For the past twenty or so years, the business communications narrative can be summarized in one word: cloud. It’s not just comms; it’s IT in general, including most applications and infrastructure. However, cloud exceptions exist, such as enterprise contact centers, which I will address in a separate post.
We have seen UC systems migrate to UCaaS. Premises-based video conferencing systems turn into cloud-delivered video applications, and contact centers migrate to CCaaS. Even the so-called premises-based world has transitioned from hardware appliances to software, often hosted on private cloud infrastructure.
The casual observer might conclude that the premises-based market has been abandoned, left for dead. But it hasn’t been abandoned, and it’s not dead. I’ve been through enough of these pendulum swings to know that there are even reasonable grounds to predict premises-based system growth will return.
Last week, Mitel surprised many of us that it’s abandoning development of UCaaS, and instead will do two things: offer its customers and partners RingCentral MVP and focus on the premises-based PBX market. It was a bold decision considering past efforts to develop UCaaS and the general expectations of the market, but let’s evaluate the news freshly.
First, UCaaS development is not a trivial undertaking. Mitel has been at it for over two decades. Mitel initially ported its PBX code to the cloud and then used acquired technologies (namely, from ShoreTel) to create its built-for-cloud solution.
As a legacy digital PBX company, Mitel was early to embrace VoIP. Mitel’s Teleworker phones, introduced in the early 1990s, put VPN functionality directly into its IP phones. If UCaaS was simply hosted PBX, Mitel would likely be a dominant provider.
UCaaS is much more than call control and includes some number of nines availability, a global presence that complies with local regulations, powerful administrative and user portals, and so much more. UCaaS has gone from startups to giants in twenty years, and Mitel had several competitive gaps to fill — and that’s assuming the competition stands still.
Mitel had to split its precious R&D dollars between its established PBX and nascent UCaaS businesses. This Jekyll-and-Hyde split of R&D put pressure on both businesses.
By partnering with RingCentral, it monetizes its base practically overnight (RingCentral paid Mitel $650 million in the partnership) and is now able to provide its customers and dealers a global UCaaS suite (messaging, video, and phone). The Jekyll-and-Hyde problem remains with its PBX competitors. While Mitel focuses its R&D and related resources on its PBX portfolio, most of its competitors are simultaneously funding UCaaS solutions.
The strategy is counter-intuitive in a cloud era, but the PBX market — albeit mature — remains a viable sector. According to Eastern Management Group, premises-based PBX system sales still accounted for 40% of the UC market last year. In its UC Worldwide Forecast, Gartner predicts that global UC spending will grow at a 4.1% CAGR to $50.8 billion by 2025.
The PBX market may be shrinking, but it’s not small and has less competition. Mitel used to compete with PBX vendors such as 3Com, Aastra, Inter-Tel, Nortel, ShoreTel, and Toshiba — all of which are gone (many acquired by Mitel). Even the vendors that are still around, including Avaya, Cisco, and Microsoft, have reduced or eliminated their PBX offers aimed at mid-market customers where Mitel thrives.
While UCaaS may seem like the place to be, it’s a sector that’s under considerable pressure. Microsoft Teams is growing rapidly. Last month, in its UCaaS Magic Quadrant, Gartner Research predicted that 15% of organizations will rely solely on cloud office suites for communications, including telephony, up from 2% in 2019. That’s an ominous prediction for the broader UCaaS ecosystem.
Another consideration is that the same report did not position Mitel’s own UCaaS offer favorably. Mitel is trading a long-term development commitment for an immediate opportunity, and it won’t have much delay in bringing RingCentral to its customers. Mitel is not creating a new, co-branded version of RingCentral, as it intends to offer RingCentral MVP directly.
Specialization seems to be the in thing. Mitel’s focus on one business is similar to the recent announcements that GE and Toshiba will each split themselves into three separate companies.
Mitel also plans to position RingCentral meeting and messaging services as an optional upgrade to existing customers. Mitel’s Cloudlink technology facilitates the addition of cloud-delivered services to its PBX customers.
Also, by distancing itself from a direct UCaaS offer, Mitel’s endpoints may become more attractive to other UCaaS providers. Mitel makes excellent wired and wireless, SIP-enabled IP phones and conferencing devices. UCaaS providers that previously ruled out working with Mitel the competitor may want to take a fresh look at Mitel’s devices — especially its DECT wireless handsets.
Though we often describe the modern PBX as a premises-based system, it’s usually not. The PBX has gone through several re-inventions: pull cords, mechanical, digital, and IP, to name a few. Most recently, the PBX transitioned from hardware to software, and that software can run onsite, in a private data center, or even on public cloud infrastructure.
That deployment flexibility is one of several reasons many organizations prefer UC over UCaaS. Other reasons include control, redundancy, and cost. Control means that organizations determine all of the implementation and operational variables, including system parameters and upgrade windows.
Organizations that are concerned about redundancy and resilience tend to favor their own systems. UCaaS tends to be reliable, but it’s outsourced, and mistakes, such as expired certificates, happen. Many IT leaders build out comprehensive backup and recovery plans that can easily accommodate premises-based UC.
Comparing the cost of premises-based to cloud is complex and requires a lot of assumptions. Businesses with more variability tend to favor cloud-delivered models. More predictable businesses like hotels tend to do better with premises-based models. Mitel is very strong in the hospitality vertical, including cruise ships, which always favor premises-based solutions. Mitel also does well in the public sector, finance, and education; all of which are still purchasing premises-based solutions.
An emerging factor that could result in increased demand for premises-based solutions is security. Not a week goes by that we don’t see a headline about some remote hacker compromising (stealing, modifying, ransoming) business systems. UCaaS has become intermingled with messaging, meetings, and general workflow. While these integrations clearly have benefits, having isolated systems can bring with them security benefits.
In the 2004 remake of Battlestar Galactica, Commander Adama takes pride in his starship’s wired phone system as it was not interconnected with the ship’s other systems, thus less susceptible to attack. I’d take a premises-based UC system if the Cylons (Cybernetic Lifeform Nodes) should attack.
Mitel’s decision was a surprise and no doubt gut wrenching, but it was the right decision.
Dave Michels is a contributing editor and analyst at TalkingPointz.