Interview with David Cork, CEO, Natural Convergence

To start with, can you please provide me with a brief overview of Natural Convergence as a company?

We are a software company. We make hosted application solutions for service providers. The solution is designed to replace key systems which are predominantly installed in small businesses. So, typical small systems might be 5 to 15 employees at a single site. Companies like Nortel, Avaya, Ericsson and Toshiba delivered digital key systems in the late 80s and early 90s. There are 32 million such lines installed in United States alone and just under 200 million worldwide. Lot of them are very old and ready for replacement. We supply the software to replace that, bringing together standard computing platforms from SUN, standard phones from Mitel, standard gateways from companies like Audiocodes and Cisco, and standard media servers from companies like Convedia- now Radisys. We also inter work with standards based session border controllers.

What according to you are the advantages and disadvantages of outsourced versus in-house management of enterprise VoIP application?

We separate the small business market from the medium size enterprise segment. A lot of people put them together and call it SME market. We don’t. We differentiate. The small business market is where the key systems were the dominant solution. When you move up the mid size market, you are competing with the PBX vendors. And once you get to a larger enterprise you typically have an IT person on staff and if that is the case the industry is better off selling them a PBX than offering a hosted solution. The IT department is quite capable of operating a VoIP based PBX from all of manufacturers, whether it be Nortel, Avaya, Cisco or Mitel. The larger enterprise is well served by the PBX industry and their VAR Channel. However when you look into a small business, they do not have an IT guy on staff trained to manage PBXs. It is a far better alternative for them to out source voice to a service provider who takes care of all the parts.

So the key differentiator is size?

The key differentiator is not necessarily the size of organization. The key differentiator is whether they have an IT person on staff trained to manage telephony applications. If they do they are better off with premise-based solution. Such companies might have their email system on premise, website hosting on premise, and maybe their own CRM system on premise. So adding an on-premise PBX is natural and actually much easier solution to manage. However in real world typical small businesses do not have such systems on premise.

Who are your closest competitors right now?

The competition comes from two main sources in the small businesses market place. One is the key system makers and the other is the hosted feature server vendors. The key system makers who sold solution years ago do have new models of those key systems. But it is very difficult for them to make margin because of the price erosion. Key system makers are struggling to find the way to bring the new key system to market with channels. The service provider on the other hand has much better solution because they are not just delivering a box, they are delivering a full bundle of services.

The second set of competitors are the hosted feature server vendors. They tend to focus either on the residential market or the medium size business market. They do not have solutions designed specifically for small businesses.

It must be hard however competing with Broadsoft and Sylantro in the small business segment?

BroadSoft and Sylantro designed solutions for larger enterprise. They are trying to take their products and re-bundle them down to make them fit in the medium size business market and I think they are making some inroads there but they just don’t have the same simplicity, they don’t have same price points and they do not have the same functionality to come down in to key system market place.

How do you perceive the competitive threat coming from Asterisk, the open source platform?

We don’t compete with Asterisk being a PBX, because you need IT expertise to be able to manage an Asterisk PBX. If you have that expertise then that is not the market for hosted solution in the first place. However there are some parts of Asterisk community who are trying to take the Asterisk model and build it into a robust hosted solution, but the feature functionality they have is much closer to what is required in the large enterprise. So I would say Asterisk as a hosted play probably is more a competitor for the larger PBX vendors than they are for us.

The hosted model in the residential segment is advancing well. What can you tell us about the hosted activity in the small business segment in comparison?

Certainly in the consumer market the hosted type solutions are clearly winning, but in the small business market place you haven’t seen that yet. That’s why up to December last year, less than 6% of the small businesses had moved off their own key systems. That suggests that small business market place is still buying TDM based key systems because they really don’t have other choice. To get inside the small business market an important issue here is the channel. The IT VAR or the data VAR, channels that already sell to small businesses, have a loyal customer base. They already have data services to sell. So for them to then to add a voice service has to be user friendly and something that fits directly with the small business needs.

What has been your target market so far?

We have segmented service provider market into four tiers. The top tier are the RBOCs, the national PTTs. The tier 2s tend to be large regional and national competitive carriers. The tier 3s tend to be regional players and sometimes can be non facilities based. The tier 4s are non voice providers. These are the data providers like the ISPs of the world who are trying to get in to the voice world also. In these four tiers, we sell directly only to tier 3 and tier 4. I learnt a long time ago that the big providers like tier 1s and tier 2s do not like to buy from small companies. They will look at your products. They will kick it around in the labs for a long time but they do not like to buy from small companies. They prefer to buy from big partners. We have however signed two OEM deals to have our OEM partners sell our products under their brand label to tier 1s and tier 2s. Today we have three tier 2 customers that came through the OEM channels.

Can you talk about who these OEM partners are?

The two are Marconi (acquired by Ericsson) and Mitel. Mitel has a CPE solution and they have through us a hosted solution.

Do you hear any sort of concerns from your customers regarding the loss of revenue stream and lines by deploying hosted services?

The large incumbent telcos are seeing the loss of revenues and lines. Our customers are all very busy winning customers away from the incumbent carriers. They don’t see any complaints at all. It is the large incumbents that are losing out here. The aggressive CLECs and the aggressive data VARs and aggressive regional players are doing very well with hosted solution because they are winning the new customers.

What are your thoughts about the consolidation and becoming an acquisition target?

I think consolidation is inevitable. In our market segment, you see the infrastructure companies starting to move up the chain into the applications space. At the same time there are not a lot of application companies around. Lot of them started and failed. So I expect that the market for companies like ours in the next 2 years is going to be tremendous. We recently raised an additional 10 million dollars which obviously reflects the investor confidence. We tripled our revenues last year which was our second year of being in business. We will be profitable mid next year.

Any advice for new VoIP entrepreneurs?

This is the second time I have done a start up. The first one did not do so well. The two things that every good start up company needs are money and talented people. With my first venture, I had the money but couldn’t hire the people. It was in 1997 and all the talented engineers in my part of the world were all engaged by the big companies. When I started Natural Convergence in 2001 it was even worse. There was a lot of lay offs from large companies, so there were tons of talented people for us to choose from. But in 2001 the biggest problem was money. It was just so tight. There are lots of good ideas around. You have to be able to execute and to do that you need the right people and money.