Will Telco’s exit the Avaya/Nortel Premises Equipment Supply and Maintenance Business?
They’ve had a great run. Even with Deregulation, the Telco’s still managed to hang on to a large portion of the market that supplied and maintained PBXs to private and public sector customers. Even as margins in this market on the supply of the hardware, software and licenses continually declined, the extremely generous margins afforded by long term maintenance contracts and the control of the equipment that lucrative WAN and PSTN services were attached to, the Telco’s saw a benefit to being a Reseller of the equipment.
Depending on where you get your statistics from, it is estimated that upwards of 60% (the other 40% presumably would have been supplied and maintained by Nortel directly or Nortel’s non-Telco channel partners ) of Nortel’s installed base of telephony ports have been supplied and/or maintained by Telco service providers. Combining Nortel and Avaya’s market share numbers it puts them pretty much on top of other PBX hardware suppliers worldwide so Telco’s won’t walk away from that business on their own or will they? That decision would be highly dependent on a number of factors including Telco management focus, financial, customer preference and the OEM suppliers views of where Telco’s fit into their partner ecosystems.
There are three issues that may tip the scales in favour of the Telco’s exiting or at least defocusing their efforts on the supply and maintenance of Premises Equipment when it comes to Nortel and Avaya equipment.
The first one is a movement towards contracting the Telco business model to focus on Core Business. That’s generally viewed as providing Carrier Infrastructure and Services and other Regulated offerings. Margins for the supply and delivery of customer premises equipment, like all technology, is under constant pressure and certainly doesn’t provide the return on investment required for an organization with the cost base of a Telco. As mentioned above, it makes sense if you get a nice fat maintenance contract that renews year after year, after year, after year, after year, after year…….(you get the idea) – in fact, there are many customers who have had a Telco maintenance contract on their PBXs since they bought their very first PBX (from the Telco). As of July 1st, 2010 the cost of providing those PBX maintenance services has changed dramatically for all partners including Telco’s.
Avaya’s Partner Assurance Support Services (see a previous blog post about Understanding Avaya’s Partner Assurance Support Services if you aren’t familiar with PASS) is a very dramatic change in the cost and margin model for Telco’s providing services. In the short term, it is expected that most customers that have a support contract can expect to see a maintenance pricing formula that looks like this: Last Year’s Maintenance Pricing + PASS = Your New Maintenance Price. Customers will quickly figure out that the entire burden of a PASS contract (ie. an increase in maintenance pricing) has fallen directly on to their already tight budgets. Certainly some customers will take that as a cost of doing business and resign their maintenance contracts with their existing maintenance supplier as they have during the last 25 years and swallow the maintenance price increase with the supplier more than happy to maintain their healthy margins which frankly are necessary to sustain their huge cost bases that have also been developed over the last 25 years. However, most customers will take a much closer look when it comes to maintenance renewal time. At that point in time, customers who see the formula of Last Year’s Maintenance + Increase for PASS = This Year’s Maintenance Price. It’s up to everybody to make their own decision on cost/value but the reality as pointed out by more astute customers see some of the responses we’ve had to our blog posting) is that they have seen an increase in their costs seemingly without an increase in service or support and that sets off alarm bells all over the place that something is not quite right in the world.
This change in policy may very well set off a series of unfavorable chain reactions that may be difficult for a Telco to swallow. The first part of this negative chain reaction is the possibility of a lucrative annuity business like PBX maintenance being subjected to competition if they attempt to pass the PASS burden on to the 60% of the installed base that they currently support. In addition, Avaya won’t be happy with the pass-thru of PASS because they will start to hear from disgruntled customers about the increase in maintenance prices – or even worse, disgruntled customers who won’t complain but will just go to one of their competitors based on the rule of thumb that for every customer who complains 10 more just simply abandon. The market and Avaya will bring immense pressure to the Telco’s to absorb the costs of the PASS contracts themselves – by the way, you can be sure this was Avaya’s intention in the first place to have the costs absorbed and not simply passed along. If the Telco’s have been running their business based on a cost to margin model that has significantly changed will they be able to adjust before shareholders and management start to see an impact to the bottom line?
The third possible issue for Telco’s in the supply, delivery and maintenance of customer premises equipment from Avaya/Nortel is based on the simple fact that in order for Avaya to remain in business, it needs to sell more products and deliver upgrades and added functionality on a fairly regular basis. The difficulty that they face as an OEM is that customers can’t afford to finance the continual upgrades and new product offerings with constrained budgets and fiscal responsibilities even if they wanted to take advantage of some of the new features being delivered unless….there was a way to take money allocated elsewhere. Avaya has a plan for this and it’s called the “Self Funded Roadmap”. This will be the subject of a soon to be released blog posting “Understanding Avaya’s Self Funded Roadmap” but it could have been easily called “Take the Money you are Paying to the Telco and Give it to Avaya to fund equipment purchases Roadmap”.
