Vonage buys Vocalocity: Better Late Than Never

For a good part of this past decade businesses have been moving rapidly to cloud-based communications… Especially small business. Bryan Martin, 8×8 CEO – his company is one of the leaders in the hosted VoIP space, told me in 2009 – around the time of the financial crisis that the situation was good for his business.

While the business market kept improving, the consumer space got tougher as competition from Skype and MagicJack rapidly reduced margins in the space.

It has always been odd to me that Vonage ignored the business market. The branding of the company made so much sense to apply to small and medium size telecom purchases. Especially when you consider how fast the SIP-trunking market has been growing as businesses upgrade from circuit-switched to packet-switched connections.

It seems Vonage finally realized the opportunity and has purchased Vocalocity for $130 million in a deal Vonage CEO calls transformative. In my opinion this deal makes a lot of sense and I believe Vonage is late to the enterprise space.

In terms of what happens next – Vonage marketing has been tremendous… It is the Vonage television commercials in 2003 that get much of the credit for getting cable companies and even ILECS moving down to the path to offering VoIP services. They will likely do similar things in the hosted SMB IP communications space meaning they will build more awareness regarding cloud-communications.

The losers here aren’t necessarily other cloud vendors but the CPE companies like Cisco, Mitel and Avaya. I surmised some time back that these companies would be buying hosted voice providers after they saw ShoreTel purchase cloud vendor M5 Networks. I was wrong but the logic is still sound. The industry is waiting to see how hardware vendors will combat the growing cloud threat.

If this deal doesn’t wake them up – perhaps this portion of the press release associated with this purchase will:

The total SMB market for voice service in North America is $15 billion and 32 million lines.  Vocalocity has focused on companies with 20 or fewer employees, which represents more than 60% of the total market.  The long-term opportunity for growth in this segment is substantial given that 85% of SMBs still purchase voice service from traditional carriers at rates that are frequently 40-50% higher than those of Vocalocity. The SMB hosted VoIP market is forecast to grow at a compound annual rate of 27.5% over the next 5 years.

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