On Rad's Radar? - broadsoft Archives

The UC Space Right Now

2013-03-26T14:09:48Z

I was chatting with another industry blogger recently. We were discussing how there are a lot of VoIP Providers out there. I estimate it at over a thousand. However, I don't see the Hosted PBX space making huge strides. Before VoiceCon, the numbers showed that premise based PBX units were the stagnant -- not decreasing.

My associate says, "Everyone has a similar platform and features; sales are predicated on relationships and lacking that price. Key system emulation is big for VSB" (very small business = less than 10 employees).

In Icarus Deception, Seth Godin describes the marketplace changes that we are living in with the decline of the Industrial Age. Godin says that we live in the Internet fueled Age of Abundance.

"We do have an abundance of choice, an abundance of connection, and an abundance of access to knowledge. We know more people, have access to more resources, and can leverage our skills more quickly and at a higher level than ever before. This abundance leads to two races. The race to the bottom is the Internet-fueled challenge to lower prices, find cheaper labor, and deliver more for less. The other race is the race to the top: the opportunity to be the one they can't live without, to be the linchpin we would miss if he didn't show up. The race to the top focuses on delivering more for more. It embraces the weird passions of those with the resources to make choices, and it rewards originality, remarkability, and art." [Seth Godin]

So why isn't UC selling?

People suck at selling it. Companies suck at marketing it. Companies stink at deploying it.

I know that is harsh, but how many businesses ask for UC? Um, none. They want a cheap phone system and their smartphones.

If Apple made a UC platform, everyone would buy it. Why? It would be user friendly. It would be a little different from all the rest. It would be branded and marketed well.

No one even does anything cool with the IP Phones! Those full color screens on those tiny computers that run XML and have numerous soft buttons that are useless.

The Broadcore Connect UC bundle includes voice, video, messaging, conferencing and mobility solutions with various connectivity options. How is that any different than XO's or any other Broadsoft BroadCloud BroadOne?

Everyone is offering a bundle - ANPI, VoIP Innovations, everyone! It's worse than the allergy aisle at the pharmacy!

"Successful organizations have realized that they are no longer in the business of coining slogans, running catchy ads, and optimizing their supply chains to cut costs." - Seth Godin

What Did I Miss?

2013-03-26T12:55:58Z

After making the news for supposedly canceling tele-working (which they only did for 200 distracted employees), Yahoo is not acquiring. First, Y! bought Jybe, a social recommendation site. Now, "Yahoo announced it is snagging the mobile news reader Summly, created by 15-year-old Nick D'Aloisio," according to the USA Today. Now 17, Nick gets $30 million from Yahoo.

Oracle bought Tekelec, which was known for its Class 4/5 TDM switch in the day, but is now referred to as a signaling company. (Huh?) On the heels of its purchase of Acme Packet, I have to wonder what Oracle sees in the telecom industry that I am missing. Consolidation and bankruptcies are coming. There is too much debt, too much disappearing revenue, and too many companies that do the same thing. There are a thousand VoIP providers out there who could buy a telecom package from oracle IF they had more than 300 customers and any profitable revenue. Unfortunately, most of the VoIP companies can only take orders and not sell. It has become a whore's game of how low can you go - in LD, international, termination, toll-free, and POTS line replacement. It will be interesting to see if these purchases end up being Oracle's Palm.

Global Capacity came out of bankruptcy with a new owner, Pivotal Investment; a new PR firm, iMiller; and new marketing spin in the One Marketplace. Netwolves, UNSI and EarthLink have joined the platform either to sell circuits or to extend their reach for MPLS.

The FCC released its wireless study that Congress requires but doesn't read. ARPU has been steady from 2009-2011 but voice revenue is dropping as data revenue increases. Is the wireless industry competitive? The report doesn't say. What do you think?

Broadsoft released UC-One, its IMS FMC offering. Basically, after signing up 400+ customers, it now has to sell deeper into each account, because there are no more new accounts. So all you BSFT customers, start selling IMS and FMC vis UC-One. Leslie says so.

Broadsoft also blogged that UC demand was outpacing supply, which makes me laugh. On the street, where sales are actually made, customers are seeing 2-4 quotes for phone service. No one is asking for UC, but that doesn't mean unified comms isn't being quoted and sold. Why would the analyst say that? One, he might not be watching enough service providers to see sales growing. Many of the VoIP companies are private and don't do PR or report numbers to anyone, so how would any analyst know the size fo the market, revenues, sales, seats sold, etc.? Two, UC is being quoted but not being purchased - due to poor sales skills or customer sticker shock or the fact that Premise PBX are still selling. Finally, it could be that UC only works with integration. So if the customer isn't using the 3 or 4 applications that integrate with the UC platform, it won't be a good fit (or will require big dollar integration). There are number of reasons why UC sales look dim. A lot of it is education to the customer and to the sales teams, but also a lot of businesses just want fast Internet, a smartphone and cheap dial-tone.

Sprint will start carrying Mitel's hosted PBX solutions as part of its broader Cloud Wholesale Services portfolio.

CallWave Patent Suits and a Rumored Acquisition

2013-02-01T17:49:28Z

At ITEXPO East in Miami Beach, where the parties are never ending it seems. No one thing says this but having spoken with quite a few people and adding it up myself, it looks like Leonid may get bought by Broadsoft. The two already work closely but a few crumbs on the path - like executive changes, Leslie Ferry at ITEXPO, and a few other crumbs - lead me to call this. A friend says that it wouldn't be a surprise.

It's kind of ironic that CallWave lost a patent dispute to J2 in 2007 and is now suing everyone - AT&T and Google, Verizon and Google, T-Mobile and Google, and Sprint and Google.

CallWave is also suing Telovations, which is in the process of being acquired by MSO, Bright House Networks.

CallWave Communications, LLC is an intellectual property company, according to its CEO's LinkedIn profile. It's this kind of litigation that waste taxpayers time and money. I could see if you were actually using the patent, but if you just sit on it... come on. We need patent reform in this country.

VoIP in 2013

2013-01-17T17:26:10Z

It's January and people are still making predictions about 2013. Dave Michels wrote a nice piece about the history of Level3's 3Tone service, which I was pretty familiar with due to four of my clients rushing into the void to sign up - just as Level3 was aborted the service. I view this move by Level3 as one reason that I don't see Jim Crowe as the visionary others do.

Today, we see VoIP Innovations rolling out a complete wholesale private label VoIP service. It might be too late for another entrant in the space, but I think the wholesale Origination/Termination space is flat with low margins, so it's a pivot towards higher margin and new prospects.

Most predictions about VoIP center on two things - mobile and video - just like they have for the last few years. If you really want business VoIP to take off, you need more inter-connection, in order for HD Voice and Fax over IP to work across NNI's. Remember the VoIP Peering Fabric?

According to Frost, "Approximately 42 percent of non-cloud unified communications users intend to deploy hosted phone systems in the future." Well, seeing as how the Hosted PBX market is still smaller than Centrex that didn't require much of a crystal ball. As the RBOCs delete copper, Centrex will die too. (Seems strange that they would be so quick to get rid of POTS and Centrex service since the margins on those are big.) Most of that Centrex business should convert to Hosted UC systems. The only thing stopping this conversion is the sales teams of the cloud comm companies. If ever you were going to invest in your sales teams, NOW IS THE TIME!

Why? People are not buying the same way as they did 4 years ago. The services being sold are not the same as 4 years ago. However, the sales people ARE the same as 4 years ago!!! Get the disconnect???

Will the mobility piece be a hurdle for some Cloud Comm companies? Maybe. I think that the SP (service provider) that can sufficiently integrate their MVNO with Hosted Exchange and their Hosted PBX offering will have an advantage. I would say be a big winner but to win, that SP would need a great sales team and other elements of the organization at the peak of its game (billing, customer service, deployment, on-boarding).

Congrats to Vidtel for scooping up Alex Doyle as VP of Marketing. Doyle had a long run at Broadsoft before a short stint at Polycom. Expect big things at Vidtel, a video conferencing company that doesn't rely on hardware as a crutch.

On that note, ACT Conferencing, one of the leading conferencing service providers in the US, is announcing a partnership with Vidtel to deliver cloud-based video conferencing. ACT will be a channel partner of Vidtel selling the Vidtel MeetMe service. Just an example of the ongoing shift in video conferencing towards cloud applications (from hardware).

One last trend I am seeing is that a lot of SP's are leaning heavy on the channel for sales in 2013 - FreedomIQ, Vidtel, Panterra and EarthLink among them. [Note: ELNK just laid off 15% of its workforce.] How effective that will be depends on a number of factors that not all these companies have figured out yet. The glaring hole in that strategy is that if you have issues - with the service, the channel program, tech support - the channel will abandon you. Even if you fix the problems, you have to regain the trust you lost. It's a tough road.

I think 2013 is a year of opportunity for any cloud services. I just don't know who the winners will be.

Am I Selling Cloud?

2013-01-07T16:34:47Z

I signed up as the first agent for Broadsoft's second customer in 2003. They were unprepared to sell via the channel, and even less prepared to market their offering in general.

In 2005, I signed up as an agent for another Broadsoft shop. It was a wholesale offering for service providers. The company had problems delivering quality service.

When I look back at all the VoIP companies I worked with, most sucked. They could not deliver on the service promises. Mainly, I think because they were in it for the Arbitrage.

I had a long discussion with a reader on Friday where he expressed concerns about most telecom and VoIP companies treat engineers poorly. He mistakenly thought that CLEC's and VoIP companies were in the engineering business. They are not. They are sales & marketing machines that happen to offer VoIP. The engineering, the service delivery, the customer care -- are all secondary concerns. Selling and billing are the primary concerns.

When I say this industry is built on Arbitrage, I mean that since the dawn of the first IXC, any competitor in this space has been about "I will save you money." It has never been about building something better and growing the total revenue -- it has always been about selling a cheaper substitute for the ILEC. This is why the debt is high and the revenues are flat or declining for most companies.

One reason the ILECs are winning is because their replacement services - voice, texting and mobile data -- actually cost more than the replacement services!! This chart shows that mobile data revenue has surpassed fixed broadband revenue. Of course it has -- mobile broadband is expensive!!!

RAD-INFO INC has signed a lot of NDA's and a lot of agent agreements to sell VoIP and other cloud services. Usually it has amounted to very little.

My clients have been selling cloud services - like virtual desktop, Hosted PBX, Hosted Exchange, XaaS, and VPS - for a long while. I only sell to an end user through a client service provider. I am selling cloud, but I am selling it to the service providers and through them to the end-users.

From what I have seen, the hype of 2012 has certainly helped the marketing for cloud services, so 2013 should be the year that the needle actually moves on the revenue side.

Of course that depends on whether the service providers can actually sell their services and provision them to the customers' satisfaction. (Both of which are up in the air presently.)

Telovations is Getting Acquired!

2012-11-26T18:41:00Z

As the Hosted PBX space is finally gaining traction, carriers are buying instead of building. ShoreTel bought M5. Comcast long ago bought NGT. Even Broadsoft bought a service provider, Adaption Technologies.

It's public: Bright House Networks, a top 10 MSO, is acquiring Telovations, a Broadsoft based UCaaS provider. Tampa Bay is not only home to Telovations but one of the biggest markets for BHN.

Telovations will become part of the Enterprise Sales division at BHN, reporting to Craig Cowden, SVP, Network Engineering & Operations, and Enterprise Solutions, Bright House Networks.

This makes me wonder about the rest of the Cloud Communications Alliance members. Who's next?

On a similar front, 8x8 just made Gartner Magic Quadrant. It's stock is more than 50% higher than it was in June. Analysts have it a buy due to strong revenue growth. The market cap is about $457M for approximately $110M in revenue. It would be worth it for someone like TWC who does not have a Hosted PBX service yet. That is the funny thing about the BHN-Telo deal: TWC usually does things first and BHN follows. This time, it may be the other way around.

Moves and Changes This Week

2012-11-19T16:29:14Z

Cisco announced plans to acquire Meraki, a managed Wi-Fi company, for about $1.2B.

Broadsoft announced UC One and now Rich Communications Services (RCS) to be added to its BroadCloud SAAS platform. [UCStrategies]

After Softbank put $20B into Sprint, Sprint turns around and buys some US Cellular markets for $480M. Consolidation - that's all we have left as an industry.

RUMOR! Google and DISH launching wireless network! This is the rumor, since the FCC is about to rule on spectrum that DISH controls (40 MHz of MSS S-band spectrum in the 2 GHz band, that the FCC renamed AWS-4). This spectrum may get cropped and added to the H-block auction. Should have an FCC announcement by Thanksgiving.

Right now, One in five smart phones sold in the U.S. is from the Samsung Galaxy series. I guess the $1B patent fine was nothing!

Money, Market, Launch - News

2012-10-12T18:28:47Z

I can't always write about everything happening, so here are some tidbits:

The TCA added 17 more members at the CPExpo in Orlando as the TCA closes in on 550 members - about 200 of whom have signed up to get certified as a CTP.

The US Secretary of Defense announced that Cyber-attacks could threaten US infrastructure. The DoD is working on a response. It is a constant game of cat and mouse - and the mouse is a fixed target.

SaaS company, Workday, IPO'ed today with a 70% bump to rake in $637M. "The company has not turned a profit." And revenue last year was $134M. That cloud buzz is a hit with investors.

"Integra Telecom today announced that investment funds affiliated with Searchlight Capital Partners, L.P. have acquired a significant equity stake in the company."

Virtual Communications Express is VZ's Broadsoft based SMB Hosted PBX offering that has some integration with Google Apps and a dashboard. I know someone who is exhausted and glad it launched!

An inside look at the Sprint-Softbank negotiations. Customers? No a worry in those rooms.

Master Agency, Intelsys, blogs about the huge opportunity in sales that agents have. "Conservatively we believe the US addressable market share for the telecom services channel of which we are all part is $100 billion annually, or $8.3 billion in monthly spend. This excludes most of the Fortune 1000 on the high end, and the SOHO/consumer segment on the low end.... , Intelisys Sales Partners will own about 0.2% of the addressable net billed market share." The numbers say we need more volume to move the needle.

Some Moves That May Seem Like News

2012-10-02T04:17:34Z

Who is going 100G? Both XO and Spread Networks announced its deployment of 100G technology. The surprise? Bright House Networks announced that it will extend its relationship with Fujitsu and utilize that vendor for 100G in its metro network.

Comcast is going after E-Rate business - through the channel! They will be trying to hit the ILEC's in the breadbasket with this move. The RBOCs are most vulnerable here since neither ATT nor VZ allow agents to sell e-rate.

Comcast hits its 20th state with Business VoiceEdge, its Broadsoft based cloud-based voice and unified communications solution, in California. Competitors need to pay attention, since Comcast sells inexpensive Hosted PBX on its own network -- read No QoS issues!

TelePacific has made its SmartVoice PRI, SIP and business-line services available on a nationwide basis.

EarthLink already has an MVNO deal with Sprint from Deltacom. Now ELNK has a wholesale agreement with Clearwire for "high-speed fixed and mobile broadband service to consumers."

FairPoint taps marketing exec Barbara Dondiego as new CMO. Not picking on Dondiego - and don't know her - but she hasn't worked at any successful telcos - DeltaCom, WilTel, and MacLeod - so BK or bought.

MetTel hits 100K seats of Broadsoft. This makes them 5th by my calculations: Comcast has about 300K; 8x8 has about 210K; M5/Shoretel Sky has about 140K; and West IP has about 100K approximately.

TiVo settled with VZ for $250M over patent dispute over DVR software. VZ TV is now at 4.5 million subs - and will pay monthly licensing fees for those subs to TiVo. VZ also "agreed to pay CloudTV developer ActiveVideo more than $260 million over the video-on-demand feature." This has something to do with the VZ-Redbox video streaming lab test.

6 SEO Myths by INC

Larry Lisser is prepping for another awesome StartupCamp Comms at ITEXPO this week, but still put out a blog post. Note that Evolve IP bought IPiphany and Nuance scooped up Ditech - for the Phonetag service.

Twilio has new money and a new CMO. Oh, and a deal with ATT.

Broadsoft Goes Direct?

2012-08-07T17:00:00Z

When I have spoken to Broadsoft customers, there has often been speculation that Broadsoft would have to go direct. The hope at the Cloud Communications Alliance was that all of them would be merged into one retail company. Did something like that just happen?

Broadsoft announced yesterday that they acquired Adaptation Technologies. All my Google search showed was that Adaptation Tech sold SIP Advantage®. Adapt-Tech even has an agent channel.

According to the press release, BSFT just wanted Rialto®, a web-based service operating platform. Adapt-tech mentions it on the website: "Agents and resellers can leverage the capabilities of Rialto® to quickly sell, provision, activate and bill for VoIP services in a fully automated, paperless environment."

One BSFT employee writes on G+ that it is likely BSFT just wanted Rialto to improve provisoning for cloud services. BroadCloud is a heavy Wall Street bet for the company.

One comment on a listserv: "If they use this chance to get their corporate mindset closer to the actual end user of their product, it could be a good thing for everyone."

The business model is primarily sell more licenses, so if they sell a platform that will make it easier to sell more licenses.....

The Cloudy Race to Zero

2012-08-06T18:44:59Z

There has been an discussion about the Transactional Agent - and his demise. I beg to differ. I think The Cloud will end up being transactional as well.

A couple of months ago, Microsoft lowered its pricing on Office 365 in March to compete with Google Apps at $50 per year per user.

At first, I thought only MIcrosoft and select partners would be offering Office 365, but with Sprint's announcement today, it looks like anyone can get in the game.

I was sitting in a CLEC training when the subject of Hosted Exchange came up. The CLEC would offer special pricing to not lose a deal. So again "We will lower our pants to get 1000 seats." Price war.

These works are licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 2.5 License.

How do folks choose CRM? I'm guessing for some, it is solely on price. Agents could certainly have a collection of 3 - Salesforce, Dynamics, Zoho - to offer to clients. See? Transactional.

Hosted PBX - how many Broadsoft players are there? Over 400. Plus add in Metaswitch offerings from EarthLink and others. It can definitely be sold on price.

Avaya's Live Connect at $19 per user is certainly a shot across the bow (towards a price war).

In an interview, one Tampa cloud provider said, "You can save a bunch of money by going to the cloud." That's when I knew it was going to be another race to zero.

ASIDE:

Managed IT had this problem a couple of years ago. Everyone and their uncle was selling managed IT via remote apps. Once it got to sub-$10 per machine, the pros had to leave the market, because you just can't provide decent service at that price point. I see this happening with other services like email, office, Hosted VoIP. Mainly because people sell it as a line item that can be comparison shopped.

It will be Bundling that changes this.

When there are only a select few offering a service, margin is high and knowledge is clustered. As more enter the marketplace, the knowledge spreads thin (not a good thing), value dips and price erodes. For example, a boutique IT shop selling integration of a software suite can sell on value and target highly qualified prospects who will need this service and be willing to pay for it. When it moves into the mainstream, not so much. More people selling similar services - or at least outwardly similar to the market. Less sales people that truly understand the value of the service; that can prospect accurately; and can sell on value. Price war. Red Ocean. See that ship? That's where it is heading to the Red Ocean.

Masergy Buys Broadcore

2012-07-10T17:18:58Z

I knew Broadcore was in play, just like many of the Cloud Communications Alliance members. Masergy has a strategy to be more than an MPLS reseller. Picking up Broadcore gives Masergy

"Demand for business-class cloud communications is growing at a rapid pace. Infonetics reported that revenue from hosted PBX and UC services grew by 33% last year and SIP trunking revenue grew by 128%. Further, the number of seats for hosted business VoIP and unified communications services are expected to more than double over the next four years," the Masergy press statement reported. (see more about the Hosted PBX Market here)

"Broadcore will continue to operate as it does today, but as a wholly-owned subsidiary of Masergy. The Broadcore service platform will be directly embedded into Masergy's global MPLS network platform, which was purpose-built to deliver real-time applications like Broadcore's voice, video and mobility offerings."

Masergy kind of has to add some services because the dumb pipe model - even MPLS - is falling apart. Transport only works when you have an exclusive route or the fastest route. Otherwise just transport is a commodity that is price shopped online - or through an agent.

This reminds me of Qwest buying US West in 2000. Qwest needed revenue and traffic to fill its pipes. Hence, buying the ILEC. Masergy had a similar problem: transport in need of some services. And most likely many MPLS customers are utilizing either SIP trunking or Hosted PBX. It might as well come on the same bill.

This won't be the last merger in 2012 - that's for certain.

Rumor has it that one ILEC isn't done acquiring and T-Mobile may be a target.

Eat Your Own Dog Food

2012-06-28T17:44:27Z

On yet another call from a service provider yammering about its features - in pure marketing spin. How about who exactly is buying your stuff and why? A Buyer Profile perhaps.

Why are we using GoToMeeting for this call if you are such a great UC provider?

#Irony

If you don't eat your own dog food, how do expect others to buy it or sell it?

Broadsoft Enhances Trunking

2012-06-13T03:58:34Z

Besides the stock price changing, Broadsoft is enhancing SIP trunking.

"BroadSoft, Inc. has announced the release of an enhanced SIP trunking solution, enabling service providers to add unified communications and mobile applications to their SIP trunking offering with speed and ease. With it, service providers can increase the value of their SIP trunks and improve their Average Revenue Per User (ARPU)." [UCSttrategies]

I wonder if they are enhancing SIP licensing as well. One of the big issues for Broadsoft based service providers is the licensing fees, especially the maintenance payments on unused licenses. For service providers with 25K licenses and only 12,500 seats, they are effectively paying a double fee for those active licenses. Hurts profitability.

With Hosted PBX revenue at roughly $500M (as estimated by Insight Research Corp.), this market has not grown like so many analysts had predicted. As Razorsight writes, "That is far less revenue than many had been predicting would be the case by now. "The hosted PBX/VoIP service providers had only garnered less than 4% of the small business lines (seats) as of year end 2010," Insight Research says... such forecasts suggest the hosted IP telephony market will not be bigger than the original "Centrex" business."

VoIP revenue is not anywhere near TDM revenue or wireless revenue. VoIP is mostly sold on price - SIP Trunking, consumer voice (Vonage, Magicjack), and even Hosted PBX. So the revenue is always going to be less than TDM and certainly less than cellular (even though that is VoIP too). That means margins are going to be less than in TDM.

There is an interesting prediction by The INSIGHT Research Corporation that states, "Over the next five years, all of the major US telcos and cable TV MSOs are expected to lose small business customers to a new crop of hosted service providers that will offer PBX-like voice services at lower reccurring costs and with minimal site equipment expense." This means that POTS lines and SIP circuits (digital voice lines that MSO's deliver over cable) will be subject to replacement by not just cell phones but some type of Hosted VoIP service. If you listen to some, the softphone on devices like the iPad will replace not just phone lines but handsets as well. To what degree? Maybe INSIGHT says in the study. i don't know. But this will be very low margin revenue, because in triple play bundles, the voice service costs about $15.

So what is this blog post about? How much longer will Broadsoft based providers continue to pay the licensing ~~tax~~ fee? On top of that, since Broadsoft already boasts over 400 providers and Metasswitch has most of the rest, there won't be many more softswitches sold. That means that most (if not all) of Broadsoft's future revenue will need to come from licensing and maintenance. Being public, BSFT will eventually have to raise the costs of maintenance to service providers to continue to fund research, fixes, etc. (Factor in consolidation and going out of business sales and that means even less sales.) Broadsoft may be te next Nortel. It certainly looks like Coppercom.

When one of the biggest independent Hosted PBX providers, M5 Networks, moves off the Broadsoft owned platform (M6) to its own switch, that doesn't bode well for the future. Since there isn't a roadmap for M6 Skinny migration to BroadWorks (without a forklift and a lot of tears), what happens next?

It's a solid platform. It scales. It's the licensing and business model that are the hurdles.

Just something to think about.

Why Did ShoreTel Buy M5?

2012-02-10T15:48:57Z

Recently, M5 Communications was acquired for about $160 million by ShoreTel. The premise PBX vendor had a bad quarter and caved to the pressure of Hosted PBX. Avaya, Interactive Intelligence and MITEL have hosted offerings. At some point, ShoreTel had to jump on that bandwagon - due to the big opportunity (ask any analyst) and the threat that cloud comm places on premise only sellers.

I think some of that money - now $162 M based on the stock - was for Dan and his team to stay on and continue to run the machine. There are a couple of million in accelerators in the LOI (letter of intent), also. Plus what does Shoretel know about running a service or the proprietary softswitch that M5 switched to in 2010? The M5 team had to stay (for a while).

ShoreTel's C-level exes probably saw that the hole in their strategy by not having a CaaS strategy. After that, the decision comes down to build-or-buy. The advantage to buying is that - if done properly - you get revenue, a market proven service offering, and a sales channel. Building from scratch has a big learning curve, capital investment and little revenue.

By scooping up M5, ShoreTel gets a proven business model. At $48 million in revenue, M5 was one of the giants in the Hosted PBX space with a proven sales record that had grown 30% in the last year. Their indirect and direct sales teams were effectively selling the service. Not many VoIP providers are organically growing revenue. In 2010, M5 was doing about $32M in revenue when it acquired Gekkotech, a Chicago based VoIP provider that was utilizing M5's softswitch platform and bringing in about $8M.

M5 left the Broadsoft platform in 2010. This move increased the profit margin by eliminating the licensing fees to Broadsoft. This might have been another factor that made M5 attractive - margin. For the second quarter of fiscal year 2012, ShoreTel revenue was $58.0 million with a net loss of $1 million. Hardware alone is a difficult business to be in, ask Amazon or Dell.

Under the terms of the deal, M5 shareholders will receive approximately $84 million in cash and 9.5 million shares of ShoreTel stock, for a total of about $146 million on stock value at close of sale. Moreover, M5 shareholders have incentives that could realize up to $13.7 million, according to the company's press release.

M5 will be run as a separate division with CEO Dan Hoffman still managing things. This is a smart strategy; the same one that TelePacific took when it acquired Telekenex. The culture of CaaS is different than hardware / premise PBX. There is some rivalry there. Why break either corporate culture?

This transaction is just another example of how the legacy telecom world will have to jump into the new cloud world - mostly through buying since it will be cheaper and faster that building it from scratch.

Why can't the rest of the cloud comm space get this deal? One reason is that investors don't look at companies with less than $10M in revenue. You don't have a proven model at $4-5M. It's a different deal at that size. At over $20M, investors know that you can sell and you can scale. It's proven. Another reason was the average revenue per customer at almost $2000. As Q-Advisors told the crowd at Cloud Comm Expo in Austin in 2011, that number has to be north of a thousand to be attractive. Those are pretty good reasons for the 3x revenue number.