This Industry Viewpoint was authored by Michael Quinn, Hayley Hughes & Natalie Czyzowicz of Q Advisors
Despite the soaring North American hosted unified communications (“UC”) market that is projected to exceed revenues of $9 billion by 2020, there might be an even better place for U.S. managed and cloud services providers to focus their efforts. The small, but growing hosted UC market in Europe may be that opportunity. Driven by rapid adoption and little competition, the European hosted UC market is anticipated to almost double in size within the next three years. A select few U.S. service providers have started to tap into the market during the first half of 2015, but there is still plenty of opportunity.
Pan European Hosted UC Market
The overall current European cloud services market is estimated at over $21 billion (€18.9 billion) and is projected to exceed $33 billion (€30 billion) by 2018, growing at 17% CAGR. Out of Europe’s 2018 total cloud services market, 21% is projected to be unified communication. The remaining market share is estimated to be comprised of 38% infrastructure as a service (“IaaS”), 16% web presence, and 25% business applications. As of May 2015, the European cloud UC market is positioned at $4.2 billion (€3.8 billion) and is expected to grow at a CAGR of 18% to $7 billion (€6.3 billion) by 2018.
In March of this year, Verizon Wireless introduced a new cloud service based on Cisco’s Hosted Collaboration Solution. This expanded offering that provides a globally consistent delivery of unified communications as a service (“UCaaS”) will target European and Asia-Pacific enterprises specifically. Similar to Verizon, BroadSoft is also aiming to expand throughout Europe using their BroadCloud managed services bundle. Service providers that package BroadCloud as a part of their customer offering are receiving help from BroadSoft when it comes to selling UC into various industry verticals and geographies.
Western European UCaaS Market
The Western European UCaaS market is proving to be more robust than other markets. UCaaS providers are going over the top and encouraging enterprises to bring their own broadband and connectivity. This has led to better margins for UCaaS providers as there is no lower margin access revenue. The U.S. is expected to see more competition and price compression as the market becomes saturated. On the other hand, Europe’s market has very little competition and could see ARPUs reach a level above the U.S. in the near future.
End-user establishments in Western Europe are becoming more and more interested in UCaaS causing rapid growth in the market to approximately $643.8 million by 2018 at a five-year CAGR of 50.1%. The U.K. (1,296,266 subscribers), Germany (601,000 subscribers) and France (577,000 subscribers) are at the forefront of cloud adoption across the Atlantic - with the Netherlands (376,700 subscribers) and Belgium (110,000 subscribers) following closely. Cloud-based communications require less of an upfront investment which is very attractive to small and medium-sized businesses (“SMBs”) looking to replace existing infrastructure. With little to no in-house expertise required, full UCaaS deployments are being adopted by European SMBs first and followed by larger enterprises looking for a more hybrid solution. Cloud services create a more efficient environment that is less complex. As more end-users in Western Europe switch to cloud services, businesses stuck in traditional markets are feeling the effects.
A major opportunity for U.S. managed service providers lies in the hosted UC European market. Higher margins and low barriers to adoption are fueling UCaaS recognition and market growth. The many benefits of UCaaS have sparked the interest of European end-user organizations, particularly in Western Europe where the desire to improve communications while lowering capex and enhancing business continuity capabilities is driving SMBs to incorporate cloud services. Now is the time for U.S. managed service providers to put their waders on and head into the water because when it comes to hosted UC, Europe is a market ready for fishing.
Given the difficulties of navigating differing regulatory, labor and legal regimes, U.S. service providers should seriously look at an M&A option for growing into Europe, as opposed to an organic growth approach. Starting with a seasoned team that understands the markets and sales channel is a solid strategy for global providers looking to secure a toehold in the ever expanding European UCaaS market. Q Advisors welcomes the opportunity to discuss our thoughts with service providers as to the best countries to secure a European beachhead.
About Q Advisors
Q Advisors (www.qllc.com) is an investment bank focused on assisting our clients with their most important business transactions – mergers and acquisitions, debt and equity financings and recapitalizations. Since 2001, Q Advisors has managed transactions for companies located on four continents with a total value approach $8 billion. We bring deep industry expertise in our areas of focus: technology, media and communications.
Michael Quinn, is the founding partner of Q Advisors. With more than 25 years of international operations and investment banking experience in the telecommunications industry, Michael has originated, structured, and executed more than 100 deals totaling more $4 billion in transaction value. Michael’s deep industry expertise and extensive transaction experience has enabled him to lead M&A and debt and equity financings in a variety of TMT sectors including cloud and managed services, competitive wireline telecom, wireless, digital media, social networking, mobile content, satellite and mobile infrastructure and solutions.
Hayley Hughes joined Q Advisors in 2014 and has executed and advised mergers and acquisitions, debt and equity financings and strategic advisory assignments for clients across the telecom, media, and technology (TMT) industries with an emphasis on the managed services, digital media and out-of-home advertising sectors.
Natalie Czyzowicz joined Q Advisors in 2015 and has advised mergers and acquisitions, debt and equity financings and strategic advisory assignments for clients across the telecom, media, and technology (TMT) industries.