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Vonage and Hosted Consolidation

Cloud Telephone System Consolidation Continues

SimpleSignal, a local (Dana Point) UCaaS provider, was purchased by industry giant Vonage and the press release is as fun as ever. Ah the acronym just rolls off the tongue: UCaaS (pronounced “you-cass” I believe), short for Unified Communications as a Service, which in this case is internet telephony plus a desktop software, smartphone or browser-based interface for your users. It is no less awkward to say than “VoIP” which rhymes with the “goit” in goiter, I suppose. Our industry needs a marketing overhaul.

Vonage, or rather the rebranded Vonage for Business, is gobbling up competing hosted commercial telephony providers left and right. Starting with Telesphere for $114M, a provider we represent and like very much, moving on to Vocalocity for $130M, who we had just signed up with, and now the aforementioned SimpleSignal, which has been bought for $25M, Vonage appears to be moving swiftly to combat hosted solutions from Mitel, Shoretel, 8×8, Five9s and every single telephone carrier.

Similar to our friends at Los Angeles-based j2 Global, Vonage seems to be intent on rolling up as many small, successful firms in their space as possible as valuations keep rising on cloud-based service businesses.

Similar to Telesphere, SimpleSignal pursued the ‘hosted plus dedicated circuit’ model where VoIP traffic is delivered over a dedicated data connection from your premise to the provider. By requiring a dedicated circuit, QoS is assured and

SimpleSignal by the numbers:

  • 1,600 customers
  • $11M in revenue (per Inc Magazine) or $20M in revenue per TMC
  • So, $573/mo per customer in revenue. Which seems high for the industry except we know that these guys push an MPLS circuit on their customers.
  •  $25M purchase price

If we assume each customer has a single $400/mo MPLS connection, monthly revenue from MPLS circuits is $7.7M (1,600 customers x $400/mo x 12mos). That is a low margin business, as the lines are leased wholesale from a Bell descendant.  The $400 is an estimate based on prices we see in Los Angeles, which tend to be lower than what we see in most US local markets.

Another critical assumption is that one MPLS circuit per customer. If you look at the customer list of SimpleSignal, there are a lot of chains and franchises. I am not sure that a small franchisee with two phones could be talked into getting a MPLS circuit but perhaps they didn’t have a choice.

A real advantage of the MPLS portion from a business standpoint, IMHO, is that you lock hosted customers into a multi-year contract. UCaaS and SaaS consumers are used to month to month or annual contracts – telling them that you would like to cast the agreement as a 2, 3 or 5 year agreement typically falls on deaf ears. I hear from customers that the technology is thought to be too new, and one feature of SaaS-type services is the low switching cost (I should say, a low perceived switching cost, as porting numbers to a new service, leaving SalesForce, or moving from Office 365 to Google for Business, for example, are all painful events). Long contracts negate this.

SimpleSignal customers

SimpleSignal customers

By comparison, Vocalocity in 2013 had 21,000 businesses and $28m in revenue. That works out to $111/mo per customer, which is works out to 4 seats per customer at $25/mo a pop plus the monthly extra charges for items such as an auto attendant and additional phone numbers. If you net out the estimated MPLS charge of $400/mo, you at $173/mo per customer or let’s call it 7 seats per customer. This puts SimpleSignal in the 11,000 seat range, or about half the size of Vocalocity in terms of seats. Home Depot alone has 2,200 stores and Domino’s has over 10,000 world-wide so I think it is reasonable to question the penetration into these accounts, though this is in the end a good thing for the new ownership.

Point of all this discussion is to keep sight of what the cloud industry looks like. Mostly small businesses – what used to be called SOHO (small office/home office) – focused on savings and on UC and PBX features previously unavailable to them. The real drivers of hosted adoption will continue to be the increasing cost of POTS lines and the ever decreasing cost per megabit per second of internet access. Now that phone lines are approaching $60 per month before usage in LA, it makes even less sense to keep traditional phone service in a small business.

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