. Dominant market share Dell’Oro Group in 2010 estimated hat Acme Packet had 55 percent of the SBC market.
Metaswitch says Acme Packet has 65 percent to 70 percent share of the service provider and enterprise markets for SBCs.
Some 38 Metaswitch customers already have placed orders for “Perimeta” devices, says Fitzgerald. Perimeta
In many ways, the move into the SBC market illustrates some enduring issues in business strategy. In recent days, as intellectual property lawsuits have escalated in the mobile handset business, we have gotten a reminder of the potential importance of patents and intellectual property ownership. Patent lawsuits proliferate
In fact, some believe the older pattern, where many device manufacturers simply licensed operating systems, might be changing. Some believe it is possible that the dominant pattern will be “essentially proprietary” strategies where each major platform consists of bundled OS and device, on the Apple model.
Keep in mind that Metaswitch Networks has, for many years, been a supplier of the underlying original equipment manufacturer software at the heart of an SBC. In other words, as Microsoft powers many PCs, and Android powers many smart phones, Metaswitch already powers many SBCs.
That isn’t to say the smart phone or PC OS model will develop in the SBC market, but only to suggest that intellectual property ownership confers strategic advantages that are not always immediately obvious in the earlier stages of some markets, but can emerge as strategic advantages later.
Some might note that the move into SBCs illustrates another enduring business issue, namely “channel conflict.” There are many instances in the telecommunications business where a supplier has to make difficult choices. Where a supplier operates in both the wholesale and retail parts of a business, there always is some potential for conflict between a firm’s wholesale partners and the supplier’s own retail efforts. Channel conflict
The analogy is the growing suggestion that device manufacturers ranging from HTC to Samsung might have to develop or acquire their own operating systems as other significant portions of the market evolve.
Android now has a “special” relationship with Motorola Mobility. Microsoft has a favored relationship with Nokia. Apple is Apple. Research in Motion always has used its own proprietary OS.
Some would note that Metaswitch now faces channel conflict in a way it has not, in the past. But that’s part of the enduring business strategy discussion. What should any firm do when it is an OEM supplier, and end users start asking it to develop its own retail products based on the underlying intellectual property?
It is easy to say a firm should avoid channel conflict. But there often are cases where end users (the market) asks or demands that an OEM supplier also supply retail products. There might be other cases where an OEM simply sees strategic value of such scope that some amount of channel conflict is the price to be paid for some important strategic step.
In fact, Microsoft and Google both face some degree of risk in developing favored relationships with a particular contestant in the smart phone market, even as the advantages also are clear. The point is that Metaswitch faces classic business issues of the case study sort.
The analogy is that Metaswitch supplies an operating system the way that Google or Microsoft do. Both those firms have important business models built on supplying “open” software to many partners. But both those firms also have significant relationships with a single retail brand in the end user market. Metaswitch now will have that same sort of relationship in its OEM business and as a supplier of the “Perimeta” line of SBCs.
No firm would casually risk such channel conflict were the potential rewards not large enough to offset the risk. In this case, Metaswitch is making strategic moves on a number of fronts to reposition its business. Virtually all of those moves carry some degree of risk.
But it is hard to ignore 82 percent profit margins in a retail business where the firm already supplies the intellectual property, nor a business where Metaswitch routinely has sold and installed SBCs on behalf of its retail customers for quite some time, giving it a view of the real world deployment issues and perspectives of its retail customers, in the SBC space.
It is hard to ignore a product whose value is such that sales volumes could triple in four years. And it is hard to ignore getting into a business when a firm’s customers say they want the firm to do so. Channel conflict is one sort of issue. Ignoring the clear requests of a firm’s customers is another sort of danger.
It’s a classic business case study.