Cavell’s view on RingCentral’s deal with Avaya

Key Elements of the Deal

  • RingCentral to Become Avaya’s “Exclusive” UCaaS solution provider
  • “Avaya Cloud Office” ACO to be built on RingCentral Technology Platform
  • Avaya to become a Super Master Agent for the RingCentral with all customer contracts signed on RingCentral contracts
  • Joint GTM and development to be undertaken
  • RingCentral to pay $375m for future commissions and key licensing rights
  • RingCentral to take a 6% stake in Avaya paying $125m
  • Deal to be ratified in 4thquarter although agreed by both boards and Avaya looking to launch ACO in first quarter

Cavell View
The deal has some interesting elements which we have expanded on below:

International Expansion
RingCentral only generates approximately 5% of its revenue from outside of the Americas whereas Avaya international revenue accounts for 45% with a strong European presence representing 27% of revenue. The opportunity to utilise Avaya’s route to market will be particularly interesting for RingCentral.

Migration key – related developments 
The joint developments mentioned appear to be focussed on ensuring a smooth transition to the service for customers currently using Avaya, with RingCentral mentioning a focus on scripting etc. Will be interesting to see if this is as easy as they say it will be as migration has always been a headache for providers.

Avaya hardware sales 
The deal mentions that RingCentral will add Avaya to its catalogue of phones, and also enable Avaya’s exiting handsets to work with the new solutions so migrating customers do not have to switch out hardware. RingCentral have not stated that the intention is to use Avaya as their key handset moving forward.

Sales & Marketing cost savings 
One of the biggest challenges to particularly US providers in the Cloud Comms market has been the increasing cost of both Digital/Online marketing and the increased competition for the channel, with ever increasing sales promotions offered as the race for market share continues.

This is why we have seen RingCentral invest 53% of their revenue in customer acquisition costs, though this may come down now due to their expanded channel as this deal gives RingCentral access to over 4000 channels and large international direct sales force. 

Avaya doubling down on CCaaS
When you look at the deal it may not be completely clear on the benefit and focus for Avaya. What is clear, is that Avaya has struggled up until now to deliver a clear cloud UCaaS story and this certainly brings them a strong proposition in that space, even if only as a Master Agent for someone else’s service.

What was hinted on the investment calls around this deal is that this really clears the way for them to focus development on other areas such as CCaaS. Avaya really needed the financial lifeline this provides and the commission they will generate will be very attractive in terms of short-term margin as there will only be sales and marketing costs associated. 

Channel benefit and international growth
RingCentral commented that Avaya have over 4000 channels and although certainly in Avaya’s top partners there was crossover where the partner was already selling RingCentral this would not be the case majority of cases. There may be a particular benefit internationally where this may give a kick start to new markets etc where RingCentral may not have existing channel relationships. The only issue is that in certain markets the Agent approach is not the preferred approach, where instead they prefer to own the customers, so this may affect some of the benefits gained through this agreement.

Helping UCaaS development 
One of the issues in many markets has been the reluctance for both enterprises and particularly traditional channels to embrace cloud communications. This deal is likely to legitimise the cloud both in the channel and some enterprise customers, clearly that will help the overall market and other providers in the market. 

Key Quotes

Michael Quinn – Partner, Q Advisors 
“The Avaya-Ring deal is quite an interesting spin on the concept of “partnership”. It allows Ring Central to move up market to the enterprise space where it has struggled to succeed. I still think there is a challenge in serving that market without connectivity and SLAs so that may be a next step for Ring. For Avaya, it is a lifeline.”

Jim Chirico – President and CEO of Avaya
“Avaya and RingCentral’s joint investment and commitment to bringing Avaya Cloud Office to market creates an unprecedented opportunity to accelerate the transition to the cloud with attractive economics for our customers and partners,”

Vlad Shmunis – Founder, Chairman and CEO, RingCentral
“This strategic partnership leverages the respective strengths of Avaya and RingCentral to provide a definitive differentiated solution,” “We are excited to bring RingCentral’s leading UCaaS platform to Avaya’s installed base of over 100 million users and over 4,700 partners, providing long-term growth opportunities for both our companies.”

Matt Townend – Director of Research and Consulting, Cavell Group 
“This deal among other benefits provides RingCentral with the opportunity to accelerate its international capability and provides Avaya with a much need clear strategy on UCaaS and a financial lifeline. The industry will also benefit as Avaya partners and enterprises will be reminded of the legitimacy of cloud offerings.”

Notes
For any questions and further information on the deal, please contact:
Matt Townend – Director of Cavell – matthew.townend@cavellgroup.com
Dominic Black – Head of Research at Cavell – dominic.black@cavellgroup.com

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