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The Approaching UC Endgame – Part 2

by Russell Bennett, UC Insights

August, 2012

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[The dictionary definition of the ‘endgame’ is: the stage of a chess game after major reduction of forces. I would add that it is the point where the player with the advantage starts to push hard for the win, whereas the other player is now playing for a draw.]

In Part 1 of this article, I put forward the idea that, after 12 years of technology, economic and regulatory uncertainty and upheaval, the telecommunications business was starting to stabilize in a new form that could be recognized as the next generation of communications. With the emergence of IP/’the Internet’ as the next-gen network, the tasks of communications service provision and network operation are largely being disaggregated. I think I made a pretty strong case that the telephony incumbents were likely to end up as providers of IP network service (i.e. ISPs) with the opportunity to offer value-added services such as ‘Quality of Service’ (QoS) at premium prices. In this paper, we are going to consider who the providers of communications service will be or, at least, who will be controlling the ‘user experience’ that will be presented by communications service providers.

Consumer and Mobile Communications

In Part 1, I discussed the idea that the PSTN was on regulatory life-support and was scheduled to be shut down in 2018 in the US, with the rest of the world likely to follow suit in a similar timeframe. Once IP communications take over (if not already), the artifacts of telephony, including digit dialing and wired access will become obsolescent and will be replaced by a range of mobile IP-based communications tools. Being software, some of these tools are relatively cheap to create and maintain and require little infrastructure (relative to the PSTN) to operate: note that myriad voice/video/text tools can be downloaded or accessed freely from the Internet, including Skype and less traditional communication tools such as Facebook.

This isn’t to say that the telephony incumbents didn’t have an opportunity to build a next-gen infrastructure to offer multi-media communications. IMS (IP Multimedia Subsystem) is a technology based on SIP that was defined by standards bodies in the last decade and was implemented by various telecom infrastructure vendors such as Ericsson, Nokia-Siemens, Alcatel-Lucent and others. However, the IMS architecture is arguably overly complex and service providers have been slow to deploy it, for whatever reason. Every major service provider will probably claim that they have deployed IMS, but mainly, I contend, as pilot projects or spot deployments, e.g. the integration of SIP Trunking into the core network. I remain unaware of any significant multi-media service offering by incumbent vendors and I would argue that the parlous state of the finances of the leading IMS vendors indicates that the global communications networks are not retooling for IMS and that most investment is going into 4G/LTE.

With the advent of the smartphone as a flexible and mobile computing and communications platform (and the absence of any other compelling innovation by service providers), the mobile operators quickly lost control of the communications user experience. Customers now have access to multi-modal communications (i.e. voice, video, text chat, presence exchange, etc.) from alternative providers, i.e. internet-based services. This revolution is largely complete: the only thing maintaining the hegemony of the mobile service provider over the communications user experience is the existence of pricing plans for voice and data on mobile networks. It is currently too expensive to use wireless data for voice/video, but that will change.

In Part 1, I highlighted the possibility that ‘voluntary’ QoS services would start to restrict general access to scarce bandwidth and thereby undermine net neutrality by allowing vendors of QoS enabled services to starve other vendors of usable bandwidth. Shortly after Part 1 was published, I became aware that AT&T and Verizon, in the US, were spending billions of dollars in aggressively seeking new wireless data spectrum:

  • In early August it was announced that AT&T was acquiring Nextwave Wireless, which is a holding company for spectrum licenses. According to Bloomberg, this is only the largest of 24 deals worth a total of $2.6Bn.

  • Later in August, the FCC granted approval for Verizon to purchase another spectrum holding company, SpectrumCo., as well as other assets from 4 cable companies for $3.9Bn.

Clearly, this new spectrum will be unavailable on existing devices, and it is too early to tell how it will be used. However, it is possible that it will be deployed for new services that will attract higher fees, (including guaranteed bandwidth/QoS services) rather than being thrown into the general bucket of wireless data access. Once again, harking back to Part 1, the regulators will play a useful role in ensuring that the principle of net neutrality is upheld, while allowing the network operators latitude to provide a reasonable return on shareholder capital.

So the question remains – who will the new consumer communications service providers be? Skype and Facebook have already been mentioned and I contend that ‘social network effect’ (see 'The Economics of Interoperability'), favors the large networks. However, enablers of communications (such as WebRTC) embedded in other applications (e.g. game consoles and browsers) are likely to play a role in initiating context-specific communications sessions such as a gaming session or the discovery of mutually relevant information on a web site.

While a mix-and-match, patchwork quilt of non-interoperable service providers works in theory and on a personal scale, the larger scale problem is more complex. Would we be happy only communicating with a small network of contacts, all of whom would be familiar with our preferred communications services and user alias (i.e. our ‘address of record’)? How could I communicate with someone who was outside any of my personal networks? Therefore, is there a role for a more general service that would allow those who are not current contacts to ‘discover’ our address of record? Only time will tell – but the strong trend towards social networking suggests that the days of the generally accessible ‘listed phone number’ are over and that people greatly prefer to communicate only with a heavily curated contact list.

So to answer the question of who the consumer/mobile service provider will be: it will be the social network/web site of choice. Access to that social network will be enabled via your ISP.

Accommodating ‘Dual Persona’ Mobile Device Usage

Clearly, there is an overlap between mobile and enterprise communications, i.e. the mobile professional. However, as has been extensively discussed elsewhere, the advent of BYOD has added an extra dimension to this overlap by introducing the concept of ‘personas’ into mobile usage; i.e. the notion that you use the same mobile device for personal and professional purposes. Suffice to say that the comments made above on the impending switch from the incumbent service providers to social networks apply equally to consumer usage as they do to enterprise mobile usage. However, the business persona communications will be routed via different ‘service providers’, i.e. those that service the business persona, including cloud and enterprise-based unified communications (UC) systems.

Enterprise Communications

Like individuals, enterprises (and this would include other organizational entities such as government bodies and non-commercial groups, but for the purposes of brevity, I will just refer to these entities as ‘enterprises’) operate within a network of contacts: in the business domain that network is normally referred to as a ‘value chain’.

Unified Communications systems, whether they are cloud based or enterprise premises-based systems, are being rapidly deployed (see ‘UC Market Deployment Data: Just the Facts Please’). The rate of deployment is strongly correlated with organization size, and clearly enterprises are hedging their bets by retaining PBX systems until they are no longer necessary. However, the trend is clear and the lack of response (or a derisory response – see ‘SIP Trunking Interoperability Update’) to UC by the service providers leaves enterprises with little choice. Add to that the increased utility and (arguably) reduced cost of UC (particularly in the cloud) means that the final outcome of ubiquitous UC is beyond dispute.

What is in dispute is the timeframe that UC will be deployed exclusively by enterprises. The main outstanding problem with UC is the ability to conduct inter-company communications (aka Federation see ‘What is UC Federation and Why Should I Care?’). Since there are no standards for multi-media federation, and only two vendors that currently support it (Cisco and Microsoft) for same-vendor only federation, enterprises have to rely on email and the PSTN (whether by SIP Trunking or PRI gateway connections) for now. While federation intermediation services (such as NextPlane) are emerging, the federation interoperability problem isn’t being solved. This is partly because achieving multi-lateral interoperability is very hard (see the section on ‘Why Mix-n-Match Interoperability is Unrealistic’ in ‘A Camel is a Horse Designed by a Committee’) but I also contend that the UC vendors have no incentive to solve it (see ‘The Economics of Interoperability’).

So we appear to be at an impasse. This is because there is a lot of money at stake: the UC business in 2012 is variously estimated to be worth $4-15Bn. Over the next decade, I would guesstimate that the global enterprise communications business could be worth well over $1Tr. My observations above and in Part 1 show that the incumbent service providers may have given up on controlling the user experience, but they haven’t given up on owning the network or, possibly, on delivering the service (more about that in Part 3). The question here is to what extent enterprise communications can be facilitated by UC if enterprise UC deployments remain islands of communications.

There are, today, UC users who are able to communicate seamlessly with other companies: i.e. those who are using cloud UC services such as Microsoft Office 365 and Cisco HCS. Inter-company federation is provided among the cloud customer enterprises as well as between the cloud and on-premises deployments of both vendors. I use O365 and use the federation feature extensively and it works very well. I have market data that indicates that federation is being widely deployed among publicly traded organizations: the figure for Fortune 500 companies is over 30%. What I don’t know is the extent to which they are yet using it compared with more traditional communications modalities. However, given the utility and cost (i.e. nothing except bandwidth consumption), combined with the pressure to reduce business travel, I can only assume that the deployment and usage of federation will continue to grow at an accelerated rate.

If UC federation is the feature that makes the UC ROI work, then I contend that the support of that feature is a key differentiator. As noted above, multi-media federation is currently only supported by Cisco and Microsoft, although instant messaging and presence federation is supported by Siemens Enterprise. There have also been hints from Avaya that this feature will be in an upcoming release – particularly since they recently acquired a session border controller capability, which is a prerequisite to UC communications across the enterprise network boundary. Interestingly, the Gartner Magic Quadrant for Unified Communications 2012 has just been released (8/27/12) and the Leaders Quadrant features only 4 companies:

  • Cisco

  • Microsoft

  • Avaya

  • Siemens

In particular, Cisco and Microsoft are very close to each other, as the upper right-most vendors. This has been the case for the last 4 years, but the gap between those two and the remainder is growing wider every year. However, multi-media federation is not all that sets these two companies apart.

The 2 Horse Race

If UC has two attributes that differentiate it from telephony, they are these:

  1. The technology is based entirely on the Internet Protocol

  2. The best implementations are tightly integrated with the computer desktop, common enterprise applications and various Internet services.

Enterprise IP routing, the enterprise desktop and enterprise applications are, for better or for worse, dominated by Cisco and Microsoft. These two companies are able to offer a “better together” UC solution with existing enterprise infrastructure that the other vendors will never be able to match. This advantage not only pays dividends in the feature set but, from a financial perspective, their other lines of business give them a revenue stream that they have been able to use to fund investment in UC and take a long term approach. In particular, the two companies have spent in excess of $10Bn each acquiring complementary technology (e.g. WebEx, Tandberg, Skype, Yammer) as well as in building and acquiring intellectual property assets to defend those investments (see ‘Voice over Intellectual Property’). Furthermore, the cloud-based versions of both vendors’ technology are, to varying degrees, in full scale deployment.

The closest competitors to Microsoft and Cisco (i.e. Avaya and Siemens) are both UC specialist vendors with no alternative revenue sources and are both owned by private equity funds; which limits their access to capital and new investment. The remaining competitors are, by general consent, struggling to maintain parity under the dual assault of premises-based UC for large enterprises and cloud-based UC for small and medium sized enterprises.

Once again, I made the argument in ‘The Economics of Interoperability’ that network effect causes customers to gravitate towards the largest networks – in this case, the vendors with the largest market share. Although others with an understandable vested interest would disagree with me, given the other factors mentioned above, I find it hard to conclude that the lead built by Cisco and Microsoft in UC can be surmounted. Furthermore, I doubt that any of the current competing vendors, other than perhaps Avaya and Siemens, will remain in the UC business in the 5-10 year horizon.

In Part 3, I am going to attempt to draw together the conclusions of Part 1 and Part 2 into a unifying theory for the future of UC. Whenever I make bold or contentious statements in my papers, my web site starts getting lots of hits from Washington DC and Brussels. Perhaps I should give my hosting service provider some advance warning.

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