Does Revenue Decline Matter?

By Gary Kim July 22, 2013

Industry transitions are often difficult at the personal level, for firms and nations.

Consider the agricultural revolution or the industrial revolution. The former means fewer people can produce more food than more people used to produce. That actually creates “unemployment.”

The latter arguably has the same effect, in a sense, allowing fewer people to create more. Of course, one might argue the industrial revolution absorbed much of the excess labor made “surplus” by the agricultural revolution.

In the telecommunications business, we might point to similar transitions, from analog to digital switching, from time division multiplex to Internet Protocol, from narrowband to broadband, fixed to mobile, hardware to software, premises computing to cloud computing. 

Image via Shutterstock

In that regard, analyst Dave Michels argues that declining revenue in the unified communications business is not necessarily a problem. Michels, a far more experienced observer of the UC business than I am, points out that the UC industry is in the midst of a transition from hardware-based to software-based and virtualized solutions, so declining revenues for hardware products do not matter as much as some think.

“Every major UC vendor is in some level of transition away from hardware,” Michels says. “Subsequently, the industry as a whole has been reporting near flat revenues.”

“It’s possible today to acquire a comprehensive enterprise class UC solution without buying a single piece of hardware from firms like Cisco, Avaya, NEC,” Michels notes.

“If revenue is heading south faster than business is growing, it’s not necessarily a bad thing,” Michels argues.

At the firm level, Michels makes a reasonable argument. Firms sometimes have to sacrifice profit margin or gross revenue when building new lines of business to replace declining product lines.

That typically is true in the venture or startup business as well, where it often takes a new firm time to reach sustainable revenue, or to discover a sustainable revenue model.

The business issues arguably are different in legacy and emerging businesses or product lines, however. A rational executive can tolerate a period of investment to build a new business.

Whether, or how well a rational executive can tolerate declining revenues in a declining line of business is more the issue. At a high level, one might argue most UC suppliers are in a transition from hardware-based to software-based or service-based businesses.

So legacy revenue declines are a big problem only when the emerging and replacement lines of business are not growing fast enough to offer full replacement of the legacy products.

At a high level, that is proving to be quite difficult for any number of actors and industry segments. And that’s probably why some observers might be less sanguine than Michels about revenue declines. He’s right, strategically speaking.

Most UC vendors are in some stage of transition to new lines of business, as are most service providers. But it’s a race, requiring that the new revenue generators grow fast enough to offset legacy product declines.

Some might say this is a race many will lose.

Edited by Alisen Downey

Contributing Editor

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