December 2007 excerpt:

The SMB market has been attracting considerable attention from a variety of vendors and service providers this year, and with the variety of solutions visible at recent conferences, an update is in order. As the worlds of conventional telephony, Internet telephony and Web services come together, the choices are proliferating, not just for SMBs, but the service providers trying to sell to them.

Service providers basically have three approaches for offering communications solutions to SMBs. It is no longer enough to offer telephony services – as with the residential Triple Play, SMBs are looking for IP-based communications solutions to help them stay competitive and keep their costs down. To do this, service providers can develop their own solutions, or outsource this, either on a hosted or managed basis. With IP technologies continually evolving, home-grown solutions are difficult to justify, especially from smaller operators who have limited R&D resources.

The hosted approach is the most economical, as multiple SMB clients can be serviced by partitioning the softswitch. In these scenarios, the operator would typically partner with a feature server vendor such as BroadSoft or Sylantro. This approach offers a low cost of entry, flexibility to customize features, and quick time to market – for both service launch and new features. The managed approach offers additional flexibility, especially for the service provider in terms of having best-of-breed options for vendor partners. It also turns network management responsibility over to the carrier, so is a more complete form of outsourcing.

We see merit here, for two reasons. First is the need to integrate a wide range of elements across many fields – features/applications, gateways, security, QoS, billing, session border controllers, etc. No single vendor is exceptional in all these areas, and the managed model offers an overall approach to bring these diverse capabilities together into a single offering.

The second reason is the emergence of Web services as an integral part of the overall communications experience. SMBs are beginning to recognize the value of Web services and the Software as a Service (SaaS) model to create highly customized applications that require minimal technical expertise. A growing number of service providers – typically smaller competitive carriers – see this as an important driver for future business, and for this reason, have adopted the managed approach.

New Global Telecom (NGT) is a good example of a wholesale approach using a Broadsoft platform, whereas companies such as GlobalTouch Telecom have developed similar functionality using their own proprietary technology, which may give them an economical edge over Broadsoft or Sylantro based systems. VoIP Logic is another interesting player which utilizes a Sylantro feature server and a number of third party SBCs, and ties their managed service offering together with a proprietary Cortex middleware solution, which may be an indicator of how managed services will evolve for SMBs.

At a high level, SMBs can outsource with well known providers such as XO Communications, Covad (see Art of the Deal in this issue), Cbeyond and M5 Networks. However, for SMBs willing to look beyond this group, there is a wide range of solutions to consider. Some of the more interesting offerings we have been seeing recently included Fustiontel, Panterra (formerly Pandora Networks), Junction Networks , and Vocalocity. Panterra is an example of the pay-as-you-go SaaS model, especially for those seeking a unified communications solution. Junction Networks has their onSIP PBX platform, which builds on Open Source elements, but has reshaped them into an IMS-based architecture that SMBs can afford. Vocalocity claims to offer a flexible, easy to install hosted PBX service targeted at the micro end of the SMB market.

These are just a few examples of the innovation that both vendors and service providers are bringing to the SMB market, and we expect to see more integration of Web services into these offerings in 2008. As social networking platforms like Facebook gain currency as business tools, Web-based applications will become more familiar, and create value for SMBs. This should bode well for Web 2.0-style applications such as Iotum, Jaxtr and Twitter, and we think that as they become more widely used they will become acquisition targets. In earlier issues we wrote about two scenarios that set the precedent for this – GrandCentral being acquired by Google, and Tellme being acquired by Microsoft. For this reason alone, we will be closely following this market in the months to come.

http://www.mercatorcapital.com/newsletters/December2007newsletter.html#3