Recently Moody’s rated a private UCaaS provider, which led to a discussion on where the market for UCaaS is going. We are past early adopters and firmly in a Red Ocean in my opinion. Here are several factors that will affect the growth of UCaaS.
The primary hurdle is the dominance of Zoom and Microsoft Teams. Cisco is struggling for Webex get a sizable market share. Meanwhile MS Teams is approaching 300M users worldwide. Zoom has hit 3M Phone subs. RingCentral only has 3.5M despite 9 large partners and thousands of channel partners.
[updated numbers for 3Q2022]
Think about that for a second: Cisco is struggling to seize market share with Webex.
Since most UCaaS providers struggle for free cash flow, investors have had to pour lots of money into this space. For several investors, enough is enough, yet the avenues for exit are limited as SPACs and IPOs aren’t effective in current market economics.
The CAC (cost of acquisition) has included free months of service; free phones; 10x SPIFFs; and lately reduced MRC. This means it takes longer to see a profit per customer – if ever. Luckily, free phones offers are slowly fading, especially as the providers highlight mobile apps and softphones. SPIFFs are also not as generous as in previous quarters and there are more gotcha’s per promotion.
UCaaS isn’t the preferred product (and never has been). UC+CC or CPaaS+CC or Direct Routing or some combination of these functionalities. This makes selling it harder since the sales teams need to understand the products, packaging and features better in order to offer the right service offering that will appeal to the prospect in front of them.
It isn’t simply how many phones? It is what are you using now? What isn’t working? What is the long term goal of this project? What are you trying to achieve by changing? This is no longer transactional.
There is a shortage of people who can consultatively sell these services. For years, telecom has been about replacement services. Telecom has been order-taking replacement service for a savings since long distance. Broadband as T1 replacement. UCaaS as PBX replacement. Even SD-WAN to replace MPLS. Those kinds of sales do not lend themselves to a exploration of business goals and outcomes, pain points beyond price savings. This puts pricing pressure on the providers, especially with a max $10 price tag from Zoom.
Take into account that – like Moody’s said, “other telecom providers can and do offer similar services bundled with connectivity services”. As I have stated over and over again, there is a lack of positioning and differentiation in the space. Hence, providers take revenue any way they can get it – Direct Routing, SIP trunks, free months, white-label, retail, resale, low price. To some extent RingCentral and 8×8 are great examples of that.
This isn’t sustainable strategy to be all things to all people. To try to sell anything that the customer will buy. AT&T used to be the go-to for all things telecom. Now wireline sales are declining rapidly across all ILECs. Government and enterprise sales are decreasing at AT&T as other vendors have moved in to sell services that eat up some of the AT&T budget. For example, Comcast winning a government contract is free money for Comcast who never had government contracts before — they all went to VZ & AT&T. Now everyone is taking a slice off the government budget.
Personally I don’t see CAGR above 15% for most providers. RNG and Zoom may see 25%+ growth but the rest of the players will only be growing at 10-15%.
Now that SPIFFs aren’t as generous, we will likely see a decline in UCaaS sales. Many people believe the channel is coin operated. I say most sales are – direct or indirect. As an independent commission only salesperson, a partner will sell what is profitable and/or quick. When the SPIFFs were generous, that is where partners’ attention went. Now that the SPIFFs have softened, attention will drift elsewhere.
NOTE: If the channel is coin-operated as many believe, then softening SPIFFs must soften sales. In addition, unaligned partners will shift to sell where the SPIFFs are (move on to the next vendor who is paying well.)
For several providers, there has been an increase in the head count of the channel organization that has resulted in labor costs increasing – unjustified by the sales revenue generated.
A final factor is the TSB space, (formerly known as master agencies or brokers). In the last 16 months, the $650M in private equity money has fueled over 100 transactions, that are disrupting day to day sales. Partners are spending all their time either trying to sell the business or collect commissions. Not enough time on selling. So many musical chairs that it is disrupting the sales process and sales flow of partners.
While everyone thinks more partners equals more sales, let me point you to RNG which has the largest telcos as partners plus Mitel & Avaya (see image above) and its growth has been level.
One UCaaS Provider claims over 7000+ partners, yet has not surpassed $100M in UCaaS revenue. Sandler Partners claims upwards of 9000+ partners, but Sandler is not one of the biggest TSBs.
The KPI shouldn’t be number of partners; it should be how many get a commission check. The whole point is to have Selling Partners, not count how many fog a mirror long enough to ink an agreement. The agreement doesn’t make you a Partner; the sales activity does.
How would any vendor even touch half of the partners a TSB claims?
Every week the TSBs add more vendors. It is part of their business model, but how well does the TSB represent that vendor? Again, the wrong KPI. It isn’t the number of TSBs or aggregate number of partners, it is about Alignment.
It is about a Partner profile and a Target market. Then asking the TSB what partners fit that bill. (Very few TSBs have this knowledge of their umpteen partners.)
It isn’t getting more and more partners because then you need more and more staff to cater to those partners. I say cater to because the process doesn’t really seem like enablement or empower.
It is Aligned partners that sign, certify and sell. That have QBRs and mutually set goals or plans.
Otherwise you have 7000 people running around trying to get a deal at any price, not knowing the product or the hot button or anything. This can result in disgruntled customers who have been sold the wrong product and who may ultimately cost the provider money. How many support calls does it take to make a customer unprofitable? Just a few!
We are seeing it now with customers that purchased during the pandemic with their hair on fire (in 2020), taking whoever answered the phone and took the order. Now they are re-evaluating everything and the churn at some vendors will be noticeable.
Another vendor is looking to a VAD as the answer to more sales, considering the traditional master agencies (TSBs) sales funnel has slowed down. This move will be even more challenging than they realize. However, it does illustrate that the sales pipeline coming out of the TSBs is slowing down. Some of that is due to musical chairs at the TSBs; partners being acquired; TSBs being acquired; and partners retiring or semi-retiring.
Vendors and pundits alike have stated how the PE money demonstrates the success of the channel. No it doesn’t. Reaching 55% of all sales for a vendor demonstrates that. Vendors being 100% channel showcases that. PE money just means that the pitch deck was a great story that an exec at the PE firm liked enough to gamble some dollars into an MRR business that he did not understand.
I would add that partners that have gone upmarket to enterprise are choosing different vendors than they had when selling into SMB, but that goes back to marketing (branding, messaging, target, value prop).
More UCaaS providers are going to have to be like Weave and pivot to two or three verticals that they heavily integrate into. There are several vendors that just target hotels. There are a few targeting healthcare. There are a few targeting dentists. You could say a few have targeted Enterprise but that isn’t the same as saying the best fit customer is manufacturing or pharma or oil.
The most efficient vendors will know who the best fit customers are and why; and has partners who can sell to them. (Not all partners can sell to all prospects – again a mismatch when just fogging mirrors.)
Red Oceans Strategy has one drawback: it needs a lot of demand for the pie to grow. 40% of the market is going to stick with on-premise PBX. Mitel pivoted to double down on on-premise PBX. NEC, 3CX, Sangoma (which owns a lot of hardware: VoIP Supply, E4, Asterisk, Digium, Fonality, and FreePBX) and others are still happily cashing checks for new on-premise PBX every quarter.
There are a number of reasons that UCaaS isn’t growing for vendors. Much of it is market forces and the rest is marketing.
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