The telephony equipment market, circa Q2 2004

Oct 11, 2004 12:00 PM, By David H. Yedwab

According to The Eastern Management Group's MonitorSM Report for the second quarter of 2004, total U.S. telephony equipment shipments (TDM and voice over IP) exceeded 3 million lines, a +6% year-over-year increase. VoIP shipments increased 54% for the quarter, year-over-year totaling over 1.4 million (and at greater than 47% of the total, very near to proving in our prediction that VoIP will exceed 50% of all shipments by yearend 2004). 

Let's examine this strong 2Q04 market performance in more detail by examining the performance of the leading equipment vendors in several categories.

For the entire telephony equipment market overall market performance is:

• 3.1 million total lines shipped

• The top three vendors in market share and their respective year-over-year quarterly growth rates (2Q04 over 2Q03) are: Avaya (-7%), Nortel (21%) and Cisco (75%), with a market total of 6%

• In the under 400 line market segment year-over-year growth in shipments is 13%

• In the over 400 line market segment year-over-year growth in shipments is -16%

• The growth in smaller systems and decline in larger systems indicates that the mainstream market is solidifying as smaller businesses and smaller locations of larger enterprises have re-entered as purchasers of new systems.

• Traditional TDM PBX shipments declined 36% reflecting the shift toward VoIP.

Market share leaders for traditional key/hybrid systems and their year-over-year growth rates are:

• Avaya (-6%)

• Nortel (51%)

• Toshiba (19%)

• Market Total (1%)

• While traditional small business systems are being replaced by VoIP solutions, the traditional key/hybrid market shows some continued reluctance by small businesses to adopt technology that still may be viewed as new and les comfortable than traditional solutions.

VoIP market performance, including IP-enabled and IP-PBX is:

• 1.4 million total lines shipped

• The top five VOIP vendors and their year-over-year market share growth are: Avaya (73%), Cisco (75%), Nortel (72%), NEC (3%) and Mitel (54%), with a market total of 53%

• In the under 400-line segment, year-over-year growth is 56%

• In the over 400-line segment, year-over-year growth is 49%

• The stronger growth in the under 400-line segment again indicates the more broad adoption of VOIP across businesses of all sizes and industries.

Several macro-economic factors are contributing to the business telephony equipment industry's resurgence and the continued rapid increase in VoIP shipments (of greater than 50%, year-over-year).

• Average 2Q04 non-farm payroll employment is up 758K (5.7%) over 1Q04, though the unemployment rate has remained stubbornly flat, declining to 5.5% in July from the June level of 5.6%.

• The Semiconductor Industry Association (SIA) reported that 2Q04 worldwide sales were up 28.1% YoY and 9.5% quarter-over-quarter. Chip sales tend to lead telecom data revenue by 4 quarters. 3Q04 sales are expected to be 4-6% higher than 2Q04 sales based on SIA's analysis of inventories, production capacity, and end-market demand. Americas sales were up 28.9% year-over-year and 6.9% quarter-over-quarter.

• Total IT spend is expected to increase 4-6% across the business market, with telecom segment year-over-year spend growth in the 7-9% range, though CIO's remain cautious.

• We are currently in the first synchronized global economic recovery since the early 1980s.

• 2Q04 GDP grew 3% despite a consumer contribution of only 0.7%, indicating a strong business sector contribution.

In addition to these macro-economic effects, the installed base of traditional telephone systems is older than it has ever been.  Many systems were replaced during the Y2K frenzy in mid-to-late 1990s and are more than 7, 8, or 9 years old.  These systems are now reaching the end of their economic lives; are becoming increasingly difficult and costly to maintain as contracts expire and replacement parts become scarce. 

The overall resurgence of technology investments, coupled with the success stories being told across the industry, of the benefits of transforming to VoIP, are resonating with more mainstream buyers.  The increases in corporate profits are easing the purse strings when good business case analysis and effective multi-disciplinary planning for new solutions bring a strong, business improvements founded proposal to senior management for approval.

Not only is the VoIP marketplace growing substantially, but also VoIP is also truly changing the overall complexion of the telephone equipment market. VoIP is a technology replacement having an impact matched in magnitude only once in more than 20 years. The transition from analog to digital systems marked the last massive technology change out in telephony. And this transition is happening, according to our forecast, at least twice as quickly as did the prior revolutionary replacement cycle. Well before the end of the decade, we expect that virtually all business telephone shipments will be VoIP.

David H. Yedwab is the Executive Vice President of The Eastern Management Group and can be reached at dyedwab@easternmanagement.com.