Thursday, September 16, 2004

Daiwa EuroTelcoblog No. 76: Thursday 16th September, 2004 - Sweet dreams, my PABX

Some time back we profiled Peerio, the P2P application from Popular Telephony which aims to disintermediate the PABX vendors (and many other market participants) through the power of software. One company which shares some characteristics (and some important differences) is little-known Canadian firm Nimcat Networks (, which has thus far been avoiding coverage ahead of an imminent marketing push. In common with Peerio, Nimcat has a P2P application interoperable with SIP and H.323, developed from the ground up, with 12 patents filed to date (and more in process) covering North America and the European Union. Also similar to the Peerio approach is a focus on embedded solutions, in which the aim is to license the application to chip and keyset manufacturers, who then ensure the penetration of the application through their normal sales and partner channels.

At this point, however, the two strategies diverge. While Peerio has so far racked up contracts spanning everything from consumer phones through to enterprise IP phones and on to CRM applications, Nimcat is focused on the opportunity within the SME segment. At an estimated deployment cost ranging from $600 - 1500 per seat (depending on features), either purchasing or overhauling a PABX is prohibitively expensive for the average SME. It is just this sort of choke point in the market which Nimcat is hoping to unlock, with a bundled solution that in many cases can deliver cost savings of up to 66% relative to conventional centralized systems.

In practice, the Nimcat solution embeds the intelligence traditionally associated with PABX or Centrex technologies into a standard client device, and scales to multiple thousands of lines within a single location if necessary. However, management say their experience suggests that organizations of more than 150 persons typically will want to retain some sort of centralized control structure, which implies that the sweet spot of this segment may be in implementations of 150 lines or less. Administrators retain control through a system of dialing rules and optional features unique to each user, and this also has the added value of allowing the service provider to shape revenues. The one-hour conference call we had with senior VP for Business Development and Marketing Marc Gingras revealed the audio quality to be exceptionally good, on a par with the PSTN, and with no perceptible latency or flutter.

Of interest from a strategic perspective is the fact that among Nimcat investors we find names like Siemens and Broadcom, and we note that Nimcat has successfully ported its software onto the chips of all major silicon vendors. As a result, Nimcat claims a time-to-market for device makers of between two and six months. We expect that Q4 of this year or Q1 of 2005 will see some significant announcements regarding products and partnerships in the more traditional enterprise space, and beyond that we expect the company may be working on a variation for the wireless arena. Considering the kind of cellular roaming charges the average SME is likely to incur, we expect this is yet another attractive area of cost savings which customers in this segment might be looking to realize.

Market definition in Europe is somewhat tough, but the European Union's Observatory of European SMEs for 2003 ( found that the market consists of 18.7m enterprises in the EU15, and SMEs in the EU actually account for a greater proportion of employment than is the case in the US (69.7% versus 49.1%). While SMEs in the survey rated adoption of new technology as a relatively unimportant inhibitor to their business development, and generally agreed that telecoms deregulation has benefitted business overall, they also acknowledged that their lack of bargaining power in procuring services put them at a disadvatange relative to large enterprises. Gross margin in SMEs also tends to correlate well with enterprise size (i.e., it is lower in smaller organizations), and the EU found that SMEs overwhelmingly favor reduction in non-labor costs as a response to weak economic conditions, as opposed to other courses of action. This may contribute to the apparent high level of interest in VoIP found in a study by the British Chamber of Commerce last year. The BCC found that 42% of enterprises with 250 or more full-time employees on site already use VoIP, and a further 23% planned to take it up at some point. Below this level, however, interest in VoIP was similarly strong, with 17% of enterprises of 50 - 249 headcount intending to adopt it, and 13% in the 20 - 49 employee range (

Nimcat claims that its product strategy has no particular regional bias, however, from our own perspective here in Europe, the case for margin enhancement for the SMEs through the kind of savings it may offer may be of relatively greater importance than in North America.

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