Incumbent Providers Hold Key to $10 Billion Cloud PBX MarketIncumbent Providers Hold Key to $10 Billion Cloud PBX Market

The incumbent service provider represents the mature, large, time-tested network company, with world-class facilities, proven in deploying large communications systems.

The cloud PBX market could easily attain $10 billion in annual revenue. Quickly reaching this target depends largely on the incumbent service providers and how they perform in the all-important large enterprise market segment. These service providers--most have been in business for decades--are strongly positioned to be leaders in the cloud PBX industry and reap the largest market shares. Many, though, are facing headwinds selling large enterprise customers on their value and commitment to cloud PBX.

Purchases of cloud PBX are split between large enterprise customers and small and midsized businesses (SMB), with the balance between enterprise and SMBs not expected to change considerably over the next several years. More than a hundred service providers sell cloud PBX today, including dozens of small, aggressive companies. We've benchmarked many cloud PBX vendors and found several examples of good infrastructure, leadership, marketing, and customer value.

The target customers, both for incumbent service providers (the telcos) and their cloud PBX competitors, run the gamut from small businesses to large enterprises. Many providers have at least a few customers in every camp. Incumbent service providers are naturally positioned to be very strong in the enterprise cloud PBX market; by targeting the enterprise, incumbent service providers may have a better footing than some less established competitors to propel the cloud PBX market to the $10-billion level.

Incumbent Service Providers are Enviably Positioned
Some cloud PBX service providers, although not all, can satisfy the expectations of large enterprise customers. We anticipate the enterprise market will account for around half of the cloud PBX industry going into the future, which means incumbent service providers may have an opportunity to capture a sizeable market share.

Right now, cloud is a small part of total PBX industry revenue. However, it could be the next big thing for the business telephone system market. The first major milestone should be to get cloud PBX sales to $10 billion a year. That's a long way off and will take some doing.

Let's put a $10 billion cloud PBX market into perspective. In 2013, total global PBX industry sales to end users were around $47 billion. If cloud PBX had been $10 billion of that number, which it wasn't, that would have given cloud PBX a respectable 21% of the PBX market. That's not an unrealistic target considering what we believe is a large and ready market for cloud PBX--but as mentioned, it's a ways off.

Centrex Heritage Cloud PBX is the current generation of Centrex, which for decades served a large customer base and delivered stable and recurring revenues to the carriers. It was principally a flagship offer for their largest customers. Government agencies, state universities, hospitals, extremely large enterprises--the majority with private networks--were served a turnkey solution, billed monthly from the carrier. Notably their equipment, service and reliability were peerless.

Centrex for small businesses came later. What these customers enjoyed was also a reasonable set of features at a fair price and the opportunity to trade off phone system capex for opex. All of the above is essentially what cloud PBX offers today.

In time the demand for Centrex significantly relaxed. It was overtaken by several forces, but two stand out over the rest. One is the value proposition of PBX equipment companies that could not afford to give ground to the carriers. The second is the carriers themselves, who shifted their own priorities.

Customers never rejected the core attributes of a flexible, reliable, reasonably well featured opex solution for PBX needs. Essentially it was just better marketing by competitors that collapsed the Centrex business. From this environment, the Cloud PBX industry has emerged.

Most cloud PBX service providers we've studied target business customers of all sizes, across all industries and with scant restrictions on geography. Since the speediest buyers are price-driven small businesses, most competitors find themselves gravitating toward this segment. While being a safe harbor for all competitors including incumbent service providers, it is possibly not the market segment these larger providers are best suited for.

Few Competitors Can Match Incumbent Service Providers
To an enterprise customer, the incumbent service provider represents the mature, large, time-tested network company, with world-class facilities, proven in deploying communications systems larger and more complex than those of its biggest customers.

These service providers are frequently the best-financed competitor. Many have offered Centrex services for decades. They have processes, NOCs, data centers, BSS and OSSs. They scale quickly. In other words, the incumbent may represent a rock-solid choice for the enterprise.

These attributes also allow incumbents to distinguish themselves from many, though not all, cloud PBX competitors. The incumbent service providers may be in one of the stronger positions to meet the cloud PBX needs of the large enterprise customers.

Small business customers receive pretty much the same benefits as enterprises, but what drives their buying decisions is commonly different. Small businesses may be inclined to trade certain features and services for lower prices. Our benchmark research shows that some service provider competitors to the incumbents are positioning themselves to capture and retain the majority of the small business market. Yet the SMB cloud PBX market is relevant to all service providers since it accounts for half of the hosted PBX industry. What the incumbent must decide is where this SMB market fits into the carrier's priorities.

The cloud PBX is a competitive marketplace and no service provider is assured of success. However, incumbents may have a strong opportunity take as much as half the market. It could depend on how they place their bets.

Eastern Management Group published a 2014 white paper for service providers who are conducting a strategic review of their cloud PBX business or doing a first time business case to enter the cloud market. It's entitled "Conducting a Cloud PBX Strategy Review" and is available free on request here.

Eastern Management Group is a consulting and research firm established in 1979 and providing marketing consulting services to more than 100 service providers and more than 400 clients worldwide.

Eastern Management Group is a consulting and research firm established in 1979 and providing marketing consulting services to more than 100 service providers and more than 400 clients worldwide.