Enterprise Communications Market Enters New Competitive OrderEnterprise Communications Market Enters New Competitive Order

Cisco Systems has ascended to the top competitive step of the North American enterprise communications market less than a decade after its Selsius Systems acquisition. During the past year, Cisco has shot by long-time market leader Avaya for PBX market supremacy. Cisco is also the market leader for total CPE shipments (PBX and KTS/Hybrid line station shipments, combined), although Avaya and Nortel are close behind (see Figure 1).

Cisco’s rapid ascension signifies a changing of the guard few would have predicted at the beginning of the millennium. Cisco, though, should not be too complacent in their current position, because another competitor – Microsoft – is biding its time on the sidelines with the potential to challenge them in a few years, while another – Google – remains in the shadows posturing and planning. Interesting times are ahead for a market space not very long ago viewed as dull and stable.

Figure 2: Enterprise Communications Market Overview Market demand for PBXs was relatively strong during 2007. System shipments were an estimated 50,000 units, accounting for 9.35 million line stations, a 6.5% annual increase (based on revised data estimates cited in my BCR January 2007 market review article). Line stations behind new system shipments accounted for about 60% of the total; the remainder were add-ons to installed systems.

Core PBX system revenues (including all common equipment, software, voice terminals and installation fees; excluding all support services and peripheral application options) increased almost 6% to about $6 billion. The smaller line size KTS/Hybrid market was not as strong: about 300,000 systems accounting for an estimated 4.5 million line stations, a 3.4% increase from 2006 (based on revised data estimates cited in my BCR January 2007 market review article). Core KTS/Hybrid system market revenues (including all common equipment, software, voice terminals and installation fees; excluding all support services and peripheral application options) increased about 2.4% to about $2.75 billion.

IP telephony market growth remained strong through 2007. Slightly more than two thirds of total PBX line station shipments were IP endpoints, 6.25 million line stations (up from 5.1 million in 2006). TDM line shipments (analog and digital) made up the remaining 3.1 million lines, and continue to decline more than 15% annually (see Figure 3).

The majority of the installed base remains TDM endpoints, but that is expected to change within a few years when installed IP line stations are forecast to eclipse traditional endpoints sometime during 2009. Virtually all PBX systems shipped last year were capable of supporting IP communications capabilities, but not every customer installed IP-based stations and/or trunk circuit interfaces.

Converged (TDM/IP hybrid) and client/server softswitch design platforms were most favored by customers, each one representing about 45% of total line station shipments. IP-enabled designs (, i.e., systems originally based on traditional digital circuit switching standards, but with interim upgrades capable of supporting IP endpoints and/or distributed common equipment cabinets/shelves) represented only 10% of the market, and will continue to decline as a new system installation.

IP telephony demand among KTS/Hybrid customers was not as strong. About 20% (1 million) of KTS/Hybrid shipments were estimated to be IP-based line stations. Compared to larger line size customers, far fewer small system customers, especially those with less than 20 line station requirements, perceive benefits from an IP telephony system.

Another reason for lagging IP endpoint shipments in this market segment is that many small system customers lack the IT infrastructure and/or support personnel required for implementing and operating an IP telephony system design. Demand for IP endpoints will continue to grow in this market segment, but traditional endpoints will dominate the installed base for many more years.

Ongoing Technology Trends

Any experienced telecommunications industry follower knows that technology change is adopted very slowly in telecom compared to other IT market segments. IP telephony is now entering its second decade, but more than half of the PBX line station installed base is still built on fading TDM/PCM technology. IP line stations should hit the 50% level sometime next year for PBXs (as mentioned earlier), but maybe not before 2015 for KTS/Hybrids.

It is now several years after a number of significant IP telephony system design innovations were introduced, such as geographically distributed redundant call servers and survivable remote gateways, but customer implementation is not yet universal. SIP telephones have been available for several years and can be provisioned behind most IP telephony systems, but the number of SIP line stations is in the low single digits as a percent of the total installed base. Shipments of 802.11-type wireless stations and softphone clients are also hovering in the low single digits as a percent of total annual shipments, despite the many articles and presentations extolling their benefits to station users.

None of this should be news to the telecommunications professional who recalls that integrated (unified) messaging systems were first introduced to the market in 1991, because the majority of PBX system installations have yet to implement the option.

Currently, four major IP communications technology issues demand the attention of system suppliers and customers, alike. They are:

As high as 90% of current R&D expenditures for PBX systems, including peripheral application options, are focused on software. The shift from hardware to software has been a long-term trend that began at the dawn of the digital PBX era more than 30 years ago.

Many current generation IP telephony systems can be configured with a manufacturer-approved third party server for common control operations, and almost all systems will work with third party media gateways for analog line station, analog PSTN trunk circuit, and/or T1-based digital trunk interface requirements. This hardware trend has contributed to declining system prices, and gives customers more choices on how their system is configured.

There were very few Industry standards governing the design and architecture of digital PBXs, but that is dramatically changing as the IP telephony era progresses. Specifics about IP telephony systems and industry standards can be found in this writer’s article “Standards and IP Telephony Design,” BCR September 2007. Linux has virtually become the default operating system of choice for IP telephony systems and SIP (Session Initiation Protocol) specifications have been adopted by system designers to varying degrees for their product offerings.

Much has been written about SIP, and this article does not need to rehash the material, but it must be noted that customers have not yet installed SIP station equipment nor deployed SIP trunk services anywhere near a level commensurate with industry hype about the communications protocol. The forecast for SIP telephone instruments may be strong, but significant shipments are not likely to materialize until a few more years. Only a small percent of currently shipped IP telephony systems, such as Siemens’ HiPath 8000, use SIP as the primary communications protocol; H.323, SCCP, or a proprietary communications protocol still dominate.

The next big industry standard taking hold is Services Oriented Architecture (SOA), an IT strategic initiative to organize diverse and independent software operations embedded across multiple applications into interoperable, standards-based services. SOA is implemented using standard protocols and conventional interfaces (such as XML & SOAP) and is intended to transform siloed , replicated processes into leveraged and shared services.

Deploying SOA will accelerate the delivery of new services to satisfy changing customer needs with a lower level of complexity and more efficient expenditure of resources (time, personnel, finances). To date, few IP telephony systems have integrated SOA into the core system architecture and design, but most system suppliers have stated their intention to do so in the near future. A more detailed discussion of SOA can be found in this writer’s article “SOA and Enterprise Voice Communications,” BCR August 2007.

IP telephony systems are characterized by far greater degree of redundancy and resiliency than traditional digital PBX systems, and customers are taking advantage of the design capabilities and options. Among the many redundant and resilient design options available with today’s IP telephony systems are:

Most common equipment elements, including telephony servers, signaling servers, and media gateways, can be geographically distributed across a customer LAN/WAN. Physically separating call control elements and port interface equipment across floors, buildings, or different facilities reduces the probability of a total system failure in case of isolated LAN/WAN problems or if an environmental disaster strikes, such as a fire, flood or a local power outage.

The next major disruptive change in the enterprise communications market is one that is currently occurring in the public network: the gradual replacement of wireline telephone instruments by mobile communications devices. Cellular handsets are replacing a growing number of residential wireline telephones and are a major cause for the demise of public payphones. Estimates that about half of all cellular business calls are currently placed from a customer’s enterprise do not bode well for the future of desktop telephone instruments.

Intelligent mobile devices integrating voice communications with desktop computing power, such as Blackberries and iPhones, will be configured as cellular-based PBX extensions and replace wired desktop telephones as the primary link to the enterprise communications system. The days of ubiquitous $500 desktop telephones for professional white collar workers are slowly fading into oblivion. For many enterprise communications system users telephony features and functions at the desktop will be soon implemented via a PC client, especially when full-featured unified communications solutions saturate the market, as forecast. UC clients, the 21st century version of 1990s CTI clients, combined with intelligent mobile communications devices will significantly change the look of enterprise communications during the next few years (see next section).

Evolving Technology Trend

IP-enabled PBXs are based on the older voice-centric digital PBX design while softswitch IP telephony systems are based on a data-centric client/server design. The latter design foundation favors a company such as Cisco that has a dominant market share for Ethernet switches and WAN routers used to connect system elements (servers, media gateways, terminal devices) and transporting communications and control signals. Cisco’s market success has been based largely on shifting customer focus from voice features (the heart of digital PBXs) to the network infrastructure supporting a mix of communications media including voice, data, text, image, and video. The next generation of IP communications systems will move even further away from the old voice-centric model towards a desktop applications-centric model that retains client/server structural design elements. Although Cisco will still be the primary supplier of the network communications infrastructure, Microsoft has the necessary technical resources to become the primary desktop application software supplier. Microsoft does not yet have all of the necessary human resources or distribution network to challenge today’s voice communications market establishment (including Cisco), but time is on its side until its unified communications offering is ready to fully replace IP telephony systems as we know them today.

Tomorrow’s full-featured unified communications offerings will combine traditional telephony features and functions with messaging, conferencing, and collaboration applications supported by both presence management and social networking tools. Presence management has slowly begun to infiltrate the enterprise communications market; social networking is currently a consumer-focused phenomenon, but will soon be ubiquitous in the workplace environment. Cisco has acquired social networking services through acquisitions, such as Five Across and the assets of Utah Street Network, for both consumer and business market ventures, and Microsoft made headlines recently when it announced it purchased a minority ownership position in Facebook, the four year old social utility currently challenging MySpace (owned by News Corporation) for leadership among social networking services providers.

One of the most important developments in the field of unified communications is the concept of federation. Federation may be a complex technological undertaking, but can be simply defined as a single view or image of data from sources originating across multiple and diverse network domains. Numerous issues, such as security, must be addressed before federated communications can be implemented and operated by enterprises as the standard for interpersonal communications across network boundaries, and though it may take many years to realize, it is an important long term objective that today’s IT community is striving for. Federated communications will replace the term unified communications in our industry jargon, like PBX replaced switchboard and IP telephony system has recently replaced PBX. It should be pointed out that federated networks and multimedia communications tools may significantly enhance remote access to people and information sharing/exchange, but will still not replace the occasional necessity for face-to-face meetings between live individuals. The competitive advantage obtained by early adopters of unified and federated communications tools will likely be short term, however, because the rest of the pack is likely to catch up sooner rather than later.

Competitive Enterprise Systems Market Landscape

Based on shipment trends the past few years there was little doubt that Cisco would whiz past Avaya to assume PBX market leadership (see Figure 4).

Cisco revenues for its Unified Communications operations were growing more than 30% year-by-year, and Avaya’s no more than 10%. Cisco now commands a substantial share of a market once dominated by Avaya’s predecessor AT&T during its monopoly days; the gap between Cisco and Avaya is the largest between the top two domestic system suppliers during the past twenty years.

It is unlikely that Cisco will relinquish its current market leadership position anytime soon, because last year it solidified its enterprise communications portfolio by adding the Unified Communications Manager Business Edition (UCMBE) targeted at the intermediate line size market segment (100 – 400 line stations), expanded its IP telephone instrument portfolio with improved models, and continues to enhance its Unified Communications Manager generic software features.

Cisco’s improving product offerings, the product sector’s strongest marketing prowess and its dominant position in the network equipment market space make Cisco the one to beat. This holds true even when Cisco is not a customer’s incumbent voice system supplier, because it is more than likely they are the customer’s primary network equipment supplier.

Since it entered the voice communications system market, Cisco has smartly executed marketing campaigns at both the macro- and micro-levels. They established a strong presence at industry trade shows attracting voice system customers, particularly VoiceCon; designed an excellent website with detailed product information and an effective search engine (something many of its competitors sorely lack); developed an effective and highly rated consultant relations program; and continues to operate a strong and influential grassroots voice communications education program (although some would say it is closer to brainwashing than education) for data communications managers. This has facilitated selling into the installed base of its competitors, despite product offerings frequently not yet equal in overall performance to several of its strategic competitors.

In a few short years, Cisco has convinced many in the industry that it is the one setting the agenda for the market’s migration from voice-only digital PBXs to IP-based unified communications systems.

It’s important to point out that they were abetted by the ineptness of the incumbent competitors to counter-market against them. For several years Cisco’s CallManager offering had more than a few major competitive weaknesses such as: significant software feature gaps; telephone instruments with no fixed feature keys and limited programmable line/feature keys; and several less than stellar networking capabilities. Competitors like Avaya and Nortel each had superior product offerings, but failed to conduct effective competitive marketing campaigns highlighting their strengths versus Cisco weaknesses. For several years, Cisco’s stronger marketing efforts gave it the time necessary to address enough product issues to significantly narrow product performance gaps against competing offerings.

Avaya is still a strong market competitor for core IP telephony systems and the leader in advanced contact centers, a market segment in which Cisco is relatively weak by comparison, and Avaya’s enterprise communications revenues exceed that of any competitor (partly owing to its decision to maintain its strong direct sales/service operations). But major corporate changes occurred last year that will have a significant impact on Avaya’s future success and survival.

The New Jersey-based system supplier with the strongest product portfolio and the largest, if slowly shrinking, installed customer base, is now a privately held company jointly owned by Silver Lake Partners and Texas Pacific Group (TPG). There are many advantages to being a private company, such as the luxury of sacrificing short term for long term profits, but none of these factors is likely to help Avaya reclaim its lost market leader position. Avaya still outships Cisco on global basis, but for how long? One more year, maybe two?

Why did Silver Lake and TPG think Avaya was worth $8.2 billion when it was losing market share to Cisco and the dynamics of the evolving unified communications market were changing to favor a new competitor such as Microsoft? Apparently, Avaya’s best marketing effort during the past few years did not involve selling IP telephone systems, but itself.

From small to very large system customers with either basic or advanced performance requirements, Avaya has highly competitive product offerings. Its product portfolio easily received the highest overall grades across the board in the most recent TEQConsult Group survey of consultant members from the Society of Telecommunications Consultants (STC) and Canadian Telecommunications Communications Association (CTCA) organizations (see “Consultants Grade the Vendors,” BCR December 2007).

The same survey also revealed why Avaya has been an underachiever despite its inherent competitive advantages. The consultants ranked Avaya’s consultant relations program sixth among the leading system suppliers, and overall consultant support services efforts ranked fifth. The two mediocre rankings are representative of two ongoing Avaya problems: marketing communications and people interaction.

Nortel has seen better days in the PBX market. Although sales of its small system solutions (Norstar and Business Communications Manager) are strong and lead the domestic KTS/Hybrid market, enterprise system shipments have fallen the past two years, and Nortel has lost several market share points to Cisco and Avaya. Nortel’s CS 1000E has certainly seen some major design improvements during the past two years, and Nortel’s close working relationship with Microsoft should have enhanced its market position, yet Nortel’s domestic PBX market share last year was at its lowest level since the late 1980s.

Nortel has not offered any reasons for its declining PBX shipments, but one can speculate that the financial difficulties they experienced a few years are still lingering in the minds of many customers and that some of their largest dealers have been pitching more Cisco voice product instead of a Nortel offering.

Nortel has undergone several major reorganizations the past few years, especially within in its executive management team. The current executive management team includes many recent hires and few with extensive enterprise communications market experience.

The migration of many experienced Nortel enterprise communications employees, especially in the middle management ranks, to greener pastures has not helped the company’s market position. Nortel once had the industry sector’s best marketing team, but times have changed, and recent product announcements and marketing communications efforts have not lived up to past efforts. Mike Zafirovski, Nortel’s current President and CEO, has made it clear that he wants to restructure Nortel’s revenue base by expanding its services businesses, hence its Integrated Communications Alliance (ICA) with Microsoft focused on the marketing, sale, installation and servicing of unified communications solutions (Microsoft’s, not Nortel’s). ICA results to date appear to have favored Microsoft, because Nortel appears to be sacrificing its own 5100 MCS unified communications solution to promote and sell the Microsoft OCS solution.

Nortel is effectively planting the seeds for its own destruction in the enterprise communications market, because Microsoft has made it clear that OCS will evolve into a full-featured telephony offering that can replace today’s standalone PBX systems, such as CS 1000E. The more OCS systems Nortel helps to sell, install, and service, the fewer Nortel IP telephony systems they are likely to sell in the future.

Perhaps Nortel believes some services revenues will be better than none down the road, but unless Nortel greatly expands its field services operations (especially outside the North American market) this strategy may prove less than successful. Microsoft is also chummy with many of Nortel’s major competitors who also expect to leverage their relationship with Microsoft.

Mitel Networks is like the little engine that could, because while Avaya and Nortel have lost market share points to Cisco, Mitel has managed to slightly increase theirs (exclusive of Mitel’s acquisition of Inter-Tel). The Inter-Tel acquisition doubled Mitel’s revenue base and also enhanced its market position in several ways: a stake in the small system KTS/Hybrid market segment; a nationwide U.S. direct sales/service dealer network with proven success in the marketing/sale of managed services; and an installed base of Inter-Tel digital PBX customers that will potentially migrate to Mitel 3300 ICS platform. Mitel is currently in process of pruning the Inter-Tel product portfolio, but remaining offerings, such as the Inter-Tel 5000 series, will help strengthen the overall portfolio.

During the past few years, Mitel has strengthened its market position by expanding 3300 ICS port capacity and improving redundant design options. They have also implemented several excellent vertical marketing programs, such as hospitality, K-12 education, and retail.

On the downside, Mitel has not been able to establish itself as a strong player in the important contact centers market segment, and needs to strengthen its overall applications marketing efforts to raise customer and consultant awareness levels. Although Mitel had strong showings in the STC/CTCA survey rankings for core IP telephony system and desktop telephone in instruments--fourth and second, respectively--they placed lower in each of the application categories (sixth for contact center; seventh for messaging; fifth for unified communications).

Siemens Enterprise Communications is currently in a state of limbo, because corporate parent Siemens AG is in process of looking for someone to buy the communications business unit. There are rumors of an announcement coming any day, but until that day comes, Siemens Enterprise Communications must bear the burden of being an unwanted child. When this is combined with the fallout from last year’s corporate bribery scandals in Germany, it’s a wonder Siemens Enterprise Communications is still the leading European market CPE system supplier and is holding its place (if barely) among the leaders on this side of the Atlantic.

The Siemens product portfolio includes several highly competitive offerings in a crowded field, including the carrier-grade HiPath 8000 SIP communications system capable of supporting up to 100,000 line stations, and OpenScape--a high-performance unified communications solution that can also be deployed as a middleware server for other software vendor application packages.

During the past decade, Siemens Communications, the US-subsidiary of Siemens Enterprise Communications, has lost North American market share and stature, though it remains a strong global competitor. A few reasons why Siemens has been in a protracted slump: delayed product introductions; Euro-centric product development and marketing programs; and a distribution strategy that needed more “feet on the street.”

Siemens would likely have retained market share if its HiPath 4000 and HiPath 8000 IP telephony systems were faster to market with full performance capabilities: the HiPath 4000 initially required circuit switched connections between IP endpoints and had too many types of gateway board options; the early releases of HiPath 8000 did not have the same level of generic software features as the HiPath 4000 and lacked a full feature survivable remote media gateway option.

When Siemens did announce or make available new product offerings, the European market was usually the first recipient; the North America roll-out was usually delayed a few months, despite North America being the leading-edge market for IP telephony systems and associated applications.

Siemens Communications was also hurt by a distribution strategy that relied heavily on Norstan Communications to cover a large geographic area of North America. Norstan was the largest Siemens dealer going back to Rolm days more than 20 years ago, and for years Norstan sold only Siemens PBXs for enterprise customers. Times changed, however, and Norstan eventually added Nortel and Cisco product to its portfolio.

Blackbox’s acquisition of Norstan in 2004 did not have a major effect on Siemens, but Blackbox’s subsequent acquisition of Nextira One in 2006 did create problems. Nextira was one of the largest Nortel distributors and also sold Cisco product. The Siemens product offering was suddenly no longer the one at the top of the totem pole for Blackbox. Siemens had to scramble to add new dealers to sustain its sales efforts, but still cannot match the third party distribution network of its strategic competitors Avaya, Nortel, and Cisco. Fortunately for Siemens it never abandoned its direct sales/service operations. This remains a competitive advantage they should promote and leverage more than they have.

During the past few years NEC Unified strengthened its position in the small system KTS/Hybrid market while concurrently losing a sizable percent of its enterprise-level PBX market share. NEC claims it is the global enterprise telephony market leader based on 2005 and 2006 line shipment data released by Gartner, although NEC will not confirm the Gartner data to this writer. Based on North American shipment data only, NEC has about 10% of the total CPE market (ranked fourth) and less than 5% of the PBX market (ranked sixth).

There are at least three reasons for its weaker showing in the higher end of the enterprise communications market: a very weak marketing effort for its UNIVERGE SV7000 roll-out a few years ago; virtually no upgrade migration path from its large installed base of NEAX2000 and NEAX2400 PBX models to the purer IP-centric SV7000; and relatively weaker application solutions (contact center, unified communications) than several of its strategic competitors.

NEC failed to learn the lessons experienced by Nortel when it introduced its Succession 1000 platform: a large number of customers want to migrate their paid for digital line circuit cards and associated telephone instruments to the newer generation IP telephony system platform. It has taken a few years, but NEC will very soon offer its customers smoother upgrade migration paths for its customer base to its next generation intermediate and large market IP telephony system offerings. The upcoming announcements should strengthen NEC’s enterprise market position after several years of decline.

NEC is also in process of addressing its marketing shortcomings. For the first time, NEC’s enterprise communications business has established a revamped marketing organization that will coordinate activities on a global level. Someone may finally have recognized that NEC’s competitive position in North America is not comparable to its home market position in Japan, where it is the undisputed market leader and where its announcements and activities are closely followed by customers and competitors alike.

NEC has tended to get lost in the North American market where traditional competitors, such as Avaya and Nortel, and newer competitors, such as Cisco, get most of the media attention. Shedding its techno-centric approach to the market in favor of more innovative marketing activities is necessary for NEC to reverse its decline at the higher end of the market.

Regarding applications solutions, NEC has worked hard to improve its contact center solutions and recently announced several major enhancements to its unified communications offerings, including stronger relationships with Microsoft and IBM. Several months ago NEC acquired Sphere Communications, a mid-1990s startup that initially designed an ATM-based telephony system that later morphed into an IP-centric platform.

Sphere’s new role is to provide a variety of unified communications and SOA-based application options working behind NEC’s IP telephony system offerings. NEC may have to go into marketing overdrive to educate customers and consultants about its new and improved communications application offerings, but at least it has real product today to back up its claims.

Rest of the Pack

There are many other system suppliers hoping for a slice of the North American enterprise communications market pie, including several with strong global presence or name recognition. Among these competitors are those climbing the market share ladder, such as ShoreTel and 3Com; competitors who have fallen down the ladder, such as Ericsson and Aastra Intecom; and those who have not yet been able to grab a firm grip on the ladder, such Alcatel-Lucent.

The company currently ranked seventh among the enterprise system suppliers is ShoreTel. Though it is not yet a global powerhouse or a household name, ShoreTel has managed to survive and succeed in a highly competitive market against many companies far larger in size and resources. ShoreTel had a successful IPO last year and is well known in the industry for receiving more industry press than their size would seem to justify.

The system supplier established itself by targeting a customer market niche characterized by geographically distributed small/medium line size facilities with basic telephony requirements. ShoreTel’s fully distributed design architecture is ideal for this market niche, but its moderate-performance applications portfolio has somewhat limited appeal to customers with sophisticated contact center and unified communications needs.

Many question if ShoreTel has the resources to compete against Cisco, Avaya, and other players with deeper pockets as the unified communications market continues to evolve, especially with someone like Microsoft biding its time before full market entry. Only time will tell if ShoreTel will be remembered as a flash in the pan or an established market competitor.

3Com entered the voice communications market when it acquired NBX Systems in 1999. Last year, 3Com signed a definitive merger agreement to be acquired by affiliates of Bain Capital Partners. The agreement also calls for affiliates of Huawei Technologies to acquire a minority interest in the company and become a commercial and strategic partner of 3Com.

The primary focus of the new 3Com organization will be enterprise networking with emphasis on the growing Chinese market. There is no indication that the company will diminish its interest in the enterprise communications market, although this market may be a cause of concern in the future. In the past few years, 3Com has been able to do reasonably well for a new player in the basic telephony small line size segment of the market, but has yet to establish itself as a force in the more intensively competitive higher end market segment with a greater emphasis on advanced peripheral applications.

For 3Com to be successful in the large systems market, it needs to address three issues: marketing communications; distribution channels; and applications solutions. Regarding the first, 3Com has recently re-established its consultant relations program in recognition of the role consultants play in the higher end of the market. And though the current 3Com website has improved during the past few years (it is one of the cleanest looking, less cluttered websites this writer navigates with frequency), more detailed IP telephony system and product documentation wouldn’t hurt (including diagrams and photographs).

Most of 3Com’s existing dealers are accustomed to selling systems to small size customers (typical 3Com IP telephony system is about 60 stations), and for most of these dealers to compete in the large system market is a totally different ballgame. This is a lesson Mitel and Toshiba both learned the hard way when they first went up market (Mitel eventually succeeded, but Toshiba did not).

3Com was able to expand its distribution network last year through its venture with IBM to sell its VCX solution on the computer manufacturer’s System i Platform. The server-focused dealers need to be trained in the ways of voice communications and will primarily target medium line size customers; addressing the more complex requirements of larger, multi-premises customers will be a somewhat more difficult task.

To compete at the higher end of the market, 3Com must enhance its applications portfolio and provide sufficient dealer training in support of the applications. The system supplier currently re-packages a variety of third party solutions for contact center, mobile communications, and unified communications.

For example, it markets IBM Sametime with the System i™ Platform (although not a particularly viable option if the customer is a Microsoft shop). 3Com still has a way to go to be on par with the leading system suppliers who market and sell a richer applications portfolio of their own design and development.

Ericsson and Aastra Intecom have each seen better days in the North American PBX market. Ericsson has far greater presence and market share in other global market regions and Aastra (through its Matra Communications operations) is a strong player in Europe.

Ericsson’s PBX market downturn in North America coincided with a corporate decision to devote ever-increasing resources to the wireless carrier market. The strategic decision to divest itself of direct sales/service operations was the point of no return for the North American market. This was followed by staff downsizings, delays to replace the aging MD 110 PBX platform with the IP-centric MX-ONE, and a failed attempt to set up a master distributor to create and support a dealer network. There are currently no signs that Ericsson’s stated plans to leverage its strong relationships with cellular carriers to help market and sell its enterprise offerings have borne fruit.

Aastra Intecom was relatively dormant for a few years in the North American PBX market as many original IBX platform customers migrated to competitors’ IP telephony system offerings at an alarming rate. After Aastra acquired the EADS Enterprise Telephony Business unit, including Intecom, at the end of 2004, Intecom’s management staff was harshly downsized over time and press, consultant, and industry analyst contact virtually stopped. A decision had to be made: Continue marketing an existing IP telephony system that could not satisfy the very large port requirements of numerous remaining customers; redesign the system; or start from scratch.

Instead of investing substantial resources in designing and developing a competitive product of their own, Aastra opted to work with Broadsoft to bring to market the new Clearspan softswitch solution. Aastra Intecom will likely have a difficult time attempting to recapture lost market share in the current competitive market environment, and will need to increase its marketing communications severalfold merely to re-establish itself as a market player.

Alcatel-Lucent is one of the strongest enterprise communications system competitors outside of North America, but here, it has failed miserably at establishing a strong foothold. In virtually the same time period it took Cisco to go from a standing start to first place among PBX system suppliers Alcatel-Lucent has barely made a dent in the market.

Its failure to even become a second tier competitor is hard to fathom, taking into account the fact that Alcatel had a very competitive PBX offering with a strong applications portfolio when they re-entered the North American market in 2000. In contrast, Cisco’s initial product offering was, to put it kindly, a mess. Alcatel-Lucent has had some noteworthy (and highly self-promoted) sales successes, such as Clark County (Las Vegas) School District and University of Pittsburgh, but its current North American PBX market share is hovering at about 1%.

It took Alcatel several years to establish a semblance of a viable distribution network, but its relationship with Nextira One went sour and its relationship with Verizon was as an also-ran behind Nortel and Cisco.

The company’s marketing efforts have been like a roller coaster with a series of hirings and downsizing. Alcatel-Lucent recently confirmed its past marketing failures when it stated during a consultant conference call that plans were in place to significantly increase marketing staff and program dollars. The grades Alcatel-Lucent received in the recent consultant survey reflect how badly things have been going, because Alcatel-Lucent’s consultant relations program was ranked ninth and overall support services ranked tenth. Grades for both efforts were below average. Just as startling were lower grades for Alcatel-Lucent product and application offerings than those offerings deserve.

Alcatel-Lucent’s enterprise business is overshadowed by the company’s carrier and wireless operations, a scenario similar to that at other full-line telecommunications equipment providers like Ericsson and Nortel. During the past few years Lucent Technologies decided to divest itself of its enterprise business (Avaya), although following its merger with Alcatel they were back in the enterprise business.

Two years ago, Siemens AG made a momentous decision to totally withdraw from the telecommunications equipment business despite 160 years’ industry experience dating back to early telegraph days. There is no indication Alcatel-Lucent will again divest itself of its current enterprise unit, but unless significantly more resources are allocated to its North American enterprise communications business, the result would be virtually the same.

Competitors of Tomorrow?

There are two powerhouse companies with potential to be major enterprise communications system competitors of tomorrow: Microsoft and IBM. Of the two, it currently appears that only Microsoft has definitive plans to place both feet squarely in the arena with a full-featured voice offering; IBM is and will remain a player in the market as a system integrator and reseller, but has no plans to develop and market its own voice communications solution to replace today’s standalone IP telephony systems.

Microsoft’s Office Communications Server (OCS) 2007 enables an integrated user experience via Microsoft Office Communicator 2007 client by providing unified voice capabilities, call management, multiparty video, on-premise web conferencing, presence status and control, enhanced business instant messaging, data and application sharing, federation capabilities and Public IM connectivity. It also delivers enhanced security, logging and archiving, and works seamlessly with other Microsoft products such as Exchange Server.

From a voice communications perspective, OCS 2007 can support a PC client as a softphone telephony endpoint, allowing users to make and receive telephone calls and bring control of the PBX telephone instrument to a users’ desktop experience. Station users can initiate VoIP calls directly on their PC without a desktop telephone, simplifying their communications experience and enabling more centralized IT systems administration.

For those who prefer a more traditional experience, Microsoft (through its partner program) has also introduced an IP desktop telephone instrument that operates independently of the PC client, and a USB telephone instrument that works behind the PC client.

The current set of OCS 2007 voice features is relatively basic compared to full-featured PBX systems, but plans are in motion to sufficiently enhance the feature set to allow the Microsoft offering to replace a standalone voice communications system. This was the message of Bill Gates during his well-publicized presentation last year at the OCS 2007 kick-off meeting.

The complete system solution would require dedicated servers to support conferencing and IVR/speech recognition capabilities in addition to media gateways for traditional telephony interface requirements, e.g., PSTN trunks. It would resemble today’s client/server softswitch IP telephony design, but support a full array of unified communications features and services including traditional telephony.

The company’s competitive advantage is that customers will have many Microsoft-based client/server elements in place when the full featured voice package is available, effectively negating the need for a peripheral voice-centric system. The evolving convergence of voice communications with data, video and messaging communications services will obsolete single-medium-centric solutions, such as a PBX.

Microsoft’s potentially dominant unified communications market position will facilitate its emergence as a real time voice communications solution competitor. If Microsoft’s plans are successfully carried out, the traditional voice communications system suppliers better start developing competitive marketing strategies yesterday.

IBM, also a strong player in today’s evolving unified communications market, is embarking on a different strategy. It may be called the “Counter-Microsoft” strategy, because IBM is working closely with several voice communications system suppliers, including Siemens, Nortel, and 3Com, as a repackager/reseller of these companies’ voice system offerings.

IBM’s market approach is to leverage a peripheral voice communications system, not fully replace it, although IBM Lotus Sametime already includes some limited voice communications capabilities. Lotus Sametime supports: presence awareness; real time collaboration tools; integration with Microsoft Office, Lotus Notes and Microsoft Outlook; video and VoIP chat in the enterprise; telephony Integration; file transfer and screen capture; Web conferencing; mobile clients; and support of Public IM federation.

At VoiceCon San Francisco 2007, IBM announced Lotus Sametime “Unified Telephony” software. “United Telephony” is designed to make it easy for station users to access and manage telephone communications from inside the Lotus Sametime or Lotus Notes client.

The Lotus Sametime “Unified Telephony” offering will extend the value of Lotus Sametime software as a platform for communications by providing the ability to: initiate phone calls and take action on incoming phone calls from within the Lotus Sametime or Lotus Notes client on the front-end; connect multiple, mixed telephony systems on the back-end; and see phone presence in your Lotus Sametime client. Planned features include: click-to-call/click-to-conference; aggregated Telephony/IM presence; incoming call management; embedded softphone; and PBX integration. More Lotus Sametime releases are scheduled for this year.

For those too young to remember, IBM’s past foray into the voice communications was not a happy one. IBM acquired Rolm more than 20 years ago and sold it off to Siemens in 1990 after discovering PBXs were not a high-growth or high-margin business. Although some rumors have circulated that IBM will acquire Siemens Enterprise Communications, this outcome is doubtful. IBM’s best strategy may be to work with the established voice communications system suppliers to tightly integrate their unified communications capabilities with the full featured standalone telephony systems. Continuing in its role as an experienced and full service system integrator would be less risky than competing against Microsoft and the voice-centric players.

Besides Microsoft, there is another potential future competitor to challenge today’s voice communications system supplier hierarchy at their own game: Google.

Google Talk, an offshoot of Google’s IM service, was made available more than two years ago, but it is a very basic talk chat service. Last summer Google acquired Grand Central Communications, a company that allows users to link multiple phone numbers to one life-long central number and manage it all—including voice mail—online. Google’s blog stated “We’re particularly excited about this because it ensures that not only will we have the resources to continue to bring you even more innovative communications features down the road, but that we will be able to continue to offer you the service, with many features for free, for a long time to come.”

Google last year also shared its plans for a Google cellullar phone platform. Google’s interest in wireless communications was further boosted recently when the company was among those named by the FCC who will be bidding for radio spectrum at this month’s auction. A free Google wireless service supported by advertisements could prove very tempting to a large constituency of current cellular service subscribers. On the enterprise front, Google has not hidden its intentions to rival Microsoft for desktop software applications. Free unified communications tools, including telephony, could totally turn the current market for enterprise communications on its head.

Google advertising revenues continue to grow at an unprecedented rate, allowing the company the luxury of funding ventures in market spaces far removed from its original Web search engine. They certainly have the financial resources to attack the enterprise communications market, but as of now this is only speculation.

A Few Final Words

Summarizing where the enterprise communications market stands right now and where it is likely to go during the next few years:

Allan Sulkin is founder and president of TEQConsult Group, and was a contributing editor to Business Communications Review for two decades. Sulkin has almost 30 years telecommunications industry experience and is recognized as the industry’s most prominent (and outspoken) enterprise communications market/product analyst. His management consulting services are used by many of the companies mentioned in this article, some of which heed his advice.