VoIP providers move to consolidate, expand hosted offerings, but can they maintain growth?

Samantha Bookman, FierceTelecom8x8's recent acquisition of cloud-based call center provider Contactual may seem like an unusual move by a provider whose core competency is selling business-class VoIP service. But it actually reflects a trend that is picking up among IP-based voice providers to round out their service offerings.

In May, Transcend United merged with LiquidSpoke, combining their managed services portfolios to offer a more rounded solution. And in March, West Corp. acquired Smoothstone, integrating its hosted communications suite with collaboration specialist Intercall (a company West Corp. acquired back in 2003).

Since a cornerstone of VoIP's marketing message is the ability to set up and manage a business phone system at a much lower cost than a traditional on-premise PBX, adding a virtual or managed contact center capability to the service portfolio makes sense for VoIP providers. It's one of a number of managed services offerings that IP voice providers are adding through mergers with or acquisitions of competitors in the space in a quest to bring true unified communications to customers.

But can SMB-focused VoIP providers balance their growth-through-acquisition strategy with their target on the budget-minded SMB segment and still remain profitable?

Smoothstone's EVP of sales and marketing, James Whitemore, who I spoke with in a July interview, felt that a focus on small to medium businesses doesn't adequately prepare VoIP providers to handle the demands of larger companies.

"Most have built their market presence primarily focused on the SMB marketplace or in the case of NGT also on wholesale. Smoothstone's focus is very much on the enterprise space," he said. "Typically, you'll see a hosted or cloud customer averaging in the $500 to maybe $5000 a month ARPU ... At Smoothstone we're averaging around $35,000 a month with deals in the $100,000 to $200,000 a month in earned revenue being quite normal. The average sized customer that we acquire is far different from most hosted providers, and that's a big factor in the volume of seats and our market share."

But if SMB-focused providers are bringing in lower ARPU, that doesn't mean their overall revenues will be less or that they'll be unable to scale to meet increased demand from either their existing customer base or potential enterprise-class customers. That depends on other factors that impact the VoIP space: competitive pricing, quality of service, depth of offerings, and so on.

Consolidation is clearly a benefit to IP-based providers, and it's a trend that has picked up much more steam in 2011 as companies like 8x8 gain the market share to comfortably pick up other providers who have components they need, like hosted contact centers. Even Smoothstone, which sees its competitors as Tier 1 carriers like AT&T (NYSE: T) and network and equipment providers like Cisco (Nasdaq: CSCO) and Avaya, chose to become part of a larger piece of the unified communications puzzle by courting West Corp.

"It became very clear to us that to reach the next stage we would need a significant partner, to keep that enterprise focus," Whitemore said. "We essentially are asking (a potential) customer to sign with Smoothstone versus signing with one of those industry giants. Just the extra effort we have to go through to close a sale based on the size and the ... nature of the company has been, it's been difficult, it's been challenging. ... (what) we've been looking for is a partner who had global scale... and West Corp. is a $2.5 billion, 37,000 employee company that ranks up there with the big guys."

Consolidating companies will continue to keep prices competitive in all segments of the IP-based voice markets, but as the VoIP market continues to grow, it's likely that many of the "cheap" or "free" offerings will fall away or at least receive less attention from companies that have built their brand around that mantra. Focusing more on business VoIP and less on the consumer end of the market is, of course, the fast road to higher revenues. And as the larger VoIP providers continue to shore up their portfolios through acquiring smaller companies, it will be interesting to watch and see if their market competitiveness, currently firmly between the hundreds of VoIP companies still out there, begins to impact traditional carriers.--Sam

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