Q. Aren’t you glad Cisco didn’t buy Avaya?
A. I actually wish they did because large corporate acquisitions usually create a wreck for the surviving entity for a couple of years and everyone else would have been able to capture market share during that time.
Q. What effects, if any, do you expect will follow as a result of Avaya being bought and taken private?
A. Despite being a relatively strong company from a balance-sheet perspective, Avaya has gotten into the VoIP game rather late. By going private, Avaya can start to make long-term investments to shore up some of the weaknesses it has in its product line.
Q. Such as?
A. IP, you know, VoIP. And affordable SMB offerings. And the reason they have these two weaknesses is they came into the VoIP game late. They didn’t need to come into it early because they had such a strong legacy business.
If you look at the nature of a public company, it’s driven by quarter-to-quarter earnings. The incentive to make long-term investment in IP early wasn’t an incentive in Avaya. Only now you’re starting to see them lose market share…if you look at it from a quarterly market share perspective, Avaya is starting to decline, whereas Cisco is on the incline. So I think that’s one of the fundamental issues that Avaya has to address and going private lets it start making that investment out of the scrutiny of the public eye.
I also think being late to the VoIP game problem is only half of Avaya’s issues that it needs to address. Another big issue, which is relative to our business, is its solutions are very, very expensive. Small businesses, call it the 5- to 100-employee sized businesses make up 50% of the world’s employees. In that part of the market segment, Avaya’s products are very expensive. And why? It didn’t need to be affordable because Nortel, Avaya and Alcatel had an oligopoly on the PBX market. And I’d put Siemens in there too.
So there’s something that’s fundamentally changed…and that’s Digium and the Asterisk [open-source] world in general. I’m not going to be so arrogant to say that Avaya’s scared of it yet. But I would say there’s a fundamental shift in the cost dynamics of telephony systems. And that if it continues to grow the way it has, certainly with the growth we’re seeing, that is going to threaten Avaya’s base business in a couple of years.
Q. Are open-source companies, like Fonality, nibbling away at Avaya’s IP PBX lunch?
A. We are a drop in the ocean, but we are gaining revenues quickly. When we go up against Avaya with our open-source solution we win 7 out of 10 times – we know this through our CRM [customer relationship management] system. And we don’t win 7 out of 10 with everyone but with Avaya we do because of price. They have a real price problem.
Q. Is the relevance of propriety players in the voice equipment market diminishing?
A. The big-iron companies – the Nortels, Avayas, Siemens, Alcatels, Ciscos – they have proprietary systems so once they get a customer they have a lock on them for a while. I would say the open-source market is challenging that because it’s a hardware-neutral approach. So you are starting to see IT directors not wanting to get locked in for five years, so open-source is becoming more attractive to these guys. Open source is absolutely a threat to Avaya and other companies because of cost and because of its standards-based approach.
Q. In what market segments is open-source networking being most disruptive and why?
A. In the SMB market, because of cost.
Q. Why not in the enterprise, because of cost?
A. The enterprise always moves more cautiously than the small business and they need to see proof of life. They wait a couple of years. They waited on Linux too while the small guys moved earlier. Enterprises also have stringent scale requirements and it takes a while to be software scalable. Avaya supports 20,000 seats, while Asterisk is better suited for less than 500.
Q. How does the cost of a Fonality IP PBX quantifiably compare to a similar proprietary system from other telecom gear incumbents?
A. When we are up against Avaya we are usually about 40% to 60% less. Cisco is usually a little bit more expensive than Avaya, so we might be 45% or 70% less than a Cisco. And Nortel is actually just a touch cheap than Avaya, so it might be a 30% to 50%.
Q. When Fonality beats out competitive proposals from Avaya, Nortel and Cisco is primarily because of cost?
A. Yes.
Q. So, in addition to cost, what is open-source’s competitive advantage over proprietary?
A. There is one other distinct advantage we have and that is being a standards-based approach. We are totally standards based and everyone else is propriety. This means telecommuting flexibility. That basically the fundamental recognition that the phone system is the world’s network and not bounded by the four corners of your office. When you take your office phone or soft phone home and plug it into your DSL modem, you can instantly dial anybody in your office for free, with no configuration. That’s the result of standards-based approach because everyone is using the same standards but the oligopoly is not. They require you to purchase a special license, etc.
And we took a really simple approach whereby you pay one price and you get every feature.
Q. What fundamental hurdle does open-source networking need to clear in order to gain significant traction among mainstream businesses?
A. I just think it’s a time as related to brand equation. It’s the same barrier that Linux had. It just took a number of years for the world to wake up to Linux being more affordable and stable than Microsoft. And I think the world is going through that same wakeup phase with open-source telephony.
Q. When will Fonality launch a hosted PBX and how will it compete with offerings from much larger rivals when you do?
A. Here’s what we found about the hosted PBX market: It’s not doing that well. The leading hosted PBX provider is Covad … and we usually outsell them. I’m not talking about consumer…hosted PB X into small businesses is not doing well because the quality of VoIP is not ready. So I don’t mean to answer your question in a circuitous fashion but the answer is, when we deem most small business have really good networks to carry VoIP we will offer hosted VoIP. My guess is it will be two to three years away.
Q. Earlier this year, Fonality closed a $7m series C round of VC, bringing total investment in the company to $12.5m since it launched in late 2004. The latest round included Intel Capital. What are the strategic synergies, if any, between Fonality and the chipmaker?
A. Intel’s recognizing that the world of phones and PCs are starting to blur. And as the global telephony market becomes PC-based, it’s an opportunity for Intel to sell a lot more PCs. Also, has a very large channel of resellers, about 150,000, and it’s in their interest to provide them low-cost software solutions like open-source. So it saw Fonality’s products as a potential opportunity for its reseller channel.
Q. What’s your exit strategy?
A. Today we’re on a straight line to an IPO. Ask me in a couple of quarters.
