Monday, June 18, 2018

How Big is UCaaS Going to Be?

I realize I am a skeptic about claims that unified communications “as a service”  is a “young” or especially fast-growing segment of the industry.

I do not see UCaaS as especially young. Keep in mind that suppliers have been touting and selling hosted communications solutions for two decades, and UCaaS still is purchased by less than 18 percent of U.S. businesses, for example, even using generous definitions.

By most estimates, actual UCaaS revenue is growing rather slowly. In its historically fastest-growing market (North America), UCaaS is growing about four percent annually, according to Transparency Market Research, although some forecasters believe license growth will be higher.

UCaaS growth rates of 10 percent are seen as realistic, some forecasters believe, a growth rate with some historical precedent.

That is not to deny the possibility of a step change in adoption; an inflection point where growth accelerates. If you consider UCaaS an information technology innovation similar to personal computing, you are open to the idea that rather significant time can elapse between investment and realization of quantifiable business value. That productivity paradox is an old story in information technology.

Nor is the size of the revenue opportunity so large. Had business phone systems been a big business, service providers would not have allowed third parties to dominate the business. Roughly the same thing can be said about UCaaS.

As important as UCaaS is to some segments of the ecosystem (some business users, all suppliers and their sales partners), it remains my contention that UCaaS--as well as the broader UC category--in the context of overall service provider revenues, remains a smallish niche.

In part, that is because premises solutions continue to make sense for larger entities and enterprises. So long as UCaaS remains a “by the seat license” model, at some point, a larger organization saves money by buying and operating its own servers and switches.

The other strategic issue is that, as important as voice communications remains, it is not viewed as driving higher value in the business, in the same way that other software-based initiatives do (e-commerce, artificial intelligence, machine learning, mobility, internet of things, robotics). And that means UCaaS remains a “cost of doing business” issue, not a “transform and grow the business” issue.

Consider that the global fixed wireless revenue stream now is about the same size as the global unified communications revenue stream (both UCaaS and premises-based solutions), if one excludes internet access and other business data access revenue that supports UCaaS. Some estimate as much as $10 billion of the total $28 billion of UCaaS revenues actually are data access pipes, not UC services and solutions. That suggests data access services represent as much as 36 percent of total UCaaS revenues.

In other words, actual USaaS revenue (excluding business data access services) probably amounts to about $18 billion globally, about the same size as the present fixed wireless revenue stream, and nobody considers fixed wireless anything but a small niche, in terms of global revenue and solution set, in an industry that books $1.2 trillion annually in total revenues.

Perhaps more to the point, it is not likely that UCaaS or UC, for that matter, can grow too much, even if it displaces all of the present business demand for phone service, conferencing and other “unified” communications capabilities.

Among the other nuances is the fact that the “UCaaS” and unified communications markets generally include a variety of services that used to be separate, including
business phone service, conferencing, international long distance calling and business internet access, UC servers and software and phone systems. So what most observers mean by UCaaS includes several services we used to track quite separately.

And it must be noted that although some of those constituent services and products continue to grow (internet access the best example), others are in long-term decline (phone systems), while retail price pressures in others (conferencing) are pushing down unit prices even when volume grows.

As important as voice and related communications are for businesses and other organizations, those costs of doing business are dropping, because there are a growing number of alternatives. In a real sense, mobile voice has supplanted much business need, even as UC costs have declined (or, more correctly, as the value-price relationship has shifted) as well.

The point is that UCaaS can only get so big, since business voice and communication solutions are a relatively small part of overall service provider revenues, and a smallish component of business spending on information technology.

Also, voice communications now are a cost of doing business, and less a perceived driver of revenues, facing rival (and often cheaper) communication alternatives. The cost per interaction using messaging or chat for customer service is far less than using voice.

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