COVID-19 Has Accelerated the Need for Unified Communications

Work-from-anywhere is here to stay, and that’s to the benefit of companies in the unified communications, unified communications as a service (UCaaS), and contact center as a service (CCaaS) space, according to Tom Muller, CTO of OTG Consulting and president of Hayden Consulting.

“The COVID wave is a big difference between now and the last quarter,” he said during a recent GLG Teleconference. “Last quarter, everyone thought we were getting through it and it was going to be a nonissue by this time of the year. However, everyone’s seeing that this is much more long term. In business evaluations, at the top of the list are solutions that allow everyone to work from home.”

Below are selected excerpts from our broader discussion with Muller about the industry.

What is the current state of the unified communications, UCaaS, and contact center as a service market? What are the top two or three trends we should be aware of?

The state of overall digital transformation applications, UCaaS, CCaaS, and the unified communication area is quite healthy. It was healthy before the pandemic, and the pandemic kind of put a supercharger behind it. Many companies were caught flat-footed having people work from anywhere, and it taught all industries a great lesson that these pandemics can happen. We really have to not just plan to get through this one, but possible future ones.

For the trends I’ve been seeing, there’s interest in Microsoft Teams. The valuations have just skyrocketed. Microsoft is very strong with its marketing engine, so the company is going after it pretty heavily. There’s been a lot of UCaaS and CCaaS adoption, as well as a lot of network reevaluations. That’s the other area trending, SD-WANs, for their increased reliability and significant cost savings over private networks. Microsoft is really a driving force. It purchased a vendor called Metaswitch, which is similar to the Cisco-purchased BroadSoft.

How has demand changed since Q3? What are you seeing within Q4, and how do you expect things to go in 2021?

Opportunities continue to be up. But we’re seeing customers take a step back and put a lot into their evaluation timelines after they went out the window when the pandemic hit. We’re seeing a more traditional evaluation timeline for UCaaS and CCaaS, roughly eight months to a year for a larger firm. A lot of the vendors, including RingCentral, 8×8, and Vonage, came to the table to get people up quickly. A lot of them offered free service for a period of time. It was a win-win for both sides, getting more customers and allowing people the ability to work from home.

But at this point, even though opportunities are up, closures are flat. Any time there’s an uptick of closings in a previous quarter, that sometimes causes flatness in the next. As we go into 2021, more of those firms would have gone through their due diligence, and we expect to see all digital transformation to once again be on a sales-closing and implementation uptick.

What about pricing? What have you tracked since Q3? Are we at a decline yet, or still holding at the $20 to $30 range?

It’s still holding in that $20 to $30 range. We’ve been in that range for more than a decade. UCaaS in particular has always been against the old primary rate interfaces, or now session initiation protocol trunks, in that they can be leveraged over more seats than on a one-to-one basis. So 100 users could use one PRI, which has 24 channels. That helped bring costs down for a private branch exchange as far as connectivity to the voice network. UCaaS is on a per-seat basis, so that kind of goes against that. That’s held down the price. A lot of the offers out there are based on certain platforms, such as BroadSoft or Metaswitch, so they have some underlying costs. They couldn’t go down a whole lot further, because companies are supplying free minutes with the offer, and there are hard costs involved in that.

The newer wave of UCaaS embeds communication straight into the application. Those have a high instance of bringing prices down, because they are efficient in supplying that code and using it directly in the application. In those big cases, there is a sub-$10 price per customer, and those vendors are actually making money, whereas the traditional UCaaS user or vendors are below their costs at that level. We’ll see more and more of that going on. However, there’s also the trend of bringing more call center capabilities into the UCaaS offer. People want that included, and it’s helping drive the price higher, because call center seats traditionally cost $125 to $150. That’s significantly higher than $20 to $30, so the UCaaS vendors are wanting to bring in more functionality so they can kind of go upstream toward call center pricing. There will be a downward trend of call center pricing in the whole CCaaS world, but the size of the markets is enormous, so no one will run out of opportunities.

We saw some churn for companies such as RingCentral this past quarter. Do you expect churn to continue, or are we more in a stabilization period now?

Churn is part of this marketplace. If a product doesn’t perform how customers expect it to, that will create churn. In defense of UCaaS vendors, that dissatisfaction can also be from the internet network or LAN systems runover. It’s not always the fault of the UCaaS vendor, even though they get blamed first. Churn has, over time, been minimized. We see right now that some of the firms such as RingCentral that offer free services for people to get up and going, if they’re counting those seats, that would naturally be one reason why its churn has taken an uptick this quarter, because those short-term customers are trying to settle their long-term solutions, so if they chose something else, that drives churn.

Which companies are most exposed to churn, and why?

The SMB marketplace has probably been hurt most by the pandemic. Those companies don’t have as much resources as larger companies to wade through this. That would have affected churn across the board. But the smaller niche players are much more exposed to this churn, particularly as they tend to go with the smaller companies, and there are probably a dozen smaller UCaaS providers out there. Not Rings, 8×8, or Vonage. RingCentral has done a nice job of taking itself upmarket and has had some big wins even at the 20,000-plus-seat level, which really would have been unheard of 10 years ago.

What should we expect to see for 2021 and 2022 in the space?

Digital transformation overall will gain traction. COVID has not derailed it at all. In fact, it’s accelerated it. Our business environment has changed for the long term. This benefits digital transformation, both for applications like CCaaS, UCaaS, for example, but also network transformation. Don’t forget the whole issue that you can’t dump all this voice side that’s now turned into digital IP and put it on your same networks because that will affect them. Voice is a real-time application, very susceptible to jitter, which is the variance of delay. So it really needs a thorough look at people’s networks. There’s a lot of transformation going on, particularly SD-WANs, enabling companies to go away from just private MPLS networks.

As people’s contracts come to an end on their networking side, there’ll be a lot of change. That will increase the reliability of those networks, lower their costs, and enable them to have other applications like UCaaS for voice, CCaaS for the call center, and also video. It’s no longer a luxury. It’s no longer a Cisco telepresence, a $20,000-a-month room to use it. Everyone now does video, but that puts a huge strain on the infrastructure.

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About Tom Muller

Tom Muller has been CTO of OTG Consulting since December 2016 and President of Hayden Consulting since May 2015. Prior to this, he was a Sales Director of IP Voice Transformation at AT&T from February 2008 to May 2015. Before that, he was Director of Enterprise Sales at MegaPath Networks, Director of Global Sales at Savvis, Senior Vice President at LineSider Communications, Vice President of Sales Engineering at ICG Communications, and Vice President of Sales Engineering at Qwest Communications.

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This technology industry article is adapted from the November 23, 2020, GLG Teleconference “Unified Communications, UCaaS, CCaaS — Quarterly Update.” If you would like access to the transcript for this event or would like to speak with technology industry experts like Tom Muller or any of our more than 700,000 industry experts, contact us.