The Search for Sustainable Growth in the UCaaS Market
Exploring why mergers and acquisitions are likely to reshape the UCaaS industry in the next decade
"A beauty contest," someone called it, referring to rumors about leading UCaaS providers 8x8, BroadSoft, and RingCentral seeking buyers or entertaining offers from acquisition suitors.
The metaphor aptly describes the current state of the UCaaS industry, which is gradually transforming under the impact of rapid technology evolution as well as ongoing mergers and acquisitions. What makes 8x8, BroadSoft, and RingCentral's suspected "for sale" status particularly intriguing is not only that they all possess significant clout in the industry, but also that the M&A rumors come on the heels of recent highly impactful acquisitions (e.g., Mitel/Toshiba/ShoreTel, NetFortris/Fonality, Fusion/Birch Communications, Windstream/EarthLink/Broadview, Telepacific/DSCI). None of the three companies is commenting on the rumors, but keen industry observers are contemplating various probable scenarios that could potentially disrupt the market.
It's important to review some of the key trends in the UCaaS market to better understand why M&As are likely to reshape the industry in the next decade.
Robust Growth Rates Attract New Market Entrants, but Industry Transformation Challenges Existing Participants
The North American UCaaS market is expected to maintain double-digit growth rates throughout the next decade. These are driven by growing customer demand for more flexible technology consumption models to support digital transformation projects. Premises-based communications solutions reaching end of life and increasing availability of compelling UCaaS offerings are also encouraging the move to cloud communications. Going forward, UCaaS adoption will also be impacted by the emergence of strong market participants with visionary strategies, broad geographic presence, solid financial performance and affordable, feature-rich solutions.
However, UCaaS providers face many challenges in their pursuit of revenue growth and market share gains. Rapid technology advancements and shifts in competitor positioning create a sense of uncertainty among businesses, and this uncertainty compels them to delay investment and upgrade decisions. Furthermore, many businesses still favor premises-based solutions for security, control, customization, and integration reasons.
Provider repositioning and strategy realignment are likely to determine the industry's evolution and growth trajectory over the next few years. Successful M&A integration, financial restructuring, streamlined operations, international expansion, and solution repackaging will aim to improve industry health and boost customer confidence in service and company long-term viability.
Invisible, but profound, industry undercurrents will also affect competitor ability to thrive. While generalized UCaaS offerings will continue to experience rapid adoption, embedded communications solutions are poised to shake things up, as I noted in my previous No Jitter post, "Where Is the Enterprise Communications Industry Headed?" The emergence of "productivity UC," "vertical UC," and "Internet of Things UC" is likely to disrupt provider business models, solution prices, customer use cases, and other market dynamics.
As communications vendors provide open application programming interfaces (APIs) and as communications platform-as-a-service (CPaaS) offerings gain traction, businesses will have more options for deploying communications and collaboration functionality from both traditional communications providers as well as completely new market entrants previously focused on software as a service (SaaS), cloud/infrastructure as a service (IaaS), or other solutions.
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