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Chasing the Clouds - The Service Provider Evolution Continues, Part 1

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April 22, 2010

Chasing the Clouds - The Service Provider Evolution Continues, Part 1

By Jon Arnold, Principal

Anyone following the business communications market recently knows there's a lot of buzz about cloud communications.

The more people I talk to, the more variations on this theme I hear. There certainly are tangible developments occurring, but I also see some fundamental shifts happening underneath all this. Individual news items will continue to come, but I want to focus more on the bigger picture and what it means for service providers. In fact, the more disparities I come across, the more there is to talk about.

Buzz can be good if the message is consistent and speaks to a well-defined audience. The buzz around cloud communications, however, is broad, and in my mind is more confusing than clarifying. For starters, several terms are being used now in all manners of combination, and they don't always mean the same thing. Just consider familiar terms like hosted, managed, cloud, VoIP, communications, services, unified communications and plain old telephony.

Before trying to sort all this out, I'll point to two April announcements that are indicative of this broad trends towards the cloud. First is news from Fonality about partnering with SugarCRM for an integrated, cloud-based contact center solution. Fonality (News - Alert) is known for being an open source solution, and recently changed its messaging to being a cloud-based provider. Not only are they going with the flow here, but their language has also shifted from "hosted" to "cloud". These terms may very well mean the same thing, but cloud is what's selling right now.

The second example is Qwest, and their new iQ hosted UC service. They could just as well have called this "cloud", but I think this would add too much newness to the concept. Incumbents are always late to market, and in this case, calling it hosted is a much safer way to sell the service. Compared to smaller carriers, Qwest's (News - Alert) customers tend to be larger, more conservative and legacy-based. I suspect these customers will be more familiar and trusting with "hosted" than "cloud'. For Qwest, however, the focus of this offering is more about UC than how it's delivered. UC, of course, is a trend unto itself right now, and that's where the money is for them. Whether you call it hosted or cloud, Qwest is in the game too, and it won't be long until all the major carriers have comparable offerings.

Why are so many service providers going cloud now? There are a lot of factors at play, but the short answer is Google (News - Alert). They may proclaim to "do no evil", and have nominal voice penetration, but virtually every service provider has reason to follow their moves. It's not so much what they're doing right now as what they've done to make the cloud so important today for service providers.

First and foremost, they have validated the cloud as a viable alternative - and perhaps successor - to software for providing the applications that companies run their businesses on. In fact, Google has been so successful that Microsoft (News - Alert) must now counter with a cloud-based version of Office, their flagship product suite. That's a topic unto itself, but let's continue.

When these two companies follow the same path, you know some important shifts are taking place. True enough, but what has this got to do with telephony and the service provider business? That takes me to my next point. Before Google made the cloud so relevant to the voice market, Skype really set the stage by making PC-based telephony mainstream. Most of us are now conditioned to make calls over the PC, and in some cases, it's become the primary voice mode. Thanks to the evolution of IP networks and VoIP services, PC-based telephony is approaching carrier-grade and is now widely used by businesses of all sizes.

With these pieces in place, voice is just another data application and easily fits into the cloud environment.  Thanks to Google, Microsoft and Skype, the desktop is increasingly becoming our communications hub, and the cloud is emerging as an attractive hosting and delivery mechanism. Whether a service provider offers voice only or some variation of UC, the cloud has a lot of advantages, not the least of which is lower cost. More importantly, though, end users have a comfort level now mixing voice with the Web, and this shifts the locus of control away from the voice-centric desk phone to the applications-centric desktop.

The big implication here for carriers is that the value of voice now lies more in how it integrates with desktop applications than as a standalone service running off an IP PBX (News - Alert) or an IP phone. Once voice becomes part of the desktop environment, the service provider can quickly be cut out of the value chain with little chance of getting back. Just consider how Google Apps and Google Voice work together. Once calls are routed through Google Voice, they stay in the cloud, leaving both the service provider and IP PBX vendor little to work with.

By integrating voice with all of their applications, Google creates a sticky, new value proposition that threatens both service providers and software players.  They have proven that the cloud can do all these things, and can scale at far lower cost than either of these parties is capable of. While the SaaS label may not mean much to telcos, CaaS definitely should, and reflects the reality that voice is very viable in the cloud. Not only that, but Google can afford to offer it for free. The term "disintermediation" hasn't been used for a while, but that's exactly what's happening here.

Nobody knows where the cloud will ultimately go, but everyone seems to be chasing it now. This is partly out of fear and partly to jump on new opportunities while the game is early. In many ways the game is early, but in others, it's actually quite late. That's a good spot to end off on, and I'll continue the thread in my next column.

Jon Arnold, Principal at J Arnold & Associates, writes the Service Provider Views column for TMCnet. To read more of Jon's articles, please visit his columnist page.

Edited by Marisa Torrieri

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