Benjamin Farmer and Dan Hawkins, analysts, Datamonitor

Q What is your latest report and what will your customers gain from this report?
A After several months of research, Datamonitor's latest flagship report, entitled "Voice Portals and Applications," is available this week. In our "Voice Business Value Chain" flagship report, last year, we examined the opportunities and trends by technology segment. "Voice Portals and Applications" builds on this and takes a closer look at customer segments.

It provides market sizing information, forecasts, trend analysis and strategic recommendations by a number of segmentations. The first split is between affiliate voice portals (carriers, telematics, web portals) and enterprise voice portals (B2C, B2E, B2B). Across both of these segments it examines ten application categories (including communications, business process automation, interactive entertainment and voice authentication among others) and the uptake of VoiceXML and SALT compared with proprietary environments. In the enterprise segment we break down the market by seventeen vertical markets and discuss key applications and strategies for each.

The 150-page report is intended to give members of the voice business industry a picture of the market as it evolves and serve as a guide to where they should focus their limited resources. It provides strategic recommendations for vendors throughout the value chain and explores the differences between selling and marketing to enterprises and service providers.

Fundamentally, this report helps vendors focus their efforts to ensure that they can achieve sufficient revenues in the short term, yet remain well positioned to take advantage of the expected long term growth of this market.

Q What is the most interesting finding of your latest report?
A For too long, voice business vendors have approached the marketplace with a broad-brush approach. The most interesting finding of this report was the significant differences between market segments that we uncovered. Go-to-market strategies obviously differ between service providers and enterprises, and vendors have worked hard on this over the last couple of years. This report goes further and discusses how strategies should vary depending on the applications offered and the vertical markets targeted.

Q What do you think are the major differences between the service provider and enterprise markets?
A In the medium term the service provider market offers significant potential. It is, however, generally "death or glory," since competition for the few, large contracts available is intense - and vendors that miss a few will struggle. The potential rewards, on the other hand are massive. Over the next couple of years Datamonitor feels that the enterprise market will be the most profitable for the majority of voice business players and will sustain the industry through these difficult times.

The primary difference between service provider and enterprise applications is revenue generation versus cost-savings. Even now, most enterprises are not investing much in speech. However, those applications they do purchase are most likely customer-facing applications that offer an ROI by cutting costs. While ROI isn't everything, and customer service is still important, applications that achieve this will sustain this market over the next few quarters at least.

Service providers on the one hand must communicate with their customers - and thus act in a similar way to other enterprises. On the other hand they are also looking to generate additional revenues per customer through premium services or increased network minutes. Datamonitor believes voice services offer service providers an attractive means of generating new revenues, and we expect to see services like voice-activated dialing and informational voice portals become more common among wireless as well as wireline service providers. The difficulty is that most service providers are struggling, and investment decisions around hoped-for rather than proven services are easy to postpone. In the next few years, service providers will increase expenditure, as voice-enabled services become a key differentiator.

Datamonitor also expects that service providers will take the opportunity to act as a channel, and to host or deploy voice applications for their enterprise customers. Voice business vendors should look to exploit this opportunity as it arises.

Q What recent market developments have caused you to stand up and take notice?
A One key development is the entrance of companies like Microsoft, Oracle, Alcatel, and Sun. These companies have all made significant moves in the last few months, either through acquisition, partnership, or statements of intent. They command the financial and marketing resources, customer relationships and brand to make voice solutions mainstream. While there entrance is a threat for some vendors, they give a boost to the overall market. Those feeling threatened will need to shift focus or look for partnership opportunities. Nevertheless, these blue chip technology companies bring dollars and a degree of legitimacy to the speech industry, which will certainly benefit the market as a whole. Their presence should be viewed as an opportunity, not a threat.

Q What type of CAGR do you expect in the next five years for the speech industry?
A The past eighteen months have been relatively flat, and we expect Q2 2002 will not be significantly different from Q1 2002 in terms of revenues. However, we do expect moderate growth during the second half of this year. After 2002, we believe revenues will begin to recover positive growth. We expect supply-side revenues will grow at a CAGR of nearly 38% between 2001 and 2007. This growth will be weighted to 2004 onwards.

Q What types of applications will be most important in the near term? In the long term?
A Far and away the most important voice application category is call center automation. Simple applications like name and address collection or call routing can shorten call length and reduce agent workloads. Shaving seconds off each call can generate significant ROIs. This will continue to be the driving force of the industry in the foreseeable future.

Directory applications, including auto-attendant, are the second most important application category in terms of revenues. Communications applications, including voice-activated dialing and voice-enabled e-mail, is third. Communications applications will have the most important role in exposing voice-enabled services to the broader population, and as such, will have an impact on uptake of other applications.

There are a number of types of applications that are on the verge of success, and will become significant in the next few years. Voice authentication is one, voice-enabled transactions another, and business process automation a third. These types of applications, though currently limited in functionality and revenues, will grow more quickly than the overall market as advanced speech technologies become market ready.

Q What are the largest vertical markets for speech applications?
A Certainly service providers are a significant portion, though not a majority, of the overall market for speech applications.

On the enterprise side, the financial services industry has been an early adopter of voice solutions and often serves as a proving ground for emerging advanced speech applications. Of the seventeen vertical markets we examined, retail banking and investments & securities, in particular, have been among the first to offer speech recognition to their customers, and will remain the largest enterprise markets for voice services.

Outside the financial services industry, outsourcing bureaus will contribute considerable revenues for voice technologies both as customers and as partners. Telcos, with respect to enterprise functions such as customer service are also important. The healthcare and pharma market has generated a lot of buzz recently. Revenues from this vertical are currently small, however there is significant potential, and we expect this market to grow quickly, though remain secondary to those already mentioned. Significant opportunities also lie in the government space, particularly in North America, although this market requires a very different approach.

Q Do you think speech technology companies should specialize by vertical market?
A If I asked the question, "What is the key factor in the success of a voice application?" the answer is commonly agreed to be "the design of the application." If I asked, "What is the key factor in getting customers to buy a voice solution?" the answer is normally "convincing them that it will work properly." Although other factors are important, they are more easily overcome. The answers to both of these questions point us to vertical specialization.

Vendors that specialize can better understand the intricacies of interactions, and are more likely to successfully design applications. The fourth or fifth deployment of a particular application is likely to be much better than the first or second. Further, specialists are better able to point to reference sites that new prospects can test - helping them get over their discomfort with new technologies that are perceived to be unproven. Successful applications and services are client specific and therefore benefit considerably from specialization.

Underlying technologies, however, are generally applicable across verticals, and we don't think platform providers and enabling software providers would particularly benefit from vertical specialization - beyond obvious sales efficiencies.

The industry is young and relatively open. Therefore gaining expertise now in a number of verticals will allow vendors to demonstrate competency in core verticals when the market begins to mature. This will also help protect vendors against new entrants down the road. However, the take home lesson has to be: in the short term at least, vendors cannot afford to turn down business.

Q Provide us with your thoughts on the various standards that are being implemented and discussed.
A First off, standards will benefit the market. Ultimately they will help drive down the cost of voice solutions, decrease time to market, and increase the available pool of developers, thereby expanding the potential market for speech technologies.

With respect to specific standards versus existing proprietary languages, there are several possible scenarios. In our report we outline five scenarios and the trends and potential change drivers that could sway the market.

For now, it is clear that in many cases proprietary environments still offer a competitive advantage to existing IVR customers. This isn't likely to change overnight. It is closely linked to the comparative maturity of proprietary environments to VoiceXML and SALT, and the sunk platform costs that customers are reluctant to jettison.

VoiceXML is promising, and the broad industry support and almost two-year development advantage this standard has over SALT will likely coincide with the significant growth we expect over the next few years. In our opinion this will probably lead to greater uptake of VoiceXML over SALT in the next few years, at least for voice only applications.

The key for both new and old-style platform vendors will be successfully offering migration paths between existing platforms and the 'open' future.

Benjamin Farmer covers the voice business market as an analyst with Datamonitor in New York. He can be reached at bsfarmer@datamonitor.com. Dan Hawkins is the program manager for Datamonitor's Voice Business Strategic Planning Program. He can be reached at dhawkins@datamonitor.com.

If you have further questions or would like detailed information about the report, please contact Sarah Person at sperson@datamonitor.com.

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