Thesis: Longevity of a company doesn’t necessarily guarantee success. Constantly changing direction can leave the firm without a leadership position in its chosen segments.
8×8, Inc. (NASDAQ: EGHT) offers hosted turnkey voice, video and mobile UC solutions for SMB’s and distributed enterprise customers by leveraging existing broadband Internet connections and cellular networks. They also provide dedicated server and private cloud computing solutions . Incorporated in 1987, the business is built around the hosted business model with all of its revenues from subscriptions resulting in annual FY2011 revenues of $70M. It’s been a chip maker, a VoIP consumer service provider and now a subscription based hosted solution provider . This constant re-inventing of the basic DNA has led to questionable long term viability and inconsistent market performance. The firm is analyzed using the four dimensions framework that dwells on the product, revenue, sales and support model . From this analysis, the strength of the firm is assessed.
Since the product is a hosted solution for voice and data applications, it is customized according to customer requirements. A customer is offered three distinct value propositions which are respectively the basic hosted telephony, the hosted Unified Communications and the hosted data center running native applications. The market segment is specific to small and distributed enterprises as the firm is exiting the consumer segment. To keep pricing low, the company’s current products are developed internally with a few critical acquisitions (e.g. vBlock, Zerigo, Central Host, Inc. to support private cloud solutions). Polycom is the only OEM vendor providing on-premise hardware which is hardcoded to work with the hosted and self-managed servers. From a product perspective, the business model is based on the need for SME’s to offload critical voice and data features to the cloud. This model may not scale with large customers that prefer on-premise solutions or a combination of the above propositions. Architecture problems can arise due to 8×8’s different core competencies. A leadership position may rest on how well the firm can execute the cloud and hosted models.
The entire revenue stream of 8×8 is from subscription of the hosted voice and data solutions. Customers get differing price points based on selective services offered . 92% of the revenue comes from services (SaaS voice and IaaS data) whereas only 8% comes from on-premise consumer products. Differentiated service levels leads to value based pricing with zero marginal cost. From a revenue perspective, the company is solely built around subscription. This leads to a service ARPU/month of $200 – a sliver of revenue compared to that of the competition . 2011 has seen resurgence with cash flow from operations hitting an all-time high of $8.59M and net income growing YOY at 67.41% . FY2011 was its best year since inception. This could be a direct result of positioning itself for the SME segment with hosted and managed solutions. But, for a public company, a total cash balance of $18.9M over 24 years is more than just a disappointing statistic .
Distribution and selling models
Marketing and sales of this company is direct (about 95% of the sales in 2011) but there is a focus to build indirect sales channel using new executives and relationships with equipment vendors . The idea of moving into a channel based system with VAR partners is a sales technique uncommon for SaaS . From a sales perspective, the distribution of the solution requires a strong inside sales team. The focus is moving towards a partner and VAR model which could take several years to perfect. Up against behemoths like Cisco and Avaya, the lack of brand equity can hurt . These weaknesses make the distribution and selling aspects circumspect.
Support, services and implementation
8×8 provides direct support via a call center and customer support group located in its Sunnyvale HQ. They also provide support via an outsourced call center operation in Santa Maria, California . Implementation is per customer on the servers that are managed locally by the firm. Different service levels can be purchased by customers resulting in varied subscription pricing. From a support perspective, scalability will be a concern when supporting true enterprise hosted solutions. The established competition like Cisco and Avaya outsource their implementation and professional services to third party service providers or have strategic tie-ups with service oriented companies like IBM and Accenture. A leadership position is difficult supporting only SME customers with NOC’s  handling multi-tenanted services. It remains to be seen how the model will change when entire data centers are needed for marquee customers who require dedicated infrastructure. ‘Vendor lock-in’ is a concern with subscription models . Quality of service levels may be an issue during this growth phase.
The business model of 8×8 is a result of the current technological times that enables faster cheaper bandwidth, powerful servers and streamlined CRM tools. Smaller firms have no IT budgets to invest in mission critical data and voice applications. Thus 8×8 is structured to take advantage of both the needs of the target market and of the growth of hosted technologies. Unfortunately, all of the products, revenues, services and distribution models of 8×8 are adapted around how SME’s function. When providing managed services for large enterprises, the product offering may be found to be inadequate without participation from more experienced OEM’s. Though the finances of the company are looking better than ever before, a tiered subscription model coupled with a purchase program may provide more revenue. A systemic change in the distribution channel is a significant shift in the ‘go to market’ strategy. Finally the call center services model may not scale supporting large installations. A sustainable competitive advantage is difficult for this relative new entrant with internally developed solutions and services which cater only to a specific market . Would there be another change in the core product when the company fails?
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 Voice Over IP
 Original Equipment Manufacturer
 Small and Medium Enterprises
 Software as a Service
 Infrastructure as a Service
 Average Revenue per User
 Value Added Reseller
 Network Operations Center