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Incumbent Service Providers Hold Key to $10 Billion Cloud PBX Market

Eastern Management Group logoThe cloud PBX market could get to $10 billion in global sales according to Eastern Management Group research.  Reaching this target quickly largely depends on the incumbent service providers and how they perform in the all important large enterprise market segment.   These service providers – most have been in business for decades – are in some of the strongest positions to be leaders in the cloud PBX industry and reap the largest market shares.  Many though are facing headwinds selling large enterprise customers on the carrier’s value and commitment to cloud PBX. 

Purchases of cloud PBX are split between large enterprise customers and small businesses with the balance between enterprise and SMB not expected to change considerably over the next several years.  More than a hundred service providers sell cloud PBX today including dozens of small, aggressive service providers.  We’ve benchmarked many cloud PBX vendors and found several examples of good infrastructure, leadership, marketing and customer value.

Cloud PBX Market

The target customers for both incumbent service providers – the telcos – and their cloud PBX competitors run the gamut from small business (SMB) to large enterprise.  Many have at least a few customers in every camp.  Few service providers – we found none – would eschew the large enterprise customer for what are obvious reasons.  However the incumbent service providers from NTT and AT&T down to small Tier 3 telcos may be perceived by large enterprises as having the attributes most desirable of a cloud PBX vendor – more about that later.  The attributes position incumbent service providers to be very strong in the enterprise cloud PBX market.  By targeting the enterprise, incumbent service providers may have a better footing than some less established competitors to propel the cloud PBX market to the $10 billion level.

Incumbent Service Providers are Enviably Positioned

Some although not every cloud PBX service provider can satisfy the expectations of large enterprise customers.  We anticipate the enterprise market will likely account for around half the cloud PBX industry going into the future, which means incumbent service providers may have an opportunity to capture a sizeable market share.

Right now cloud is a small part of all PBX industry revenue.  However it can be the next big thing for the business telephone system market.  The first major milestone should be to get cloud PBX sales to $10 billion a year.   That’s a long way off and will take some doing.  Let’s put a $10 billion cloud PBX market into perspective.  In 2013 total PBX industry sales to the end user were around $47 billion worldwide.  If cloud PBX had been $10 billion of that number, which it wasn’t, that would have given cloud PBX a respectable 21 percent of the PBX market.  That’s not an unrealistic target considering there has always been a large and ready market for cloud PBX.

Cloud PBX is a current generation of Centrex – CO and CU – first rolled-out in 1961 by incumbent service providers.  For decades Centrex served a large customer base and delivered stable and recurring revenues to the carriers.  Principally it was a flagship offer for their largest customers.  Government agencies, state universities, hospitals, extremely large enterprises – the majority with private networks – were served a turnkey solution, billed monthly, from the carrier.  Notably their equipment, service and reliability were peerless.  Centrex for small businesses came later.  What these customers enjoyed was also a reasonable set of features at a fair price and the opportunity to trade off phone system capex for opex.  All of the above is essentially what cloud PBX offers today.

In time the demand for Centrex significantly relaxed.  It was overtaken by several forces, but two stand out.  One is the value proposition of PBX equipment companies who could not afford to give ground to the carriers.  The second is the carriers themselves who shifted their own priorities.  Up to this point, in the United States at least, incumbent service providers held close to a 20 percent market share of the overall PBX market just by selling Centrex.  Customers never rejected the core attributes of a flexible, reliable, reasonably well featured opex solution for PBX needs.  Essentially it was just better marketing by competitors that collapsed the Centrex business.  As such the Cloud PBX industry has emerged.

Most cloud PBX service providers we’ve studied target business customers of all sizes, all industries and with scant restriction on geography.  Since the speediest buyers are price driven small business, most competitors find themselves gravitating here.  While being a safe harbor for all competitors including incumbent service providers, it is possibly not the market segment they are best suited for.

Few competitors can match what incumbent service providers already bring to enterprise cloud PBX

To an enterprise customer the incumbent service provider represents the mature, large, time-tested, network company with world class facilities, proven in deploying communications systems larger and more complex than those of its largest customers.  These service providers are frequently the best financed competitor.  Many have offered Centrex services for decades.  They have processes, NOCs, data centers, BSS and OSSs.  They scale quickly.  In other words the incumbent may represent a rock-solid choice for the enterprise.   These attributes would also allow incumbents to distinguish themselves from many though not all cloud PBX competitors.  The incumbent service providers may be in one of the stronger positions to meet the cloud PBX needs of the large enterprise customers.

Small business customers receive pretty much the same benefits as enterprises, but what drives their buying decisions is frequently different.  Small businesses may be inclined to trade certain features and services for low prices.  Our benchmark research shows that some service provider competitors to the incumbents are positioning themselves to capture and retain the majority of the small business market.  Yet the SMB cloud PBX market is relevant to all service providers since it accounts for half of the hosted PBX industry.  What the incumbent must decide is where this SMB market fits into the carrier’s priorities.

The cloud PBX is a competitive marketplace and no service provider is assured of success. However incumbents may have a strong opportunity take as much as half the market.  It could depend on how they place their bets.

Eastern Management Group published a 2014 White Paper for Service Providers who are conducting a strategic review of their cloud PBX business or doing a first time business case to enter the cloud market.  It’s entitled “Conducting a Cloud PBX Strategy Review” and is available FREE on request here….

The Eastern Management Group is a technology consulting and research company established in 1979.  The firm provides marketing consulting services to more than 400 technology companies and service provider clients worldwide.  Eastern Management has a recognized cloud consulting practice.  Contact jmalone@easternmanagement.com or visit us at www.easternmanagement.com

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