Service Provider Business Case:      Hosted Unified CommunicationsJuan Carlos SanchezDecember 2008
Overview    • Executive Summary    • What are Unified Communications?         – Enterprise Benefits         – Sources of v...
Executive Summary• Studies show significant benefit in adopting unified communications to enrich &  enable better interact...
Unified Communications (UC) offer greater businessproductivity through richer, more convenient interactions    Voice integ...
Over 95% of businesses regard integrated multimedia     communications as important to their organization5      2008 Broad...
SoHo & SMBs are ready to pay $50-75 (€40-60) for a full range  of hosted office productivity services, beyond telephony6  ...
Using hosted UC services offer businesses                       a wide range of benefits    Enterprise benefits of using  ...
Hosted Unified Communications offers service                                          providers many value creation possib...
The business case looks at a Service Provider with an    existing BroadWorks system, selling Hosted UC services           ...
We consider a leading service provider offering Hosted      UC to businesses in a Sm-to-Med competitive market            ...
The case is built on delivering 3 Hosted UC           Value Propositions to SoHo & SMBs                                   ...
Hosted UC boosts current SMB ARPU, it unleashes a     new SoHo revenue stream, while helping reduce churn Business cases c...
Delivering Hosted UC requires incremental             CAPEX to integrate with the ASP’s UC           Cumulated Investment ...
Offering Hosted UC involves IT application &       networking expenses, but delivers strong margins                       ...
The hosted UC business case shows strong short-mid  term value creation, incl. quick time to +ive cashflow                ...
What if the market impact where different?               The preliminary hosted UC business case suggests that the        ...
What drives the business case?                                                                                            ...
Appendix A – Free Cash Flow18   2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
Appendix B – Hosted UC Units Sold & ARPU19    2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, ...
Questions?20   2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
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Hosted Unified Communications - Business Case

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A business case I developed in 2008, while at BroadSoft, to support their prospects' investment decision for Hosted Unified Communications.
This executive-level report demonstrates the business case for investing in Hosted UC services to serve the SMB market. The case proved pivotal in helping numerous service providers understand the emerging opportunity and add UC to their service offer.

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Hosted Unified Communications - Business Case

  1. 1. Service Provider Business Case: Hosted Unified CommunicationsJuan Carlos SanchezDecember 2008
  2. 2. Overview • Executive Summary • What are Unified Communications? – Enterprise Benefits – Sources of value creation for Hosted UC Service Providers • Case assumptions & results • “What-if?” Analysis • Appendices: Base Case Cash Flow, Unit Sales,2 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  3. 3. Executive Summary• Studies show significant benefit in adopting unified communications to enrich & enable better interaction within businesses• Providing hosted UC services, integrating voice with productivity applications, offers businesses high-value communications, which they are willing to pay for• Preliminary bus case* for Hosted UC, powered by BroadWorks & HMC yields: – Positive CF after 1.5 Yrs; 2 Yr Payback – 5yr NPV: €50 M – ARPU: €54, with 61% AMPU – 5yr Net Hosted UC CAPEX/sub: €64• Further analysis suggests: – “What if?” scenario analysis suggests that despite market uncertainty, the 5yr NPV > €45 M in 88% of cases – Maximizing the project value requires focusing efforts on a strong low-mid level SoHo SB Hosted UC propositions * Considers incremental hosted UC business case, based on 86k Hosted UC subs over 5 years3 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  4. 4. Unified Communications (UC) offer greater businessproductivity through richer, more convenient interactions Voice integrated with your business applications… IM, Presence, e-Mail, Contacts, Calendar, To-do List, Web Meeting, Doc Sharing, CRM … and accessible from various business touch points4 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  5. 5. Over 95% of businesses regard integrated multimedia communications as important to their organization5 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  6. 6. SoHo & SMBs are ready to pay $50-75 (€40-60) for a full range of hosted office productivity services, beyond telephony6 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  7. 7. Using hosted UC services offer businesses a wide range of benefits Enterprise benefits of using Benefits of getting UC as a Unified Communications hosted service Productivity Increase Lower CAPEX & OPEX •Quicker problem resolution & •Less IT staff required decisions making •Lower implementation costs & efforts •Less missed calls •Upgrades included •Mobile device integration •Business process integration •Future Proof Up-to-date Technology Greater Customer Satisfaction Optimized OPEX •Better responsiveness •More predictable operating costs •In-time access to key •Only pay for services that are being used customer data •Easier mobile & tele-worker support Cost Reduction Greater business productivity •Remote collaboration •Integration with other hosted & SaaS •Reduced Travel applications •More effective Tele-working •More reliable & disaster resistant7 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  8. 8. Hosted Unified Communications offers service providers many value creation possibilities Business Objective Strategy Possible Tactic Protect current •Reduce churn vs. competition by •Offer existing clients possibility revenue streams introducing differentiated UC offers to easily upgrade to Hosted UC •Create differentiated business Revenue Grow current •Grow ARPU by adding HMC & CRM revenue streams offers integrating voice with services to existing voice & data portfolio HMC, CRM Hosted UCCashflow ROI •Attract new business segments with • Attract SoHo & SMB with simple, Develop new fee-based Hosted UC service scalable, fee-based UC offers revenue sources •Develop new revenue streams by • Offer dedicated services catering targeting non-traditional markets to specific vertical sectors Operating Cost Increase •Reduce complexity and time to market •Establish wholesale agreement productivity in delivering UC service by outsourcing with Hosted UC ASP Gross Investment Make costs variable •Make business more scalable •Enter demand-based service agreement with ASP Minimize HW/SW •Reduce CAPEX vs. implementing & •Outsource HMC & CRM service Investment maintaining HMC & CRM apps in house supply to specialized ASP Hosted UC net business benefits will be a mix of these factors, 8 2008 BroadSoft , Inc. by strategy and duplicate, or distribute competitive context driven Proprietary and confidential; do not copy, the local ®
  9. 9. The business case looks at a Service Provider with an existing BroadWorks system, selling Hosted UC services to SoHo & SMBs ASP Communication Communication ASP Service Provider Service Provider Med Bus Small Bus Selling HMC, CRM Selling HMC, CRM Selling Hosted UC Selling Hosted UC SoHos (HMC 4.5 inside) (HMC 4.5 inside) (BroadWorks 14sp6 inside) (BroadWorks 14sp6 inside) Wholesale HMC & Hosted UC CRM agreement Propositions Monthly Wholesale Pricing Monthly Service Pack Pricing •Hosted Exchange: €9.38/user •Office UC: €40/user •Share Point: €6.13/user •Live Meeting: €17.50/act. for up to 50 user •Anywhere UC: €50/user •CRM (Dynamics): €15.00/user •Premium: €70/user •Mobile Access: €2.00/user9 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  10. 10. We consider a leading service provider offering Hosted UC to businesses in a Sm-to-Med competitive market Hosted UC Service Market 4,200 30.0% Subscribers (x1000) Market Share, Churn 4,000 25.0%Assume constant market position 3,800 20.0% Rate (%)over 5yr period: 3,600 15.0% 3,400 10.0% 3,200 5.0%- Bus BB Market Share: 25% 3,000 0.0% 2008 2009 2010 2011 2012 2013- Bus Customer churn: ~ 3.5% Business BB Lines Consumer BB Lines SP Bus BB Market Share Business Churn Rate Total Business Market 460.0 0.9 450.0 0.9 4.1Total addressable market*: 440.0 4.0 Business (x 1000)441K businesses, growing 0.5%/Yr: 430.0 420.0 45.7 44.5 410.0 400.0 SoHo: 89% Mid: 0.9% 390.0 380.0 401.4 SMB: 10% LE: 0.2% 370.0 391.6 360.0 2008 2013*No. of employees per co.: SoHo 1-9, SMB 10-50, Mid 50-250, LE > 250 Soho SME Mid LE10 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  11. 11. The case is built on delivering 3 Hosted UC Value Propositions to SoHo & SMBs Office Unified Anywhere Unified Premium Unified Communications Communications Communications For business with: 2-25 employees 2-25 employees 10-200 employees Office IM + Integrated Voice Hosted Exchange 1GB user account 1GB user account 2GB user account Hosted SharePoint - - Hosted Live Meeting Hosted Dynamics (CRM) - - Mobile Access - Hosted Business Telephony Unlimited Local Fix-line Calls Broadband Internet 10 MB/s 10 MB/s 50 MB/s €40/user.mth €50/user.mth €70/user.mth11 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  12. 12. Hosted UC boosts current SMB ARPU, it unleashes a new SoHo revenue stream, while helping reduce churn Business cases consider three Hosted UC Revenue - 5yr sources of value creation: 0% 5 Yr Total: € 139 M 36% 1) ARPU uplift from SMBs customers: Beyond existing ‘voice & data’ ARPU of €14/user.mth 64% Incr SMB ARPU SoHo Rev Rev from retained customers 2) New SoHo revenue: Hosted UC fees + VoIP phones Rev based on 86 k HUC subs after 5 yrs Hosted UC ARPU 3) Reduced churn across existing SMB ‘voice & data’ customers base 70 ARPU (ZAR/Sub.Mth) 60 - 2.5pts 0% pts; from Yrs 1 3 50 40 30 20Case Considers 5 yr take-up scenario: 10 0 Yr 1 Yr 2 Yr 3 Yr 4 Yr 5Office UC: SoHo 2.6%, SME 6%Anywhere UC: SoHo 2.6%, SME 6% Incr SMB ARPU SoHo Rev Rev from retained customersPremium UC: SoHo 0%, SME 6% ARPU ~ €54Avg. subs/bus: SoHo 6, SME 29 Incr. SMB Rev. 65%, SoHo Rev. 35%12 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  13. 13. Delivering Hosted UC requires incremental CAPEX to integrate with the ASP’s UC Cumulated Investment - 5 Yr Overlay Business Case requires € 5.4M CAPEX over 5 yrs 8% • New IP phone sets: 71% User Handset • Incremental VoIP licenses: 21% 21% VoIP System - HW • ICT network systems: 8% 0% VoIP System - SW ICT Network-related CAPEX as %Rev: 43 6% in Yr 0 3 71% CAPEX/sub: €64 • Based on 86 k Hosted UC subs after 5 yrs 5Yr Total CAPEX: Overlay investment scenario is demand €5.4 M driven, and considers: - VoIP phone set: €50-90 / new sub - VoIP Licenses: €29 / new sub - Servers: €6.5 k / unit - ICT systems: CSTA Gateway, Voice & HMC Mediation systems: €7-100k /unit13 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  14. 14. Offering Hosted UC involves IT application & networking expenses, but delivers strong margins Op Margin / Sub - After 5yr Cost of Goods Sold - 5 Yr Total ASP Expense 11% 45.0 28% 40.0 Network O&M 35.0 30.0 Distribution Channel Cost (M ZAR) Expenses 61% 25.0 Customer Retention Cost 20.0 COGS Overhead Op Margin 15.0 Net Subscriber Acquisition 10.0 Cost Offnet Interconnection - 5.0 Expenses Hosted UC offers 61% Op Margins: – COGS: 28% total rev, of which: Overhead Costs - 5 Yr Total •44% Off-Net traffic interconnection 45.0 22% SRC, 11% SAC, 10% ASP 40.0 35.0 G&A – Overhead: 11% total rev, of which: 30.0 Marketing Expenses •55% Marketing, 22% CC&B, Cost (M ZAR) 25.0 Customer Care & Billing 20.0 15.0 Net Support & Scenario COGS Overhead Maintenance •Off-net Interco: 15% sub fees • CC & Billing: €15-17/sub 10.0 based on: •SRC: €30-36/sub •15/18% HW/SW Maintenance 5.0 •ASP: €9-18/ app.sub.mth •Marketing: €1.25 M (Launch) - •Power Expense, 3 staff 7-5% rev (Promo)14 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  15. 15. The hosted UC business case shows strong short-mid term value creation, incl. quick time to +ive cashflow Hosted UC project shows strong mid-term potential: • Time to positive CF: 1.5 Yrs Free Cashflow Hosted UC Project • Payback: 2 Yrs 100 – 5 Yr NPV: €50 M 80 60 M ZAR 40 Hosted UC success 20 0 depends on driving new -20 Y0 Y1 Y2 Y3 Y4 Y5 customers & revenue, while -40 containing IT networking fees Rev COGS Overhead CAPEX Cum FCF15 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  16. 16. What if the market impact where different? The preliminary hosted UC business case suggests that the project will create €50M NPV over 5 yrs (12% WACC)“How much added value would the Based on ‘what if” Hosted UC offer analysis*, Hosted create if…”: UC will provide:1. Service demand where different ? NPV > €45M in –Worst case: 50% lower –Best case: 50% higher 88% of cases - Min: 35 M ZAR2. Customers paid higher / lower service fees? - Max: 67 M ZAR –Worst case: 20% less –Best case: 20% more Positive NPV in all3. Offnet inter-co fees where cases considered higher/lower ? –Worst case: 25% less –Best case: 25% more Despite uncertainty in the market impact of launching the offer, a Hosted UC service will create value for a first-mover service provider * Monte Carlo simulation: NPV distribution obtained by running 5000 ‘NPV trials’ with randomly generated sets of input variables as specified16 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  17. 17. What drives the business case? The NPV is most sensitive to SoHo adoption of low & mid- level offers UC offers This implies: 1) Creating “Office” & “Anywere” UC offers that appeal to SoHo SB segment 2) Ensuring strong market awareness & promotion 3) Providing superior overall experience to ensure customer satisfaction Maximizing this opportunity requires focused efforts on developing and going-to-market with strong SoHo SB Hosted UC value proposition17 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  18. 18. Appendix A – Free Cash Flow18 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  19. 19. Appendix B – Hosted UC Units Sold & ARPU19 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute
  20. 20. Questions?20 2008 BroadSoft®, Inc. Proprietary and confidential; do not copy, duplicate, or distribute

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