Rising Competitive Threat of Communications as a Service (CaaS)
Where and how is CaaS competing against Telecom and Cable?

By: Bruce Bahlmann - Contributing Author (your feedback is important to us!)

Created: August 26, 2008

Communications as a Service (CaaS) as well as everything (or “x”) as a service or XaaS involves migrating away from traditional licensing and installs of technology to deliver software, IT, Public Relations, Voice services, etc. as they are needed (on-demand) for a fixed monthly cost whereby minimizing the disruption in a business. While CaaS may have many names (e.g. Hosted Services, Unified Communications, etc.), they all seem to resonate around installing some customer premise equipment which facilitates fixed and mobile device access to the services which are maintained out of one or more central/regional facilities by the CaaS or Managed Service Provider (MSP).

After more than 20 years in this business some CaaS companies are starting to see daylight. According to Gartner, CaaS will grow from $251.9 million in 2007 to $2.3 billion in 2011 representing an annual growth rate of more than 105% - with the largest growth expected to come between 2010 and 2011. The sweet spot for this industry seems to be the Small to Medium sized Business (SMB) market where CaaS vendors have been successfully chipping away at mainstream telecom vendors (ILEC and cable) to offer significant discounts (up to 50%) for bundled services. CaaS slow start has been attributed to many factors but near the top of the list involves customers needing time to get used to higher, but better consolidated, pricing. As an industry, CaaS is seeing average pricing of around $50/seat but some operators have been able to fetch $100/seat or more based on expanding the range of services bundled and throwing in extras (like a T1).

Among the benefits of CaaS include:

• Low startup costs – No capital equipment to buy, expensive technical help to hire (virtual CTO), maintenance fees, or applications to setup and run – rather all services come as one packaged monthly rate in a pay-as-you-go model.
• Virtual company – Ability to support a distributed company through collaboration applications like unified messaging, real-time presence, audio/video/web conferencing, etc. as well as have the expertise to run a communications system that can reach employees around the globe.
• Guaranteed Quality of Service (QoS) and quick turn around – CaaS service quality generally sets the standard that internal IT departments aspire to provide and all services have been pre-tested, integrated, and preconfigured to work together, so adding a new service doesn’t involve lengthy deployment cycles.

The range of services include: Internet service, conferencing, email (outlook) integration, e-faxing, local phone service, long distance calling, business applications, and instant messaging.

500 pound gorillas in this space include the usual suspects. Microsoft is working on a “Service in the Sky” for unified communications which does for CaaS what Comcast’s Headend in the Sky (HITS) does for small to medium sized cable operators. Service in the Sky has the potential to greatly expand the current service repertoire of competing CaaS companies (a number of which are already aligned with Microsoft) as well as establish a meaningful roadmap of continuous service additions and upgrades – especially with the announcement of Microsoft stepping up its deployment of new data centers. Cisco Systems recent acquisition of WebEx which already offers WebOffice, a set of applications offered as a service, has been thus far quiet about its CaaS plans. However, clearly it has assembled many of the pieces it would need to do this. Google and especially Amazon have also made strides in this area.

The trouble with competing with CaaS is the deep pockets of their technology and application partners. Near term, as CaaS companies become larger and more savvy they could move up market to small to medium sized enterprises which could further expand their existing market. However, their Achilles heel and what likely impacts their churn the most is a personal touch as well as a strong presence to compete in local markets. For now, they are just a mild annoyance in business telecom sales but this is likely to change in the next 2 years.

Breakdown of players:

Vendor:	Market:	Rev (2007)	Rev (2006)	News:
8x8	EGHT	$61 mil	$31 mil
Aptela	private	na	$0.250 mil
CallTower	private	na	$7.4 mil	Partnered with Nevotek, Inc. – 11/10/2006 New Customer – Cybermax – 06/20/2006
Cbeyond	CBEY	$80 mil	$76 mil
Cypress Communications	private	$70 mil
Intelepeer	private	$40 mil	na
M5 Networks	private	na	$11 mil
Smoothstone	private			New Customer – Southern Star, Inc. – 07/07/2008 New Customer – Healthcare Waste Solutions – 10/16/2007 Partnered with Advanced Technology Consulting – 10/16/2007 New Customer - Travel Authority – 5/11/2007 New Customer - Jones Plastic & Engineering – 3/5/2007 Partnered with Network Solutions, Inc. – 9/26/2006 Acquired Easy411 – 8/7/2006 Partnered with Solarcom Partner Services – 2/28/2006

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