September 2000

Comm Servers: Redefining The Category

BY BRIAN STRACHMAN

How things have changed! Virtually every major PBX vendor now offers either a comm server, or a product designed to compete in that market. Don't misunderstand, the switch vendors aren't worried. 1999 was once again a record year in the PBX market, with sales and service revenue exceeding $8 billion. It's the growth rate that the "big iron" guys are looking at. Even in what is considered a great year for the PBX, it only grew by about 10 percent in revenue. By way of comparison, the comm server grew over 300 percent in revenues to $78 million.

SLOW AND STEADY
Is the tortoise gaining on the sleeping hare? I believe the answer is yes. The PBX industry is the hare -- so far ahead that it appears that the other contenders may never catch up. The tortoise, or comm server, may be gaining ground, but the hare's lead is such that he can afford to rest on his laurels. Seriously, what is $78 million compared to $8 billion -- barely one percent of the switching market? The spectators of this race are thinking the same thing.

With all due respect to AltiGen, Artisoft, Picazo (who will soon be out of the race thanks to an Intel acquisition), and the rest, they will never have aggregate sales in the multiples of billions of dollars. The comm server companies are fighting giants that have been in the business for decades. But I do believe that the companies with a vastly different view on enterprise switching will change the way we look at the market.

THE RACE HEATS UP
Just look at LAN telephony products. They are effectively comm servers running call control and applications that just happen to use packet handsets. Suddenly the race becomes more interesting -- it's not just small, innovative start-ups, but other speedy giants like Cisco and 3 Com. And I didn't even count those products in the $78 million in comm server sales. Currently, Cahners In-Stat Group segments the non-traditional enterprise switching market between the comm server vendors and the LAN telephony vendors. LAN telephony products use Ethernet and packet handsets to deliver voice to the desktop, while comm servers use traditional telephone wiring and standard analog handsets. Because of the vast differences in technology and potential customers, it makes sense to segment the market. However, that will not be the case for much longer.

WELL, WHAT IS IT?
Comm server vendors are beginning to offer LAN telephony as an optional feature on many of their products. But, if a comm server has a number of LAN-based voice ports, is it a comm server or a LAN telephony product? For an analyst trying to clarify an already confused market, this creates a serious problem.
It gets worse when the PBX vendors enter the mix. They too are offering products with optional packetized voice ports, and some are beginning to migrate their systems to Windows-based servers. So, is a PBX that uses Windows for some applications and offers packetized enterprise voice a comm server, a LAN telephony product, or is it still a PBX?

Currently the market is segmented by its respective technology, not its functionality. This creates an extremely confusing situation for the customer. A typical buyer is asked if she wants a comm server, LAN telephony product, or a PBX. They all perform the same function and offer similar benefits, just in different ways.

TIME TO SOLVE THE IDENTITY CRISIS
The confusion created by this hodge-podge of names is causing the switching industry to shoot itself in the foot. At a basic level, all of the products do the same thing. The only differentiation is at a technical level, which is irrelevant to many buyers. It is analogous to the networking industry and the differences between a router, a switch, and a hub. For most lay people these products do the same thing, with the only differences lying at the technical level. (Routers, switches, and hubs operate at different levels of the OSI model.)

It is for this reason that I forecast high growth rates for the comm server industry. I predict revenue of over $4 billion in U.S. sales by 2004. I don't necessarily believe that these small start-ups will become multi-billion dollar companies in the next five years. While I give them credit shifting the paradigm of the enterprise switching industry, the large vendors will still garner most of the revenue. I predict that increasing numbers of PBX vendors will alter their products such that they will have to be categorized as comm servers. Furthermore, comm servers will increasingly offer packetized voice, and thus will fall into the LAN telephony space. In this manner, the current vendors will "jump" categories and bring their revenue with them. This is simply a matter of moving sales from one pocket to another.

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