Market_Requirement_Document _for_Product_Marketers 
Market Requirements Document for C5CM IP Centrex Offering Draft 1.2 October 7, 2004 Copyright © Copyright 2004 Verso Technologies, Inc. All rights reserved. No part of this publication, including text, examples, diagrams, or icons, may be reproduced, transmitted, or translated in any form or by any means, electronic, mechanical, manual, optical or otherwise, for any purpose, without prior written permission of Verso Technologies, Inc. Information in this publication is subject to change without notice. Verso Technologies, Inc. may have patents or pending patents applications, trademarks, copyrights, or other intellectual property rights covering subject matter in this publication. The furnishing of this document does not give you license to these patents, trademarks, copyrights, or other intellectual property. Trademarks NetPerformer, PowerCell, SkyPerformer, ACTview, Clarent OpenAccess, Clarent Command Center, Clarent ThroughPacket, Clarent BHG, Clarent C4CM and C5CM are trademarks or registered trademarks of Verso Technologies, Inc. All other trademarks, registered trademarks and service marks are the property of their respective owners. Corporate Headquarters: Verso Technologies, Inc. 400 Galleria Parkway, Suite 300 Atlanta, GA 30339 www.verso.com Revision History /Contact Information Market Requirements Document 1 Verso Technologies, Inc. Proprietary and Confidential Revision History The following revision chart describes the changes made for each version of this document. Revision Date State/Description 1.0 09-03-2004 Draft -Initial 1.1 09-24-2004 Added information to market sizing, target markets and product requirements section. 1.2 10-07-2004 Added initial business case, price strategy, additional market and competitive information, as well as interoperability and application configuration information. Added product branding. Contact Information Send comments on this document to: Michael Williams Phone: 678-589-3702 Email: Michael.williams@verso.com MRD Approval The following chart defines who is responsible for approving the product addition defined in this document. Role Person Email Address Phone Number Marketing Denise Grey Denise.grey@678-592-0075 Revision History /Contact Information Market Requirements Document 2 Verso Technologies, Inc. Proprietary and Confidential verso.com Product Management Product Development Operations Guidelines for Writing and Reviewing the MRD Market Requirements Document 3 Verso Technologies, Inc. Proprietary and Confidential Guidelines for Writing and Reviewing the MRD The MRD is a market-related document created by Product Marketing. Product Marketing is responsible for collecting and organizing input from Sales, Marketing, Product Marketing, and customers (e.g., focus groups). The Market Requirements Document (MRD) defines the market requirements and opportunities in sufficient detail to determine whether to fund further definition of the product. The length of an MRD depends on the nature of the opportunity. The MRD, once approved, flows into the Product Requirements Document (PRD), which defines the detailed customer requirements for the product, and the Project Development Plan (PDP), which defines the technical plan for developing this product. Once approved and addressed in a PRD, the MRD is not maintained. Within Marketing, management may choose to review the business case before determining whether to complete the MRD. The MRD for Product/Solutions template is designed to define the market, customer, competition, and pricing information required for a product/solutions decision. In this template, tables have been included to help define the information that should be included in a section. If any of the tables do not work for your data, feel free to either modify the table or replace the table with a written explanation. Table of Contents Market Requirements Document iv Verso Technologies, Inc. Proprietary and Confidential Table of Contents 1.1 OVERVIEW..........................................................................................................................................6 1.2 PRODUCT REQUESTOR .........................................................................................................................6 1.3 REFERENCES .......................................................................................................................................6 1.4 TERMS AND ACRONYMS.......................................................................................................................6 2.1 PRODUCT OVERVIEW..........................................................................................................................8 2.2 PRODUCT MARKET REQUIREMENTS.....................................................................................................8 2.3 PRODUCT INTERACTIONS ...................................................................................................................13 3.1 MARKET OPPORTUNITY .....................................................................................................................15 3.2 COMPETITION....................................................................................................................................22 3.3 PRODUCT POSITIONING ......................................................................................................................27 3.3.1. Branding .....................................................................................................................................27 3.4 MARKET SEGMENT ............................................................................................................................28 3.5 WINDOW OF OPPORTUNITY................................................................................................................31 4.1 PRICING STRATEGY AND RATIONALE.................................................................................................32 4.1.1. Verso Business Analysis...........................................................................................................33 4.2 RECOMMENDED PRICING ...................................................................................................................35 5.1 TARGET COUNTRIES..........................................................................................................................35 5.2 DOCUMENTATION REQUIREMENTS ....................................................................................................35 List of Figures and Tables Market Requirements Document v Verso Technologies, Inc. Proprietary and Confidential List of Figures ERROR! NO TABLE OF FIGURES ENTRIES FOUND. List of Tables TABLE 1: PRODUCT REQUESTOR.........................................................................................................................6 TABLE 2: REFERENCE MATERIALS ........................................................................................................................6 TABLE 3: TERMS AND ACRONYMS .........................................................................................................................7 TABLE 4: MARKET SEGMENTS AND CUSTOMER BENEFITS ................................................................................28 Introduction Market Requirements Document 6 Verso Technologies, Inc. Proprietary and Confidential 1. Introduction 1.1 Overview This MRD outlines the market requirements for an IP Centrex application offering on the C5CM product. The document outlines the market forces driving the need for IP Centrex service from softswitch vendors, the competitive forces at work, and the most likely target markets for such a service on the C5CM. This document will attempt to show that not only is there a large opportunity for Verso in providing IP Centrex capabilities on the C5CM product, but that there is a very substantial threat to ongoing sales of the C5CM if this capability is not added, and that the timelines for introducing the functionality are very short. In this initial draft of the document, not enough data is available to deliver a complete business case, but the deficient areas are highlighted and will be completed prior to a gate 1 being completed. 1.2 Product Requestor The following table defines who requested this product addition. Table 1: Product Requestor Source of Product Request Contact Name Email Address Phone Number Softswitch sales group
1.3 References Table 2 defines the reference materials used to write this MRD. Table 2: Reference Materials Title Version Description 1.4 Terms and Acronyms Table 3 provides definitions for terms and acronyms used within this MRD. Introduction Market Requirements Document 7 Verso Technologies, Inc. Proprietary and Confidential Table 3: Terms and Acronyms Term or Acronym Definition C5CM Class 5 Call Manager KTS Key Telephone System MRD Marketing Requirements Document PBX Private Branch Exchange PDP Project Development Plan PRD Product Requirements Document ROI Return on Investment SME Small and Medium Enterprises USD US Dollars NCI Natural Convergence Incorporated KTS Key Telephone System PBX Private Branch Exchange Product Definition and Target Dates Market Requirements Document 8 Verso Technologies, Inc. Proprietary and Confidential 2. Product Definition and Target Dates This section provides a high level overview of the proposed product addition and defines the products impacted by this product addition. This section also provides a use case definition of the product, a summary of how this product interacts with existing products, and the timeframe when this product should be available. 2.1 Product Overview The IP Centrex offering for the C5CM is an application that the existing C5CM will deliver to end-users, providing the feature functionality required by SME’s phone systems. In so doing, the IP Centrex application will provide service providers with a means of selling phone service to the SME market, and generating additional revenues from enhanced services. 2.2 Product Market Requirements The following product market requirements derive from the information given the subsequent sections on market drivers/characteristics, competition and target markets. As shown in those sections, the key areas of product functionality that should be added to the Verso C5CM are as follows. 1. IP Centrex 2. Unified Communications/Voicemail 3. Call Center Support 4. Mobility IP Centrex Offering While some softswitch vendors offer a broad range of feature functionality in their IP Centrex offerings, typically grouping it into IP Centrex and Hosted PBX offerings (of which, Hosted PBX is just an IP Centrex service with additional feature functionality), the offering that makes sense for the C5CM will typically be somewhat smaller as it is targeted specifically at the smaller offices that constitute the core of the KTS replacement market (see the Target Markets section). While each vendor has variations in the feature set of their IP Centrex offering, the major vendors all tend to provide roughly the same core feature functionality (note that this summary does not include the Hosted PBX offerings, which offer a broader feature set and are likely target at larger end user organizations with broader feature requirements). These core features are summarized here. IP Centrex Feature Set – Major Vendor Core Feature Offerings Extension dialing Speed dial Last # redial Product Definition and Target Dates Market Requirements Document 9 Verso Technologies, Inc. Proprietary and Confidential Hold Conference calling (typically 3 or 4 way) Call Waiting Caller ID/CLASS services Forward DND Voicemail Web-based MACs Hunt Groups Park/Retrieve Transfer Call Blocking Star Codes (for feature access from legacy sets) DID/DOD Auto Attendant Attendant Console Music on Hold While this list captures the most common core features of major softswitch vendors’ IP Centrex offerings, it may not necessarily represent the needs of small businesses, since these vendors do sell to a variety of organizations. As a further test of what feature functionality an IP Centrex offering targeted at SME’s, particularly in the KTS replacement market, should include the following composite list of features was derived, which is intended to show the most commonly used KTS features. The List was generated from a combination of common feature lists found on web pages, phone user documentation, and market research reports (Yankee Group), SIP standards documents, and BCR magazine research tables. Most Common User Features (composite): • Hold • Conference • Drop • Transfer • Forward • Call Park/Pickup • Speed Dial buttons Product Definition and Target Dates Market Requirements Document 10 Verso Technologies, Inc. Proprietary and Confidential • Intercom (Extension dialing) • Caller ID • Handsfree • Call Waiting • Call Pickup • Redial • Message Waiting Light • Mute • Music on Hold • Night Service • Least Cost Routing • Callback • Bridged Call Appearance • Distinctive Ringing • Follow me Most Common System Features/Applications (composite): • Voicemail • Hunt Groups • CAP Modules • ACD • Auto Attendant • Call Accounting In comparison, the two lists are very similar and can be taken to be a reasonable estimate of the initial feature set that would need to be delivered in order to satisfy a large share of potential IP Centrex customers in the SME market. While these assumptions should be tested with target service providers and end-users, an initial feature set should, minimally include the following. Extension dialing Speed dial Multiple Line Support (minimum three lines) Last # redial Hold Conference calling (typically 3 or 4 way) Product Definition and Target Dates Market Requirements Document 11 Verso Technologies, Inc. Proprietary and Confidential Call Waiting Caller ID/CLASS services Forward DND Voicemail (with message waiting indication) Web-based MACs Hunt Groups Park/Retrieve Transfer Call Blocking Star Codes (for feature access from legacy sets) DID/DOD Auto Attendant Attendant Console Handsfree Music on Hold Night Service Least Cost Routing Callback Bridged Call Appearance Distinctive Ringing Follow me ACD functionality would be a desirable, feature for this market, as multi-site organizations looking to replace legacy KTS’ and ACDs would find value in it, but the effort involved may be beyond the scope of this project. Typically, of the softswitch vendors providing integrated ACD support today, the service appears to be tied to the more feature-rich Hosted PBX offering and not the IP Centrex service. Voicemail/Unified Messaging Requirements The integration of a voicemail offering with the C5CM will be important to success in the IP Centrex market space, as customers seeking to replace a KTS will also need a voicemail alternative. Having a voicemail system available as an integrated part of the C5CM solution is desirable as it simplifies deployment for service providers and customers, although there is also evidence that service providers see value in the ability to also interface with other voicemail systems, including legacy TDM systems, to provide flexibility in how the softswitch offering can be deployed and migrated. More information is needed on desirable systems to interoperate with before this can be adequately defined. Product Definition and Target Dates Market Requirements Document 12 Verso Technologies, Inc. Proprietary and Confidential There is also, from an end-user perspective, value in being able to provide IP Centrex service that will work with the customer’s legacy, CPE-based voicemail system. However, it is not clear at this point whether service providers would embrace this capability or not, since it provides a smoother migration path to their customers, but reduces service revenue opportunities for them. Unified Messaging: There is strong interest among service providers and end-users to have/provide unified messaging services. Some of the softswitch players are providing these today, with more likely to add them in the near-term. The integration of voicemail systems with email, while not necessarily a vital requirement of an IP Centrex offering, would offer an opportunity for feature differentiation in the short term and is likely to become a basic requirement in the medium term. Desktop Integration Desktop integration is another area where service providers are looking to differentiate themselves through advanced features designed to enhance productivity for end-users. The most common elements of desktop integration functionality are web-access to call logs, with click to call functionality, as well as web based conference call setup, and Instant Messenger style corporate directories with click to call and user status information. Like unified messaging this is not so much a critical requirement today as a way of providing product differentiation (relatively few vendors provide this today) and is likely to become an important feature set in the medium term. Also part of the desktop integration aspect of the product, is the need to allow service providers to brand the desktop. This means allowing the user interface to carry the service providers’ brand names, instead of the Verso brand name. This functionality allows small service providers to build brand awareness and loyalty, which will be important in their attempts to carve out lasting market share versus the major incumbent players. Mobility Support for mobile client endpoints is growing in importance and appearing in the feature sets of more softswitch vendors, including find me/follow me functionality, to allow users to remain a connected part of the organization at all times. More specifics on the necessary functionality need to be verified, but mobile client functionality is likely to be an important product feature in the near term. Scalability The correct scalability formula for a softswitch targeting SMEs is not adequately clear at this point and requires more input from service providers. In general, the available softswitches today all seem to claim easy scalability from a few thousand to over a million ports, which is in accordance with service provider interests. However the size of increments and port densities at which different solutions are cost-competitive is not known at this point and needs to be clarified. Product Definition and Target Dates Market Requirements Document 13 Verso Technologies, Inc. Proprietary and Confidential 2.3 Product Interactions The Verso IP Centrex offering should be designed to operate in two primary configurations, which will dictate the nature of the equipment interoperability that needs to be supported. Configuration One: Legacy TDM Migration In this configuration the IP Centrex application server will work with a legacy Class 5 PSTN switch, to allow service providers to deploy IP Centrex service without replacing their existing TDM switch. As the configuration diagram above shows, in this configuration the application server provides telephony features to the IP phones at the customer site, and then links these calls to the PSTN, when necessary, via an IP/PSTN Gateway that converts the IP calls into TDM and connects them to the service provider’s legacy Class 5 switch. In this configuration, key product interoperability elements will include operation of the IP Centrex application with: • SIP phones. • Mitel MiNet IP Phones. • BHG IP/PSTN Gateways. • Third party gateways (lower priority, but desirable). • Third party data routers. • Existing service provider voicemail systems. Configuration Two: Softswitch Environment In this configuration, the service provider has deployed a softswitch so there is no longer a need to use an IP/PSTN gateway to provide an interface to the PSTN. Product Definition and Target Dates Market Requirements Document 14 Verso Technologies, Inc. Proprietary and Confidential In this configuration, key product interoperability elements will include operation of the IP Centrex application with: • SIP phones. • Mitel MiNet IP Phones. • Third party IADs • Third party data routers. • Other Softswitch applications, including voicemail systems.3. Market Definition As the softswitch market continues to evolve, the introduction of IP Centrex feature functionality to the Verso C5CM will be key to maintaining the product’s competitive position. The following sections will outline the market and competitive forces that are currently changing the softswitch market and necessitating the evolution of the Verso C5CM product. 3.1 Market Opportunity Market Drivers The deployment and adoption of IP Centrex service, which is expected to begin ramping up sharply this year (see next section) is being driven by a number of factors, on both the service provider and end-user side. IP Centrex: Service Provider Drivers VoIP Adoption – Business adoption of VoIP is becoming mainstream now, with most companies deploying or testing VoIP for connecting sites. IP Centrex service gives service providers a VoIP service that they can offer, to take part in this market. Service Revenue Opportunity – IP Centrex gives service providers incremental revenues beyond what they normally would get for Internet connectivity service or basic broadband pipes. This is particularly significant since one of the attractions of deploying a VoIP service network has been the promise of new application/service revenues, and to date IP Centrex is one of the only applications to present any significant incremental revenue opportunity. IP Centrex also provides a desirable alternative to reselling IP PBXs, for service providers, as they can earn more revenue from selling monthly services than from a one time IP PBX sale with support contract. Out of Region Services – Within the US, the RBOCs are starting to expand their service footprint beyond their traditional borders. IP Centrex gives them a way to offer nationwide voice service. Service Differentiation – Particularly for small service providers, finding features that differentiate them from other competitors is key to establishing a competitive position. IP Centrex provides them with a service that many major players don’t offer yet. Customer Retention – IP Centrex helps service providers retain customers because they are less likely to leave if it means changing all of their calling features. For incumbent service providers, it also provides a means of defending their existing Centrex base against the new providers who are trying to steal market share from them. Competitive Alternative to IP PBXs – As businesses look to replace their old PBX/KTS systems, IP Centrex gives services providers a product that they can use to compete against IP PBX offerings. IP Centrex: End-User Drivers Simplify Network – IP Centrex provides one migration path to an integrated voice and data network, reducing costs and network complexity. Increased Messaging Features vs. Traditional Centrex – IP Centrex provides more calling features than traditional Centrex. It also delivers unified messaging features not found in Centrex, including call logs, voicemail/email integration and click to call. Unified, Multi-Location Calling Features – IP Centrex allows multiple locations (including teleworkers) to be part of a single, common dialplan, and shared feature access, which was not possible with traditional Centrex (unless locations were within the same CO area). Additionally, IP Centrex provides a simpler and at times more seamless means of connecting branch offices than can be attained with networked PBXs or KTSs. Simplify Moves, Adds and Changes – With IP Centrex, the need to have a technician onsite to handle changes is removed, and the time consuming need to have physical lines added or deleted is removed. Most IP Centrex packages allow users or administrators to use a web-based application to changes services available on a phone, and IP phones can be moved to other ports on the network without any system reprogramming required. Focus on Core Business – IP Centrex service allows businesses to focus their resources on running their own business rather than on installing and managing the phones system, but does it without many of the inherent disadvantages of traditional Centrex service. Reduce Capex – IP Centrex allows companies to reduce Capex requirements, by avoiding the upfront purchase cost of a PBX or IP PBX. IP Centrex Market Forecast For the reasons outlines in the market drivers section, analysts are predicting strong growth rates for IP Centrex service in North America and worldwide. As the table and graph show, iLocus are predicting worldwide IP Centrex line shipments to continue growing rapidly (growth in 2003-04 exceeded iLocus’ previous forecast). iLocus forecast the market to grow from 655,000 lines shipped in fiscal year 2003-04 (actual), to 7.8 million lines being shipped in 2008-09. In-Stat/MDR show a very similar trend in their forecast of service revenues for the IP Centrex/Hosted PBX market (In-Stat do not differentiate between IP Centrex and Hosted PBX), forecasting a cumulative annual growth rate of 105%, worldwide, for 2002-2007, as shown in the table below. Further, In-Stat see most of the growth currently coming from outside of the US, with most service growth in the US coming from second and third tier service providers. Much of the uptick in US service revenue growth rates forecast for 2005 and beyond represent the adoption by the RBOCs of IP Centrex service. IP Centrex Lines 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 IP Centrex Lines$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 US ROW Worldwide US $74 $186 $443 $890 $1,602 ROW $91 $200 $433 $858 $1,442 Worldwide $165 $386 $876 $1,748 $3,044 2003 2004 2005 2006 2007 As shown by the forecasts above, IP Centrex is expected to quickly become an important new source of revenue and competitive advantage for service providers worldwide, which will have an significant impact on the choices they make when deploying new network equipment, including softswitches and application servers. The following table shows In-Stat/MDR’s forecast for IP Centrex infrastructure spending from 2002-2007, as service providers add these capabilities to their networks. This forecast is somewhat limited in that is shows revenue from sales of application servers and seat licenses, which does not include the actual softswitches required in conjunction. $0.00 $200.00 $400.00 $600.00 $800.00 $1,000.00 $1,200.00 $1,400.00 $1,600.00 2002 2003 2004 2005 2006 2007 ROW US The next section attempts to assess the potential softswitch sales for Verso, which the IP Centrex offering should help to achieve. Before addressing the softswitch sales opportunity however, an assessment of the potential market for Verso IP Centrex sales is provided in order to help assess the direct business impact of providing IP Centrex service, and the viability of providing IP Centrex as a standalone application without the softswitch (as part of a service provider migration strategy). To estimate Verso’s sales of IP Centrex, we start by taking the iLocus forecast of worldwide IP Centrex lines, as shown earlier in this section. Then, to determine the share of this market that Verso can realistically hope to achieve, Verso’s current softswitch market share numbers are applied to this forecast, as shown in the table below. The forecast looks at three scenarios, one using the most recent market share of 1.4%, one using the previous year’s share of 2.8%, and an in-between estimate of 2%. In all three cases, the share is held constant over the duration of the forecast, to be conservative, although the addition of a well-targeted IP Centrex offering should help Verso to increase it’s market share. Softswitch Sales While the In-Stat forecast does not provide an actual forecast for Class 5 switch sales, it does substantiate the belief that softswitch sales are expected to rise strongly as IP services are deployed by more service providers, and gives a sense of the revenue opportunity associated with providing IP Centrex services on a softswitch. As further evidence of this, Infonetics provide the following data points in a recent press release for their VoIP equipment sales research. Infonetics reports that, overall, next generation voice products totaled $389 million in revenue in 2Q04, up 10% from 1Q04 and up 21% year over year, with annual revenue projected to grow from $1.3 billion in 2003 to $4.8 billion in 2007. Infonetics also reported that, in 2005, class 5 softswitch sales and application are expected to overtake class 4 softswitch, and represent the lion’s share of long term revenue opportunity in the market. Synergy Research Group do provide a market forecast for the worldwide softswitch market, although it does not differentiate between the class 4 and class 5 portions of market. The following table shows the Synergy forecasts for both carrier sales of packet voice, and sales of softswitches worldwide. Verso Softswitch Market Share 2002 2003 2004 (partial) C5CM/C4CM 6.0% 2.8% 1.4% Synergy, June 2004 iLocus IP Centrex Line Forecast -Worldwide (thousands of lines)2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 IP Centrex Lines 655 1,212 2,121 3,499 5,423 7,864 Verso Share 1.4% 30 49 76 110 2.0% 42 70 108 157 2.8% 59 98 152 220Worldwide Softswitch Sales $0 $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 $1,400,000 $1,600,000 $1,800,000 2001 2002 2003 2004 2005 2006 2007 2008 Sales The Synergy forecast shows a sizable market opportunity for the Verso C5CM product, with worldwide softswitch sales poised at the start of a steep growth curve, driven by carrier deployments of voice over packet service. The cumulative annual growth rate for the softswitch market from 2004 – 2008 is predicted to be 69.89%, with the market expanding from $201 million in 2004, to approximately $1.7 billion in 2008. While Synergy do not split the class 4 and class 5 markets out in their forecast, they do point out that in 2003 there was significant growth in Class 5 softswitch license shipments, and they anticipate this trend to continue as carriers push VoIP deployments out into the access market. This prediction is supported by Infonetics’ prediction that sales of class 5 softswitches will overtake class 4 sales in 2005, and by the fact that of the 6 softswitch customer wins that Nortel announced in Q2 2004, 5 were for class 5 applications (3 residential VoIP and 2 for enterprise VoIP). The following estimate of class 5 softswitch sales is based on the Synergy Research forecast for softswitch sales shown above. For the year 2004, the percent of sales that are class 5 is estimated based on an average for Nortel, Siemens, Alcatel and Sonus’ class 5 vs. class 4 sales in Q2 2004, resulting in 33.75% of sales being class 5 switches. For 2005, Infonetics are predicting that class 5 sales will overtake class Worldwide Carrier Packet Voice Forecast (in thousands) 2001 2002 2003 2004 2005 2006 2007 2008 CAGR (04-08) Ports 5,806 4,223 7,512 11,343 18,027 27,410 41,464 61,626 52.70% ASP/Port $143.72 $112.86 $81.20 $69.35 $66.99 $66.26 $65.32 $65.57 -1.39% Sales $834,438 $476,608 $609,974 $786,637 $1,207,629 $1,816,187 $2,708,428 $4,040,817 50.55% Source: Synergy, June 2004 Worldwide Softswitch Sales Forecast (in thousands) 2001 2002 2003 2004 2005 2006 2007 2008 CAGR (04-08) Sales $207,562 $124,087 $154,205 $201,707 $359,000 $605,000 $1,017,000 $1,680,450 69.89% Source: Synergy, June 20044 sales, so a conservative estimate of an even 50/50 split between class 5 and class 4 is used. In subsequent years, a flat rate of 55% is used, which is likely a conservative number as service providers have historically been deploying softswitches in the network core and are now switching more to network edge (class 5) deployments. As the table above shows, based on the Synergy forecast and the rough market split described above, class 5 softswitch sales are expected to reach nearly $1 billion worldwide by 2008. Market Opportunity Conclusions: While a more precise definition of addressable market opportunity will be helpful in generating the final business case for the C5CM IP Centrex offering, some important conclusions can be derived from the available data. First of all, the softswitch market is poised for a period of strong growth that could potentially deliver significantly increased sales for the C5CM product, and should make justifying investment in this product line relatively simple. Secondly, given the importance of a strong IP Centrex offering to service provider revenues illustrated by the forecasts above, the viability of the C5CM product as a platform for delivering IP Centrex service can be expected to play a major role in it’s ability to compete in the class 5 softswitch market. In short, without an IP Centrex offering, the markets in which the C5CM can compete and win can be expected to decline quite rapidly. With this in mind, the following section examines how the C5CM stacks up against competing products today. 3.2 Competition Worldwide Class 5 Softswitch Sales Forecast -Estimated (in thousands) 2004 2005 2006 2007 2008 Sales $68,076 $179,500 $332,750 $559,350 $924,248 0.3375 0.5 0.55 0.55 0.55The accompanying Softswitch Competition Matrix file provides a somewhat more detailed view of the comparison between the C5CM and it’s primary competitors. However, this document will attempt to summarize the important areas of functional comparison between the products. The matrix shown below provides a snapshot comparison of key areas of product functionality. As the matrix shows, the leading softswitches, in terms of functionality delivered, are Sylantro, NetCentrex, Broadsoft and Vocaldata. Not surprisingly, the market share leaders in terms of IP Centrex lines deployed in 2003, all came from this group, as shown below. Cirpack and Metaswitch both offer IP Centrex on their products but have not progressed beyond the “other” category, in terms of market share at this point. This is likely due to a combination of their being light on other features, relative to the market leaders, their being relatively new to the IP Centrex space (Cirpack just launched IP Centrex service on it’s softswitch in March 2004), and possibly due to a lower starting penetration of the softswitch market. NetCentrex provides a very full featured product offering that matches very favorably with the market leaders, but still have a small market share with a relatively small number of service provider deployments. The Lucent and Nortel products compared here are not actually softswitches, but are essentially gateways that allow service providers to deploy Centrex IP using their existing Class 5 network. In this case, IP is used as the transport, but the class 5 Sylantro NetCentrex Broadsoft VocalData Cirpack Excel Metaswitch Telica Lucent Nortel Clarent Tekelec Sylantro NetCentrex Broadworks VocalData HVS CSP2090 VP3500 PLUS iMerge CS2000 C5CM 7000 IP Centrex X X X X X X X X User Administered MACs X X X X X X X X Conferencing X X X X X X ? X X X ? Residential Services X X X X X X X X X X X Hosted PBX X X Legacy PBX Networking X X X ? ? ? ? ? X ? Voicemail/Unified Messaging X X X X X X X ? Desktop Integration X X X X ? X X ACD X ? X X Mobility X IVR X ? X Attendant Console ? X ? X ? X X H.323 Endpoints X X X X ? MGCP Endpoints X X X X X X X X X ? SIP Endpoints X X X X X X X X X ? Proprietary Endpoints SCCP, MiNet KTS RFC3149 Avaya i2004, m6350 Softswitch Competition Summary Matrixswitch provides legacy Centrex features, leaving customers with many of the same limitations found in traditional Centrex deployments and few of the benefits of a full IP Centrex service. However, some service providers are deploying the Nortel and Lucent products as they provide a means of defending their existing Centrex customer bases from IP Centrex and IP PBX offerings, without having to replace the class 5 switches before they are due to be replaced. Based on meetings with Qwest and Verizon, the general approach involved in these product deployments is to sell the new service to existing Centrex customers, and only actually deploy equipment once large service contracts are signed which can justify the considerable cost (Qwest indicated that a metro area deployment of the iMerge product cost millions). As such, these products compete in the traditional Centrex customer base today, rather than in the KTS replacement market, which is heavily composed of relatively small businesses. Additional Key Competitor Notes: Broadsoft: Part of Broadsoft’s success can be attributed to its strong distribution channels. In addition to having a healthy variety of service provider deployments, Broadsoft has reseller agreement with Lucent, Sonus and Ericcsson, providing significant help in getting its solution deployed. While Broadsoft offers one of the richest feature sets of the softswitch vendors today, they are not heavily involved in expanding their feature set further at this time. Broadsoft’s current focus is on interoperability, expending effort on ensuring integration of their solution with a broad range of IP phones, softswitches and gateways. With strong feature functionality and scalability up to around 10 Million users, Broadsoft consider interoperability to be a top priority for the near term. VocalData: Vocaldata have not introduced any significant new applications or features in the last year, primarily rolling out things like additional languages support, but do offer a very feature rich product. VocalData’s key strengths include a broad applications portfolio, end point support and protocol support (including Cisco Skinny Client support and Mitel MiNet). Most common telecom applications (voicemail, conferencing and ACD) are integrated in the product, so that service providers don’t have to source additional systems from 3rd parties. However, VocalData also support a wide range of third party applications, so that customers aren’t locked-in to their solution. With a number of different service provider trials under way, VocalData view China as a key new market for their product. Sylantro: Sylantro offers a very feature rich softswitch solution, with a strong variety of integrated applications to simplify service provider deployments. Sylantro also offers a very wide range of end-user devices, supporting connections to legacy and IP ohones, desktop applications and wireless phones and PDAs. Like Broadsoft and VocalData, they also have one of the widest ranges of service provider deployments, leaving them well positioned to take advantage of the forecast growth in IP Centrex and softswitch sales. C5CM Offering Competitive Evaluation: In comparing the C5CM to other softswitch product offerings, as the table illustrates, there a number of areas of missing functionality. In determining which of these functional areas are the highest priority to address, it is important to look at what customer buying decisions are being driven by. The following list shows the top 10 applications/features that service providers are looking for from softswitch vendors today, based on Yankee Group survey results (March 2003). Feature/Application C5CM Support 1. IP Centrex X 2. Conferencing √ 3. Unified Communications X 4. Contact/Call Centers X 5. IP VPN √ 6. Voicemail X 7. Prepaid Calling Cards √ 8. Mobility X 9. Voice Portal √ 10. Announcements X Based on a combination of the competitive comparison shown earlier, the service provider demands shown above, and the needs of the Key System Replacement market segment (described in the target markets section), the following areas of product functionality represent high priority targets for broadening the feature/application scope of the C5CM. • IP Centrex • Unified Communications/Voicemail • Call Center Support • Mobility The more specific requirements for these four areas are discussed in more detail in the Product Market Requirements section of this document. IP Centrex Offering – Feature Comparison The following table compares the feature sets of the leading IP Centrex competitors versus the proposed Verso offering, using the Natural Convergence Silhouette product. As the table illustrates, the Natural Convergence solution would make the Verso offering extremely competitive versus the primary competitors in the IP Centrex space and erase a significant portion of the C5CM’s competitive disadvantage. While there are still a number of areas of functionality that would need to be added in future releases, to fully address the market demands, a Verso/NCI IP Centrex offering would provide a very competitive entry into the market, with a short time to delivery. IP Centrex Comparative Matrix last updated 9.29.04 Bold -designates most common features Freature Verso Broadsoft NetCentrex Sylantro VocalData Auto Relocate X X X Hot Desk X Handset Login X Active Features (handset) X Call Log Made Calls X X X X Received Calls X X X X Answered Calls X X X X Missed Calls X X X Call Hold X X X X Call Hold Reminder X Conference X X X X X Audio Paging X Extension Dialing X X X X X Speed Dial X X X X X Call Return X X X X X Last number Redial X X X X X Consultaiton Hold X X X X X Call Transfer X X X X X Blind X X X X Supervised X X Call-back X Three-Way Calling X X X X X Calling Line ID X X X X X Call Forwarding X X Busy X X X X X No Answer X X X X X Remote Access X X X X X Variable Rings X X X X X Selective Call Forwarding Find me X X X X X Remote Office Selective CF to PSTN X X X Do Not Disturb X X X X Voice Messaging X X X X Voice Portal X X X Calling Plans X X X X Device Inventory X X X X Series Completion X Hunt Groups X X Circular X X X X X Receive from other ext X X X X Linear X X X X X Click-to-dial (list) X X X X LDAP Directory Integration X Outlook Integration X X X X Priority Ring X X X Distinctive Ring X X X X Anonymous Call Reject X X X X X Selective Call Accept X X X X X Selective Call Reject X X X X X Call Screening (by digit Patterns) X X X X X Call Notify X X X X Voice Mail X X X X VMWI X X X X X VM to Email X X X X X VM Notificaiton X X X X X VM Call Back X X X X MWI to Cell Phone X X IM X X X Presence Management X X X Alternate Numbers X X X X Shared Call Appearance X X X Dial by Name Auto Attendant X X X X X Dial by Extension Auto Attendant X X X Remote Record Greeting Auto Attendant X X X Day/Night Modes Auto Attendant X Directory Manager Attendant Console X X X User Status Attendant Console X X X Queue Supervision Attendant Console X X X Drag/Drop call control Attendant Console X X X3.3 Product Positioning The Verso IP Centrex offering will be an application designed to work on its own, with existing Class 5 TDM switches, or in conjunction with the Verso C5CM softswitch. The intent of the IP Centrex offering is to strengthen the value proposition of the C5CM product by providing a key application that customers are seeking, and without which further sales of the C5CM will likely be very limited. The net effect of adding the IP Centrex offering to the Verso product line should be three things: 1. Sales revenue and profits from selling the IP Centrex application, as described in the business case. 2. Increased revenue and profits from C5CM sales, due to sales driven by the addition of a key application desired by the market (not quantified here). i. Increased revenue and profits from C4CM sales, due to sales driven by C5CM sales. 3. Increased revenue and profits from the sale of BHG gateways (not quantified here). While selling the IP Centrex offering in legacy TDM applications, without a softswitch, will have a much smaller revenue impact than selling it in conjunction with the C5CM, it is a necessary configuration to support in order to provide service providers with a migration path from their current network equipment (which they are unlikely to replace before it is due for retirement) to next generation services, and should increase the likelihood of the service provider going with a Verso softswitch solution when the time comes to replace their existing Class 5. 3.3.1. Branding A brand name for Verso’s IP Centrex offering needs to be agreed upon. At this point there are several key considerations to keep in mind when developing the brand name. • The term ”Centrex,” is generally regarded as having negative connotations, owing to the problems and failures of legacy Centrex. • “Hosted Voice” appears to be emerging as the dominant term for IP Centrex type services. • The key, initial target market for Verso’s offering is the KTS replacement market, among small businesses. 3.4 Market Segment The following table defines Verso’s market segments, the key customers within each segment, and how Verso customers would benefit from the product addition. Note that some companies may be represented in several market segments. Table 4: Market Segments and Customer Benefits Market Segment Key Customers Perceived Customer Benefits (as a result of this product) Enterprise SMEs, single and multi-site – KTS replacement and Centrex replacement • Satellite • Carrier Service providers looking to deploy next gen, IP voice services • End User Target Markets Key Telephone System Replacement Market Numerous research firms have identified the KTS replacement market as the most lucrative target for IP Centrex offerings today. In-Stat/MDR feel that businesses looking to replace their old KTS will be the most likely to switch to IP Centrex, for several reasons: • The core of the KTS market is in systems of 40 or fewer users. This is the same space where IP Centrex providers have reported their greatest early success in selling the service. • KTS users, being smaller than PBX users, are less likely than PBX users to pay for an IP-PBX when the time comes to upgrade their system. • KTS users, being smaller sites, typically are much less likely than larger organizations to have onsite telecom staff, and thus benefit from having a hosted voice service which takes most of the management burden off of them. Additionally, the small business market (which accounts for 48% of businesses in the US, and spend $43 Billion per year on telecom equipment and services) tends to be relatively underserved by the major carriers. The major carriers tend to aim their products at large organizations, and then just offer scaled down versions of these to small businesses. This results in products and services that are too expensive and too complex to suit the needs of smaller organizations. Conversations with Verizon and Qwest confirmed this approach in deploying IP Centrex, as both carriers indicated that they were targeting large customers in their installed base, in order to get contracts that would cover the cost of deploying the new services. Their intent is to gradually expand marketing efforts to smaller businesses after sales to large organizations have driven the buildout of the network to deliver these services. The KTS replacement market is composed of two primary groups: single-site organizations and multi-site organizations. While both groups are promising markets for an IP Centrex offering, the multi-site organizations are the most attractive as the relative complexity of their networked voice needs makes IP Centrex an even more valuable service for them. The table below breaks out the needs of these two groups of organizations in more detail, but the three key needs of small businesses, in a phone system are control (should be something that the organization can manage themselves without hiring additional IT/Telecom staff, or outsourcing to a third party), price (needs to fit within their small budgets) and simplicity (they don’t want to have to choose an equipment vendor, a service provider, and a service organization). KTS Replacement Market – IP Centrex Needs Single Site Organization Multi-Site Organization Simplified Network – Single integrated voice and data network. No need to own and manage separate voice and data networks. Simplified Network – Single integrated voice and data network. No need to own and manage separate voice and data networks. Increased Feature Functionality – IP Centrex feature set provides greater features, and migration path to new features, not found in traditional Centrex service. Increased Feature Functionality – IP Centrex feature set provides greater features, and migration path to new features, not found in traditional Centrex service. Simplified MACs – MAC costs are typically over $100 per user per change. IP Centrex, by allowing users to administer their own changes through web-interfaces, and allowing IP phone portability without system reconfiguration, reduce costs and reduce down-time as field tech visits are not required. Simplified MACs – MAC costs are typically over $100 per user per change. IP Centrex, by allowing users to administer their own changes through web-interfaces, and allowing IP phone portability without system reconfiguration, reduce costs and reduce down-time as field tech visits are not required. Obsolescence Protection – A hosted telephony offering ensures that small businesses don’t need to worry about replacing their phone system every 5-7 years (the typical replacement cycle for a traditional KTS), as the service provider can deploy new services and software upgrades, greatly reducing the risk of an obsolete phone system for the customer. Obsolescence Protection – A hosted telephony offering ensures that small businesses don’t need to worry about replacing their phone system every 5-7 years (the typical replacement cycle for a traditional KTS), as the service provider can deploy new services and software upgrades, greatly reducing the risk of an obsolete phone system for the customer. Unified, Multi-Site Communications – IP Centrex can provide single dialplan and feature transparency between remote sites (including teleworkers) not available with traditional Centrex and expensive and costly with networked KTS/PBX (and often not available at all). Integration of Legacy and Next Gen Systems – Multi-site organizations can realize a smoother migration path is sites running IP Centrex and sites running legacy KTS’ can all be networked together to be part of same dialplan and feature set. Another relevant consideration when looking at the KTS replacement market is their legacy equipment. Due to the cost-sensitivity of this market, there is value to them in providing ways to re-use old equipment. This can be in the form of providing gateways to allow them to use old digital/analog sets with the new IP Centrex service, as well as potentially integrating the service offering with their legacy voicemail system. In the case of multi-site organizations, there is also value in being able to provide a service that will network legacy KTS’ at some locations with IP sets at other locations, allowing all parts of the organization to be part of the same, integrated voice system, while not forcing them to migrate all locations (which may have equipment at different stages in its lifecycle) to the new service simultaneously. Small Business Centrex Replacement Market SMEs represent a very large proportion of the traditional Centrex market in the US today. While data for the rest of the world are not available, this information can be taken to be indicative of a likely large opportunity in other parts of the world. The table below summarizes Centrex’s US market share vs. PBXs, by system size. As the table shows, 2-40 line systems represent more Centrex lines than any other category. System Size (Lines) Centrex Lines PBX Lines Total Centrex Share 2 – 40 6,800,000 35,100,000 41,900,000 16.2% 41 – 400 4,100,000 36,100,000 40,200,000 10.2% 401+ 5,600,000 25,300,000 30,900,000 18.1% The needs of the SME Centrex replacement market are essentially the same as the KTS replacement market. However, the Centrex replacement market segment is likely to be somewhat more difficult to target as these organizations are currently served by major service providers who, as described in the previous section) are targeting their initial IP Centrex efforts at larger customers. These customers are, however, potential targets for smaller IP Centrex service providers looking to take business from the major players by providing a service offering more tailored to the needs of SMEs. Service Provider Target Markets Service provider target markets for the C5CM IP Centrex offering still require more definition, but some general observations can be made at this point. The service provider needs, which an IP Centrex offering provides as described in section 3.1, are summarized again here. VoIP Adoption Service Revenue Opportunity Out of Region Services Service Differentiation (more of a small service provider benefit) Customer Retention Competitive Alternative to IP PBXs While the correct service providers to target require more definition, at this point it appears that, smaller service providers represent a more desirable market than major incumbent players, in spite of the large market made available by the incumbents. The reasons for this, which are bound to vary somewhat between countries and service providers are as follows: • Large incumbents seem to be initially targeting their legacy Centrex base. These represent very large customers not suited to a small office Centrex offering, and would require the development of a considerably larger and more complicated feature set, just for the C5CM to begin competing in this space. • The larger service providers tend to have the longest certification trial periods, often lasting well over a year. This means that a new service offering targeted at these markets would take a considerably long time before it could become commercially available, delaying Verso revenues. • The preference among major service providers for deploying the equipment of established, major players, makes the difficulty of winning business in this market, given a comparable product offering, more difficult, due to Verso’s newness to the IP Centrex space versus other, more established vendors. 3.5 Window of Opportunity The IP Centrex offering for the C5CM needs to be available as soon as possible, for two reasons. 1. Most softswitch competitors have already introduced IP Centrex capabilities to their product, leaving the C5CM missing a key revenue producing application, which puts it at a substantial competitive disadvantage. 2. The market for IP Centrex service is already taking off and is expected to experience major growth in 2005. With IP Centrex likely to represent a major new revenue generator for service providers in the near term, it is likely that sales of the C5CM will be negatively impacted unless this application is available. Given these factors, and the likely short-term impact on C5CM sales of not having an IP Centrex offering, it is of great importance to this product line to introduce IP Centrex capabilities as soon as possible. In this light, it may be necessary to OEM a solution (Natural Convergence), at least as an interim step, to prevent substantial losses of sales. 4. Information for Packaging and Pricing This section defines the strategy and rationale used when pricing products that support this product. It discusses product packaging and identifies product packaging requirements. Cost estimates for product introduction and projected profits from product sales due to this product addition are also included in this section. 4.1 Pricing Strategy and Rationale Visibility into market pricing for IP Centrex services is somewhat limited, with even Natural Convergence not having direct pricing information on competing solutions. However, some basic information is known, from market research and from NCI’s experience with selling in the market. According to iLocus, end-user pricing for IP Centrex service typically ranges between $50 and $75 per user per month, depending on number of lines bought, with the upper limit on end-user pricing being $100 per user per month. In-Stat MDR reports typical end-user spending on voice applications at $45 per user per month in the US, and expects this to remain relatively flat due to a lack of head to head competition between service providers in the IP Centrex space, and an existing, significant price advantage vs. IP PBXs. The following table illustrates NCI’s price schedule, which they report as having met with very little price resistance and as such, represents a reasonable estimate of average market pricing. NCI promote an end-user price target of $40 per user per month, as the small business market that their IP Centrex implementation is targeted at is more cost sensitive than larger organizations. The pricing is designed with the aim of service providers being able to offer an endusse price of approximately $40 per user per month. However, without knowledge of the service providers’ cost structures, it is difficult to tell exactly how well this pricing will enable them to reach this service price point. The best indication is that NCI has reported success in selling to service providers in the KTS replacement market at a very similar price schedule. See section 4.2 for the initial recommended Verso price schedule. 4.1.1. Verso Business Analysis The following section presents a relatively simplistic business case for the Verso IP Centrex offering. To derive a rough estimate of the business impact of the offering, we start with the iLocus market forecast for IP Centrex lines, worldwide. Note that the dollar value associated with these lines is estimated using an average list price from the Natural Convergence price list of $80 per line (price to distributor). To determine how much of this market Verso might be able to capture, Verso’s current worldwide softswitch market share numbers are used as a starting point (Synergy Research, June 2004). According to Synergy, Verso’s softswitch market share was 6.0% in 2002, declining to 2.8% in 2003, and at 1.4% for the first portion of 2004. Based on these numbers, market share is calculated in the following table at four different market share levels. NCI Software Price List Perpetual License Fee Number of Users 500,000 200,000 100,000 50,000 20,000 10,000 5,000 1,000 MSRP -Fee Per User $45.00 $55.00 $65.00 $75.00 $80.00 $85.00 $95.00 $110.00 OEM Discount 40% 40% 40% 40% 40% 40% 40% 40% OEM Discounted Fee $27.00 $33.00 $39.00 $45.00 $48.00 $51.00 $57.00 $66.00 Subscription License Fee Number of Users 500,000 200,000 100,000 50,000 20,000 10,000 5,000 1,000 MSRP -Fee Per User $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $8.00 OEM Discount 40% 40% 40% 40% 40% 40% 40% 40% OEM Discounted Fee $2.40 $2.70 $3.00 $3.30 $3.60 $3.90 $4.20 $4.80 iLocus IP Centrex Line Forecast -Worldwide (thousands of lines) 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 IP Centrex Lines 655 1,212 2,121 3,499 5,423 7,864 Revenue (000's) 52,400 96,960 169,680 279,920 433,840 629,120The first part of the table calculates the number of IP Centrex lines Verso would sell at each market share level, in thousands. The second part of the table calculates revenue (in thousands) that would be generated from those sales, based on an average selling price of $71.25 per line (based on list price of $80 with a 25% discount). Using these numbers, a trending forecast is then derived assuming an initial market share of 1.4%, in keeping with current softswitch market share, gradually trending up to 8%. The following table illustrates the revenue and contribution margin generated from sales under this forecast. This forecast represents a very simplistic view of the business case for the IP Centrex offering as it looks strictly at revenues and product costs. When more of the details of the offering are finalized, a more detailed business case will be available which incorporates the complete Verso cost structure, including sales and marketing costs, support and administration. However, it should also be noted that this business case looks strictly at revenues from sales of IP Centrex software – it does not take into account revenue from sales of application server hardware, media gateways or softswitches. As a result, the net revenue impact resulting from this project should be considerably larger than is captured here. Verso Share 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 1.4% 30 49 76 110 2.0% 42 70 108 157 2.8% 59 98 152 220 6.0% 127 210 325 472 Verso Revenue Forecast (000's) Avg Selling Price to Dist $71.25 Market Share 2005-06 2006-07 2007-08 2008-09 1.4% $2,116 $3,490 $5,409 $7,844 2.0% $3,022 $4,986 $7,728 $11,206 2.8% $4,231 $6,981 $10,819 $15,689 6.0% $9,067 $14,958 $23,183 $33,619 2005-06 2006-07 2007-08 2008-09 Market Share (ports) 1.4% 2.0% 6.0% 8% Avg Selling Price $71.25 $71.25 $71.25 $71.25 Ports Sold (000's) 30 70 325 629 Revenue (000's) $2,116 $4,986 $23,183 $44,825 Cost (000's) $980 $2,309 $6,833 $13,212 Contribution Margin (000's) $1,136 $2,677 $16,350 $31,613 Trending Revenue Forecast (000's)4.2 Recommended Pricing The following table shows the recommended price schedule for perpetual license sales, based on the NCI price schedule plus distributor margins. Contribution margins are calculated based on negotiating pricing with NCI at the 100,000-port level, and then at the 500,000-port level for sales of 100,000 or more. A distributor discount level of 25% is assumed – sales feedback on this will be required. 5. Additional Requirements The information in this section contains additional requirements for the product. 5.1 Target Countries The goal of the release will be to make the IP Centrex application available in all countries in which the C5CM is sold. 5.2 Documentation Requirements For purposes of the initial product launch, NCI user documentation will be converted to Verso brand format. Verso Price List (Perpetual) Number of Users 1,000 5,000 10,000 20,000 50,000 100,000 200,000 500,000 MSRP $125.00 $110.00 $100.00 $95.00 $90.00 $75.00 $65.00 $55.00 Distributor Discount 25% 25% 25% 25% 25% 25% 25% 25% Discounted Selling Price $93.75 $82.50 $75.00 $71.25 $67.50 $56.25 $48.75 $41.25 COGS $33 $33 $33 $33 $33 $21 $21 $21 Contribution Margin per user $60.75 $49.50 $42.00 $38.25 $34.50 $35.25 $27.75 $20.25 CM % 64.80% 60.00% 56.00% 53.68% 51.11% 62.67% 56.92% 49.09%