Merging cloud computing with telecom capabilities has also produced entirely new channels of communication, such as CPaaS. Also known as “programmable cloud communications,” CPaaS refers to cloud-native software that enables developers and less-tech savvy users alike to easily embed communications capabilities, such as SMS messaging and video-calling, into their applications and websites. Unbeknownst to most, CPaaS technology is used frequently by people in their day-to-day activities, powering much of the seamless digital customer experiences to which we have increasingly grown accustomed. When you receive one-time passwords and last minute flight change notifications by SMS, when you receive automatic email reminders for upcoming medical appointments, or when you anonymously call your ride-hailing driver via an incorporated in-app calling functionality—you are unknowingly relying on behind-the-scenes CPaaS technology. In summary, UCaaS, CCaaS, and CPaaS form a trio of capabilities that form the core of cloud-based business communications.
Sizing the market
Like much of the cloud computing space, cloud business communications is a market that is both sizeable and fast-growing. Together, UCaaS, CCaaS and CPaaS represent approximately a USD 80 billion market opportunity by 2022, implying an aggregate 22% compounded annual growth rate (CAGR), according to IDC figures. When ancillary markets are included, estimates can increase even further. For example, IDC has assessed that programmable messaging—a sub-market of CPaaS—alone represents an approximately USD 30 billion addressable market. Of the three spaces, UCaaS currently represents the largest market at around USD 30 billion. However, it is also forecast to grow the slowest relatively in the medium horizon at circa 18% per annum. Compare this to the CPaaS market, which only generates USD 6 billion in annual revenues today, but is projected to grow at an impressive 40% CAGR over the foreseeable years on the back of evolving B2C/C2B dynamics and the increasing proliferation of internet-connected devices. The CCaaS market, which sits between the latter two in both market size and growth prospects, is currently circa USD 5 billion in size and forecasted to grow 20% year-on-year. For comparison, the customer relationship management (CRM) software market—dominated by the likes of Salesforce, SAP, and Oracle—is expected to reach roughly USD 60 billion in revenues by 2022 and almost USD 90 billion by 2025 following a 14% CAGR from 2020.
These impressive growth forecasts reflect the relatively low penetration levels of cloud-based communications products in businesses, and particularly in larger enterprises (defined as having more than 1,000 employees) where system overhauls can be complex and daunting tasks. According to Bernstein Research, approximately 20% of total global business workloads were hosted on public cloud infrastructure at the end of 2019 and they predict that this figure will climb to between 50% and 70% by 2029. Similarly, cloud communications penetration still has a long way to go before reaching market saturation. Finding exact figures on this is tricky, but by some estimates the unified communications market is today only 15-20% penetrated by the cloud while it is believed that only around 8% of the 15 million contact center agents worldwide currently use a CCaaS product instead of a premise-based one. Consequently, UCaaS, CCaaS and CPaaS present very promising growth prospects.
Current trends driving the competitive environment
Fast growth often produces a certain degree of chaos in market dynamics. The world of digital communications is no exception. While distinctions between UCaaS, CCaaS and CPaaS are helpful for conceptualising competitive forces, in practice there exists significant crossover between these areas. Add to this the increasing number of complementary technological capabilities that are being wrapped into some solution sets (such as artificial intelligence, robotic automation, data analytics, and more), in addition to differing levels of modularity and customisability, and the result is constantly shifting definitions of what actually constitutes a UCaaS, CCaaS or CPaaS solution. Some industry onlookers question whether such categorisations will persist or whether they will all eventually morph into a single, more general concept of cloud communications. The latter thesis is supported by the growing number of vendors that are starting to sell solutions across two or three of these spaces (as can be observed in Figure 2) in a bid to offer more comprehensive solutions sets and thereby capture more market share. In the future, one could also envisage a greater rapprochement of CPaaS and CCaaS given their mutual focus on targeted communications and enhancing the customer experience. In conjunction with CRM solutions that were referred to above, unifying these could lead to a more holistic end-to-end service for the management of entire customer journeys, from initial prospecting through to preserving longer-term customer loyalty post-product or -service delivery.
Legacy vendors and larger tech players are adding further dynamism to the sub-sector by launching their own rival offerings. Some of these attempts to catch-up with the cloud-native upstarts have fallen flat, such as Avaya’s initial attempt to launch their own UCaaS offering before striking a capitulating partnership with RingCentral. However, others, such as Cisco and their UCM Cloud (UCaaS) product, have become strong contenders in their own right. For companies that are unable, or unwilling, to develop proprietary solutions internally, M&A offers up another route to join the party. Israeli-headquartered NICE, previously an on-premise contact center and security software specialist, made a big bet in 2017 when it acquired then-upcoming CCaaS player inContact for USD 870 million. The wager has paid off handsomely for NICE, as today they are one of the preeminent players in global CCaaS software. Furthermore, cloud-based products are expected to account for just under 50% of the company’s total revenues at the end of this year, up from just 9% in 2016, demonstrating how the acquisition has transformed the company’s business model. Some of the tech giants have also made forays into these markets recently. For instance, Microsoft now competes in UCaaS and team collaboration with their Microsoft Teams product. Furthermore, only a few weeks prior to the writing of this article, Microsoft announced the launch of their own CPaaS offering called Azure Communications Services.
The merging of these three spaces and the increasing number and types of competitors entering the market are both trends that are likely to continue in the future. Nevertheless, we view the nimbler cloud-native providers that are best-in-class in their respective domains as the most promising contenders, rather than larger vendors or those with broader, but relatively lower-quality solutions.
Environmental, social and governance (ESG) considerations
Several ESG issues are important to consider when looking at companies offering cloud business communications solutions. The most pertinent of these is data privacy and security. Given that communications systems are critical components within most companies—from micro SMBs all the way up to multinational conglomerates—it is inevitable that much of the data and information shared across these systems is sensitive or private in nature. It is thus crucial that vendor solutions adhere to the strictest standards of data protection. Failure on companies’ behalves to guarantee this can lead to severe reputational damage, deterring users away from their products due to privacy concerns. For example, although Zoom has been the beneficiary of many flattering news headlines as of late, over the past summer the company was set back by reports that, in addition to its relatively sub-par end-to-end encryption standards, customer data was being routed through Chinese servers, raising concerns of local government eavesdropping. This led many companies and organisations to ban usage of Zoom’s app. Another important factor to consider is the governance structure of UCaaS, CCaaS and CPaaS companies. For example, many high-tech companies implement dual-class share voting arrangements. This is partly to allow founders to retain control of the long-term vision of their companies. However, such voting structures reduce the ability of institutional investors to make their voices heard and to exert influence where necessary (for example, in cases of managerial incompetence or malpractice).
On the flipside, cloud business communications arguably have a net positive impact on society overall, enhancing interconnectedness and facilitating better communication more generally. Indeed, one need not look further than the current COVID-19 pandemic to witness how cloud-based communications can serve as a key enabler of societal functioning and resiliency even in the midst of extraordinary circumstances. There is also a case to be made from an environmental standpoint, given that, on a like-for-like basis, cloud-based SaaS solutions generate lower carbon emissions than on-premise software. The reason for this lies in hyperscale cloud data centers, which service hundreds or thousands of companies on the same hardware and can achieve considerably higher server utilisation rates than private on-premise server arrangements. In other words, cloud computing is more energy efficient overall. Finally, cloud communications systems in particular lead to a reduced need for physical communications hardware, such as office phones, given that everything can now be operated from within the computer software directly. In summary, the SaaS communications space carries various specific ESG-related risks and opportunities, both at the company- and sector-level.
Forecasting the future of cloud business communications
The TMT market constantly abounds with exciting new developments for investors to mull over. Digital business communications is undoubtedly one of them. A number of companies crowding this space could act as attractive candidates for investors seeking exposure to robust growth trends. However, caution is still advised when investing in this area. We believe that assessing individual financial health, understanding the intricacies of key competitive dynamics, and thoroughly examining ESG factors are just some of the essential steps required before making long-term, high-conviction investment decisions—whether in cloud business communications or beyond.
