Vonage: What is Ericsson’s end game?

Rationale for acquisition

In late November 2021, Ericsson announced it would purchase Vonage, a global cloud-based communications provider for $6.2bn. The acquisition is part of Ericsson’s expansion into the enterprise segment through Vonage’s communication platform as a service (CPaaS) offerings and follows on from Ericsson’s purchase of US-based Cradlepoint in late 2020. Cradlepoint’s enterprise solutions include wireless wide area networks (WAN) over LTE and 5G edge routers delivered as an all-in-one solution with more than a million (NetCloud) endpoints under subscription. Ericsson believes the enterprise market offers attractive software as a service (SaaS) revenue opportunities that can be scaled and aligned to strengthen its core business. Vonage is the latest acquisition in this strategic direction.

STL Partners has been talking extensively about the growing need for greater network intelligence amongst applications and platforms as a key opportunity to provide unique value in a B2B2X environment. We believe if Ericsson can leverage the developer community in the way it wants, it has the potential to become a strategic partner and a channel for operators to access developer communities, perhaps even challenge the hyperscalers by acting as an aggregation point for developers and network operators to engage with each other.

However, it may be too early to tell how Vonage’s existing developer community will see value and differentiation in the network APIs and 5G capabilities Ericsson and its operator base has to offer. Given many developers still do not have strong understanding of 5G technology, its capabilities and applicability to them, the opportunity for Ericsson rides on its ability to successfully encourage the developer community to see the value in leveraging these advanced network capabilities and programmability.

The Vonage Communication Platform

Founded in 2001 as a consumer VoIP provider, from 2013 Vonage has evolved through acquisitions into an integrated communications platform as a service provider (CPaaS) with sales of $1.24 billion in 2020 and $1.4bn expected in 2021. Of the company’s two business divisions, its cloud-based Vonage Communications Platform (VCP) accounted for over 73% of Vonage’s 2020 revenues serving over 120,000 customers, from SME to large enterprise business across a range of sectors (healthcare, finance, education, retail).

The Vonage Communication Platform (VCP) has three offerings:

• • Application Programming Interface (API) platform enables developers to embed communication services such as messaging, voice and video services into their applications and services. Through acquisition of Nexmo’s API platform and TokBox’s WebRTC programmable video integration, Vonage offers a range of communication APIs (such as voice, SMS, video, verify, messages and dispatch, number insight) enabling businesses to integrate programmable capabilities such as communication and authentication quickly into their products.

Vonage Communications Platform

Source: Ericsson Vonage Announcement Presentation November 2021

• • Unified Communications as a Service (UCaaS) – Vonage Business Communications (VBC) is the company’s cloud-native over-the-top unified communication service. Vonage also offer a Business Enterprise unified communication and collaboration service in the US (offering voice, data, video, mobile and contact centre services) for mid-market and enterprise customers delivered over a private secure IP MPLS network.

• • Contact Centre as a Service (CCaaS) solutions – Vonage Contact Centre is a cloud-based contact centre as a service (CCaaS) aimed at the middle market. The service integrates Vonage’s unified communications service and its APIs to deliver a full communication suite for enterprises.
    

    • • Vonage’s unified communication (UCaaS) and contact centre (CCaaS) services come with third-party enterprise software applications to support workflow and productivity. Integrations include Salesforce, Microsoft Dynamics, Teams, NetSuite, Zendesk, and Hubspot, which are available via Vonage App Centre ecosystem. According to Vonage, its Contact Centre solution currently holds the esteemed position of “Premier partner status” on the Salesforce AppExchange with a five-star rating and number one ranking across 800 reviews.

In late 2020, Vonage’s API revenues overtook UCaaS and CCaas revenues highlighting the growing demand for its API solutions from its developer network. Vonage’s recent API business growth has been driven by the popularity of its messaging and video APIs. It’s API revenue grew 43% year-on-year in Q3 2021.

The Vonage acquisition offers Ericsson the opportunity to introduce network and API capabilities to a wide developer community. Announcing the acquisition, Ericsson CEO said the company’s first step will be to embed its advanced network capabilities into Vonage’s existing communication APIs which have the potential to be adopted quickly on the back of existing 4G and 5G network build outs.

API business driving VCP growth

Source: STL Partners, Vonage Q3-21 results

Multi-vendor and multi-operator developer ecosystem

In announcing the acquisition, Ericsson’s CEO pointed out how the company has already developed quality of service APIs, but up to now they have only been tested in operator networks around the world. Accessing Vonage’s developer community would put the APIs into the hands of developers and convert them from “nice to know” capabilities into user friendly and valuable APIs.

Ericsson wants an engaged developer community/ecosystem to take these APIs and advanced network features and design real-world applications leveraging the capabilities of 4G and 5G advanced networks. It believes it can unlock value from its network APIs and 5G advanced capabilities by combining its deep network expertise of 26,000 R&D specialists with Vonage’s 1.1 million global developer community, 780 API platform engineers and Vonage’s back-end connections across over 200 CSPs.

These 200+ CSP connections are made possible by underlying technology supplied by vendors such as Ericsson. The developer and API ecosystem will be open to competitor network vendors and the wider MNO community in order to ensure the fullest possible participation in 5G innovation for enterprise. Ericsson is confident its worldwide market share position (outside China) and network capabilities will give it a strong starting position in developing new applications and that the openness of this developer, vendor and MNO ecosystem will be good for the industry overall.

It is hoped this developer ecosystem can leverage next generation of 5G advanced services and functionalities such as latency (across device types for example), quality on demand and network slicing across industry verticals and that developer/enterprise innovation will drive usage of the CSPs networks, providing an ROI on their 4G and 5G network investments.

• A key test will be whether the developer ecosystem will see the value in Ericsson network APIs and capabilities, and whether Vonage hosts the right app developers that can see value in and will actually use these new network APIs (e.g. slice configuration, dynamic traffic routing, bandwidth management etc.)

Up to now, telecom operators have established their own API platforms or used third-party API developer platforms to attract developers and foster innovation on their networks. Ericsson wants to ensure that it is compensated for the innovation that occurs on its next generation (5G) network equipment as opposed to losing value to over-the-top players. It may believe it can reach a more global developer community more efficiently than MNOs.

Competing with Twilio at API and ‘super network’ level

Given that Ericsson (among other vendors) supplies the underlying network technology to and has extensive relationships with network operators globally, it may be in a position to compete with other communication platform players such as Twilio by having the advantage of advanced 5G network knowledge and capabilities in addition to its close MNO relationship ties.
Twilio’s developer-first platform approach consists of four core elements; its Programmable Communications Cloud, it Super Network, its Business Model and its Engagement Cloud or Customer Data Platform.

• Programmable Communications Cloud consists of the APIs that enable developers to embed voice, messaging and video capabilities into their applications.

• The Super Network is Twilio’s software layer enabling its customer’s software (Amazon, Airbnb) to communicate with connected devices globally by connecting to CSP networks and internet service providers in 80 countries. Twilio has agreements in place with CSPs globally to route communication through their networks. The Super Network also contains a set of APIs giving Twilio customers access to more foundational components of the platform such as phone numbers, and SIP Trunking.
  

  • Twilio highlights its extensive carrier agreements ensure resiliency and redundancy for its customers. By using real-time feedback data on handset deliverability from carriers and across geographic markets, the Twilio Super Network can detect issues and make routing decisions quickly. It can optimise communications flow through its platform based on network quality and cost.
  • According to Twilio, network service provider fees account for a substantial majority of its costs particularly outside the US.
  • Twilio has said its Super Network provides it with massive volumes of data from end users, their applications and from communications. As more communication is handled by Twilio, the Super Network “becomes more robust, intelligent and efficient” improving its performance in terms of quality and cost, making it, according to Twilio, difficult for others to replicate.

• Segment Customer Data Platform / Engagement Cloud – Twilio offers their customers (Amazon, Airbnb) the ability to gather and analyse customer data from across all their communication channels. This helps Twilio customers generate new customer insights which they can use for personalised targeted marketing communication.

• Business Model – To empower developers to experiment and innovate on its platform, Twilio offers a low friction model that eliminates up-front costs, offers a free-trial and free developer resources, and more importantly, adopts usage-based consumption pricing.

Twilio customer engagement platform

Source: Twilio investor presentation, March 2021

Mavenir and Telestax

There may be parallels between Ericsson’s tie up with Vonage and Mavenir’s (August 2021) acquisition of Telestax, a global communication platform as a service (CPaaS) enablement and application provider.

Mavenir has said it expects Telestax to enhance its Mavenir Engage solution, a cloud-based customer engagement and messaging monetisation solution offering RCS Business Messaging, A2P and P2A campaign management, templated chatbots, visual flow builders, payment integrations and advanced analytics. Mavenir’s CEO Pardeep Kohli has stated CPaaS can help service providers enhance their 5G enterprise offerings in areas such as IoT, Smart cities and Automotive. The rationale being that 5G capabilities and associated APIs will be integrated into these 5G enterprise use case verticals creating new value and new revenue opportunities.

Ericsson’s view of the market opportunity

Overall Ericsson believes Vonage will see strong growth across its three VCP offerings as enterprises accelerate their digitalisation. Ericsson cites analyst expectations of 17% growth in the CPaaS business up to 2025 and a total addressable market (TAM) worth $69 billion by 2025.

It expects Vonage to outperform due to its strong position in the API market, citing Vonage’s 7% share of the API market today. Ericsson expects the total API market to be worth more than 50% of the global RAN market by 2025 and conservatively estimated the global API market to be worth $8bn by 2030.

The question is: what role is Ericsson seeking to play as a result of this acquisition? If Ericsson is able to successfully leverage Vonage’s developer ecosystem to drive the use of 4G and 5G APIs, then it could play an interesting role as a strategic partner and channel for operators as a means of accessing developer communities. Ericsson could position itself a potential alternative to the hyperscalers as an aggregation point for developers and network operators to enable both to engage with each other. However, whether Vonage’s existing ecosystem of developers see 5G as a means of competitive differentiation (either by enabling new types of applications or enhancing existing ones) or whether Vonage’s customer base will be interested in leveraging 5G capabilities, is still up for debate.

Vonage Communication Platform future market opportunity

Source: Ericsson Vonage Accouchement Presentation November 2021

During 2021, Vonage found itself under the scrutiny of the activist investor Jana Partners, who urged management to consider selling all or parts of the business. The activist investor believed Vonage’s growing API business was undervalued (compared to pure play API players such as Twilio) and that its overall valuation was weighed down by its legacy consumer VoIP business for which it is better known. In February 2021, Vonage abandoned plans to sell the consumer VoIP business citing the unit’s $600m projected cash flow generation over the next five years.