The Search for Sustainable Growth in the UCaaS MarketThe Search for Sustainable Growth in the UCaaS Market

"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.

Click to next page: Portfolio Breadth and Geographic Reach; Which Company Will Win?

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Market Consolidation Elevates the Importance of Portfolio Breadth and Geographic Reach
UCaaS providers are responding to industry challenges by engaging in M&A activity that aims to address varying needs and objectives, including the following:

Continued market consolidation at the top will create greater challenges for existing competitors, but is unlikely to prevent the entry of innovative new providers with highly differentiated solutions. As businesses increasingly seek to integrate communications with other software to realize more tangible gains from their UCC and IT investments, UCaaS providers, particularly those managing proprietary platforms, will become primary acquisition targets for larger software and IT companies.

Common success factors in the UCaaS market include speed of innovation, service reliability, efficient provisioning and billing systems, attention to customer needs and effective customer support, market reach (geographic footprint, channel network) and financial stability. Eventually, all providers will also need to support an end-to-end digital customer journey from online marketing to e-commerce to multi-channel customer care.

However, success factors vary based on the target customer segment. Going forward, providers serving SMBs must offer competitive prices, all-inclusive solution packages, and greater ease of use and solution management. They will also need to leverage digital marketing and e-commerce especially well to match SMB solution evaluation and purchasing patterns and to reduce customer acquisition costs, which in this segment are typically very high compared to customer lifetime value.

In the mid-market and enterprise customer segments, providers will garner greater success using a more consultative approach. From needs assessment to solution design, custom application development and integration with existing solutions, providers need to work hand in hand with various stakeholders within the customer organization to ensure broader adoption, better solution performance, and greater return on the customer's technology investment. To effectively serve more demanding customers with complex communications environments, providers also need to streamline and enhance internal processes that enable more efficient response and better customer support throughout the entire customer engagement lifecycle. Other capabilities that determine provider success in this segment include an advanced admin portal, robust analytics, and an integrated contact center.

Currently, the market is relatively untapped and can support a large number of providers with a diverse background and skill set. Eventually, as the market matures, highly diversified telcos and SaaS providers are likely to dominate the market.

Which Company Will Win the Beauty Contest?
Important to note is that potential buyers/investors focus on slightly different criteria from the customer criteria discussed above. Private equity investors are much more likely to focus on provider long-term growth potential, sustainable competitive advantage, profitability, stable cash flows, low capital expenditure requirements, and a strong management team. Buyers from within the industry (e.g., other UCaaS providers) or from adjacent industries (e.g., SaaS), on the other hand, are looking for complementary and/or differentiating capabilities (e.g., unique technology) and/or existing UCaaS customer base or even premises-based users that can be converted to UCaaS.

The good news is that there are plenty of potential buyers in the UCaaS industry. Many successful UCaaS providers are reviewing potential acquisition candidates and are likely to make a move in the near future. Based on Amazon's recent launch of Amazon Chime and Connect, SaaS/IaaS companies are clearly vying for a share of the rapidly growing UCaaS market and are likely to explore opportunities to enter the market via M&As.

8x8, BroadSoft, and RingCentral are particularly well positioned in the UCaaS market. RingCentral remains the market share leader among North American service providers with 8x8 a strong contestant for a leadership position. BroadSoft, on the other hand, powers one-third of the hosted IP telephony/UCaaS seats in North America, as well as millions of feature-rich VoIP lines and SIP trunks, making it the leading VoIP platform vendor in the region. All three companies can easily thrive on their own in the next few years. However, M&As can help these companies boost growth rates and, more important, extend their longevity as part of larger and/or more diversified entities.

In summary, there's no telling which company wins the beauty contest, because this is not a winner-take-all type of scenario. However, the competition among UCaaS providers to prove their customer value and long-term viability will be fierce.