“I like our poker hand.”

Me too.

That’s the main message Vonage’s CEO Alan Masarek conveyed to our tribe last week at their first-ever analyst event. For a change, this was an analyst-only gathering, and you can’t beat that for listening and learning from each other. Maybe 20 analysts and Vonage’s brain trust going over their roadmap and vision for the road ahead. Some analysts there also took in a bit of the massive AWS re:Invent event that overlapped Vonage, and I have no doubt it was a very different experience. I couldn’t manage to attend both, but in terms of spending quality time with the right people, I’m happy with my choice.

I’ll explain here why I agree with Alan – along with some points of caution to keep it real – but there’s more to explore to understand why Vonage is well-positioned in a very crowded and messy market. Much of our time in Scottsdale was spent getting updates on how their three major pieces fit together – both in terms of the offerings and the entities that came via recent acquisitions.

In a nutshell, that’s Vonage Business Cloud (VBC) for UCaaS, CPaaS – driven by Nexmo, and CCaaS – driven mainly by NewVoiceMedia. There’s more to it, but the main idea is that their portfolio has three distinct pieces, with One Vonage being the roadmap to tie them all together. That ground – and beyond - has been covered very well (and faster than me!) by colleagues Blair Pleasant and Dave Michels, and I would encourage you to check out their reviews here and here.

So, forget about the details for now. Based on last week’s event, I’m seeing two basic things that Vonage has done very well – at least so far – that lead me to like their poker hand as well. Simple things, but they go a long way sustained success – pivot and acquire. Let me explain.

Pivot – from whoo hoo to workflows and CX

Remember those goofy ads when Jeff Citron was running the show? I go back to Vonage’s early days, mainly through the other Jeff – Pulver – one of the company’s co-founders, whose VON conferences were the epicenter of VoIP when it was truly disruptive and dangerous to the status quo. That’s ancient history, and while Vonage didn’t kill off AT&T (it almost did, but that’s for another time), they knew residential VoIP was a race to zero. Their pivot to the business market began in 2013 via acquisition, first with Vocalocity, followed by Telesphere in 2014.

Of course, what’s interesting is how Vonage kept going with residential, and that has served them very well. Most people in our circle gave up home phone service ages ago, but there’s still a big market out there, and by virtue of Vonage’s strong brand, they remain a strong player. One comparable is 8x8, who has a similar early-days pedigree to Vonage, and while they started out in residential, they pivoted entirely to business some time ago. They never had Vonage’s name recognition in VoIP, so that was probably the right move for them.

And then there’s magicJack, perhaps the greatest gadget play in VoIP lore. To this day, I’ve never understood how they’ve managed to survive, and I’m sure Vonage is thankful they don’t have to compete at the end of the market.

Anyone can pivot, but it’s all about timing and execution. Vonage certainly pivoted at the right time for business, as cloud was maturing to the point where OTTs could offer much more than VoIP. First-generation UC was premises-based, and limited the playing field basically to the telco vendors. Cloud gave rise to hosted options, and now those vendors can’t migrate there fast enough. Being cloud-native, OTTs could move faster, and now the race is fully on for anyone with a platform.

That’s where execution comes in, and we got a good sense of that at the event for how they’ve parlayed many moves into a successful portfolio both for SMBs and enterprises. The proof is in the pudding, and this slide below from Alan’s presentation says it all. Within four years of entering the business market, those revenues have caught up to residential - $499M and $503M respectively in 2017. Clearly, residential is a sunset business, but it’s highly profitable, and that margin subsidizes their push into business.

I can’t think of anyone else who has this luxury, and as pivots go, it’s a pretty good game plan. As mentioned, 8x8 exited residential early, and their other main OTT competitor – RingCentral – was never in the residential market. It’s also worth noting that this pivot is paying off on the top line. As the slide shows, combined residential and business revenues now make Vonage a billion-dollar sales machine. That’s impressive in its own right, but also in competitive terms. RingCentral and 8x8 are their main OTT rivals, and Vonage’s revenues are roughly the equivalent of these two companies combined. That’s a strong poker hand.

Acquire – the right pieces for the right reasons

I have less to say here, but with Mitel just going private – again – it made think differently about Vonage’s moves. For a while now, CEO Rich McBee has positioned Mitel as a consolidator, acquiring both competitors and complementary pieces. That strategy makes sense given their market standing. Mitel will never become a Tier 1 player like MSFT, Cisco and Avaya, but could certainly become the leading Tier 2 player, and acquisitions were the way to do that. There were plenty of other Tier 2 competitors to choose from, along with an ocean of Tier 3 trying to hold their own.

Mitel has had a rocky history being both public and private – not just themselves, but also via the companies they’ve acquired. Going private again with Searchlight feels a bit like Avaya going private to restructure and later go public again, but it’s more about financial maneuvering than responding to changes in the marketplace. Nobody is perfect, but they needed two tries to take arch-rival ShoreTel, and going for Polycom seemed like punching above their weight. Mavenir never made sense, and there isn’t a desk phone vendor out there they didn’t like. Don’t get me wrong – Mitel is a major player with a solid cloud portfolio, but there sure is a lot of hardware in their asset mix.

Most people think of Mitel when talking about consolidators in our space, but it seems to me that Vonage has done a better job with acquisitions. Everything happens faster with cloud now, and it’s almost impossible to have sustained success now just with organic growth. Under Alan’s vision, all their moves make sense, especially for the trifecta he talked about and Blair covered in her post. For UCaaS, they have mix of customers on BroadWorks and VBC, their proprietary platform. With BroadSoft in Cisco’s tent now, that’s going to present some challenges, but they plan to keep supporting both indefinitely. However, the future will be VBC, and as Alan explained, this is part of their “own the stack” strategy.

For the other two parts of the trifecta, they smartly acquired Nexmo, the next biggest CPaaS player after Twilio, and then NewVoiceMedia to take their CCaaS play to the next level, namely beyond their partnership with inContact. It might be enough to view these as standalone pieces, but the real end game is One Vonage, where the entire portfolio is integrated, with a heavy emphasis on programmable communications via APIs.

As Alan noted, over half their pipeline is for combined UCaaS and CCaaS, so there’s a strong rationale for this end game. More importantly, it’s been driven by market forces, not financial forces, and that’s why I think Vonage is holding the hot hand right now for being a consolidator. I say that in particular because Vonage’s moves haven’t been to consolidate the supply side by acquiring competitors. Rather, it’s been to acquire pieces that consolidate a value proposition that the market is buying now. I’ll take that scenario over the challenges Cisco will face with BroadSoft, or even Genesys and their play with Interactive Intelligence. Every scenario is different, but Vonage looks to be moving and executing with purpose.

3 things that could go wrong

I concur with Blair and Dave – and others at the event – that the candid nature of the Vonage team gave us a close look at what they have, and it was hard to come away not feeling good about their chances. They seem to have the right mix of technology, innovation, culture, leadership and financial strength to stay in the game for years to come. Many new players won’t make it, and others will be acquired or exit as the barriers to entry get higher and the remaining competitors get stronger. I believe Vonage will hang with whoever’s left, and as Alan says, at this point it’s all about execution. That said, I’ll balance things out with three wildcards that could make things much harder if they don’t execute to plan.

Costly S&M and branding

While residential VoIP is a race to the bottom, cloud offerings for the business market are an expensive undertaking. Currently, Vonage is spending 30% of revenues on S&M – Sales and Marketing. That may seem really high, but OTTs don’t have an installed base – those new customers have to be taken from someone else. Getting customers and keeping customers are two different things, and with Vonage telling us about their low churn numbers, they’re holding their own on the latter. The same actually applies to the former when considering S&M for their OTT competitors. RingCentral currently stands at 44%, and 8x8 is a whopping 60%. Alan noted that in dollar terms, their M&S spend is comparable to RingCentral, but that’s not being reflected in name recognition, so there’s room to improve there.

2. Losing the golden goose

Another risk factor would be golden goose from residential that frees up cashflow to maintain that spend level for S&M. Their business revenues may be growing at a faster rate than the YoY declines in residential revenues, but clearly that free money will be harder to come by. If Vonage wants to stay in both lines of business, at some point, they’ll need to up their investment to keep the residential business going. I’m sure they’ve thought this through, and the implication would be the need to complete their trifecta One Vonage integration ASAP. If that somehow gets bogged down with technology issues, GTM execution or culture clashes, the pressure will be on to somehow keep the business growth coming on its own merits.

3. What everyone else is doing

State of the competition. CPaaS is central to Vonage’s API-driven value proposition, so Twilio is the main target there. Having recently attended their SIGNAL event, I understand why their momentum is so strong, but it remains to be seen how deeply developers can take them into enterprises. I agree with Alan that Vonage is better equipped end-to-end to serve enterprise customers, but Twilio is hitting its stride now, and they want to succeed as badly as Vonage. For better or worse, I’ve long said that Vonage is the Kleenex of VoIP, and I would say the same about Twilio for APIs. They have great brand recognition, and Vonage is still trying to migrate upstream to enterprises, so the road won’t be easy. Finally, there are those pesky Tier 1s to worry about. If Cisco gets it right with BroadSoft, they’ll be even stronger, and Microsoft has its mojo back in enterprise. Trust goes a long way when picking a cloud partner, and Vonage will have to earn that to grow at the expense of those players. If they’re holding a full house, they’ll be fine, but if just two pairs, they’ll have to play the game more carefully.