Shoretel's Strategy Is High Risk

Shoretel's CEO, in the companies last conference call, described the companies vision for the future as a cloud based company. This shift began with Shoretel entering the hosted market with the acquisition and integration of M5. the numbers bear witness to this as their hosted revenue is now almost on par with the combined revenue from sales and service.

In theory, this would seem like an excellent strategy. Even though the sales of equipment and service have higher margins than hosted, hosted provides recurring revenue, whereby equipment sales is largely dependent on company growth.

However what Shoretel did not mention, is that by shifting towards the cloud, they are facing a massive risk. Currently in the U.S. market, their are primarily 5 main competitors in the market (Cisco, Avaya, Mitel, and  Shoretel). Shoretel has been successful by growing their market share in this space.

However, when you enter the hosted market, you are inviting a lot more competition. There are hundreds of Hosted Telecom Providers. While Shoretel is targeting it's current user base for hosted migration, the real challenge will be when those current users original hosted contract expires.

Shoretel is not the least expensive option by far. They will also face increased competition from the carriers who are moving into the Hosted PBX market as well. In theory, carriers (as well as cable companies on the small business end) can provide this service more efficiently, as the telecom traffic already passes through their hubs. By using a non carrier provider, this adds an extra stop in the flow of voice data, and another point where something can go wrong.

In practice, it would seem that Shoretel is moving from a market where they can continue to flourish, to a market at which they will be at a distinct disadvantage in the long run. Yes, they can get an immediate boost from migrating customers currently on Shoretel hardware, but how long will those customers remain loyal to Shoretel, and how much of a premium are customers willing to pay in order to do so.

While hosted works for many small businesses, there are many mid size and large businesses that will stick with premise based systems for many reasons (another post for another time). It would seem that shoretel would be best served in the long run by developing applications where they can continue to monetize their customers while keeping them in their premise based solutions.

This would seem to be an example of the difference between a public company and a private company. Long term outlook for a public company is no more than 3 years, whereas a private company has a much longer term outlook.