October 13, 2011

IP Communication - Business Growth and Survival Over the Next 5 Years

By Doug Mohney
Contributing Editor

As the world starts to shift more rapidly from legacy TDM to an all-IP world, it is clear some companies in the IP communications business are taking a long term view to grow and thrive. Others seem to have taken a more stoic approach to growth, engaging in a strategy of acquisitions to increase revenues. It's not clear if there's a right answer for survival and success over the next five years.

Acme Packet (News - Alert) and Metaswitch Networks have a relatively clear picture of where they want to be in five years -- all the more ironic since the two are starting to part ways over Metaswitch's aggressive entry into the carrier SBC market. Both companies realize they need to diversify their revenue streams from reliance upon a single good product and have a portfolio of products to offer service providers.

Each plans to build businesses with a combination of organic growth supplemented by select acquisitions to fill in specific needs in a larger, consistent portfolio of offerings.   And everything in the portfolio will (should) play well together. Both will leverage their existing customer base and industry reputation to promote their vision.

Acme Packet's vision is a migration from the SBC market to the Service Delivery Network (SDN), providing the tools to provide two-way quality of service for applications between parties, be it voice, video, or data-based transactions. Acme has a longer way to go do diversify, with over 90 percent of its revenues last year coming from SBCs, but that shouldn't be surprising since Acme has the dominant position with over 60 percent of the SBC market.

Metaswitch Networks is more diversified and further into its transformation into an IP communications software company. It started out with the mundane business of protocol stacks and stuck gold with its Class 5 softswitch replacement laying the foundation for growth into new areas, such as telephony applications. Today, the company is organized around three major areas: VoIP and Voice Applications, SIP Infrastructure, and 4th Generation Communications. Each area has its own set of products and the company has hinted in no uncertain terms that more products are on the way.

One other note: Acme had about $300 million in revenue last year while Metaswitch had a bit more than half that ($158 million or so at the recent close of its fiscal year, if memory serves).   Both companies expect steady growth in the wireless sector with the deployment of LTE and continued growth in the wireline sector as the world moves from TDM to IP.

Growth by acquisition has been a big part of BroadSoft's (News - Alert) strategy, first by buying up competitors to gain market share and then moving to acquire complementary businesses/products/technology and integrating them into the company. In its latest round of buying, the company raised nearly $116 million cash in a June notes offering, followed by using the money to purchase iLink in September and Moval Applications in October.

Acquisition-based companies face the challenges of integrating their purchases into the bigger machine so to speak and transitioning customer relationships without disruption. There's also the need to present a clear roadmap for existing and transitioning customers as to where the company is going. Service providers start looking at alternatives if they believe existing products and services won't be improved or supported in the future.

Doug Mohney is a contributing editor for TMCnet and a 20-year veteran of the ICT space. To read more of his articles, please visit columnist page.

Edited by Jennifer Russell