Yesterday, contact center company Genesys agreed to buy Interactive Intelligence for about $1.4 billion as it looks to build scale in the face of fierce competition in the contact center and workforce optimization (WFO) markets. The $60.50 per share offer is at a 36 percent premium to Interactive Intelligence’s close on July 28, a day before the company reported it was considering strategic alternatives.

Genesys acquiring Interactive Intelligence should not come as a surprise as the space is undergoing massive transformation across three areas:

1. It is being commoditized by cloud vendors, which generates pressure on margins. Sales of cloud solutions have been growing at a sustained 25% annual rate for the past five years, while the remainder of the market was flat and is now declining. If cloud contact center vendors enjoy a significant growth, they often have lower margins. The three largest, Five9, InContact, and Interactive Intelligence, while being over $100 million in revenue are still not profitable, and generated a combined $60 million of net losses in 2015. This financial pressure pushed InContact to merge with Nice despite projecting $664 million in revenue in 2020, and that same pressure is behind Genesys’ acquisition of Interactive Intelligence. The decline of legacy markets is impacting historical players as well. Aspect had to file chapter 11 to restructure its debt, and Avaya is exploring its sale.

2. The stock market is rewarding revenue growth rather than earnings. Five9’s $800 million valuation and Interactive Intelligence’s ~$1 billion valuation have pressured these public companies to focus on aggressive growth. Now, with two out of the three public cloud players being acquired, leaving Five9 as the only pure play, incumbents could expect some relief and get more pricing power.

3. The contact center and WFO markets are coming together. The two dominating WFO vendors, Nice and Verint, have recently made or announced acquisitions to penetrate the contact center market: Verint acquired both Kana and Contact Solutions, and Nice announced its acquisition of InContact. Meanwhile, the largest contact center providers have been building or acquiring WFO capabilities.

After this consolidation, the six main vendors — Aspect, Avaya, Cisco, Genesys, Nice, and Verint — will account for 50% of an estimated $8-10 billion market. We should expect other moves within market leaders, as Avaya is also looking for strategic options.

There is, however, more happening to the larger customer interaction management space. It is pulling the market in many and sometimes conflicting directions.

Customer service and contact center are merging

The contact center market can no longer be looked at in isolation. Contact centers are often used with customer service software. For many years, CRM vendors have been eyeing the contact center space. They have been adding email, chat, and other digital interaction capabilities but have stayed away from telephony. Late in 2015, Zendesk broke that pattern and announced a voice offering. It was followed by Salesforce unveiling the addition of call management to its platform earlier this year. At its June analyst conference, Interactive Intelligence shared its intent to add case management to its application suite. I expect to see more moves bringing these two markets together.

Adjacent industries are stepping into the space

Customer interaction management is not just for contact centers. Two adjacent industries, sales communications and customer success management, have been developing rapidly, almost independently of customer service. As companies embrace customer lifecycle management and account based disciplines, we should expect bridges to be built between them.

Unified communication solutions are integrating contact center capabilities

For many years, contact centers could be purchased either as standalone solutions or bundled with telephony systems. The combination of interaction management with telephony is enjoying a renewed traction coupled with the rapid growth of unified communication as a service (UCaaS) solutions. 8×8 was the first vendor starting this trend when it purchased Contactual. Today, 20% of its business is contact center related. 8×8 has since been followed by RingCentral, which added InContact to its portfolio. These bundled offerings aim to simplify contact center acquisition for small and midsize businesses. But they are also adopted by other customer facing departments looking to better manage their customer communications.

Contact centers have become too complex

Over the years, enterprises have stacked many technologies and solutions to operate their contact centers. The complexity of these assemblies has been holding back enterprises from improving their customer service. There is now a strong desire to remove this complexity and consolidate technology stacks. Integrated suites are compelling, but many companies are finding these transitions long and difficult. Eventually, a growing number are trying to stay away from big and complex projects and are considering alternate approaches.

One such approach consists of improving the existing set of technologies in small increments, using an agile methodology. Point solutions that can be added quickly and are easy to manage become compelling. It is a popular way for adding self-service and analytics, or supporting emerging channels.

Custom development is another approach. A new set of players has emerged, simplifying telecom with communication platform-as-a-service (cPaaS) offerings. Twilio, which went public in June, is a poster child. cPaaS vendors offer APIs to integrate communications into business processes, shielding developers from the intricacies of telecom. This is, for example, the approach that Uber has used to connect drivers and riders in a seamless experience.

The latest entrants are looking to disrupt the market with simplicity

Reviewing the latest cohort of entrants, I see that several are looking to disrupt the industry not just with a cloud delivery model, but by making multichannel and omnichannel interaction management much simpler. They are aiming to take the complexity out of the adoption and operations of these technologies for enterprises, vendors, and consumers.

Despite the consolidation of large contact center providers, the interaction management market remains vibrant with more than 450 participants. The declining number of historical players is offset by three powerful forces — expansion, simplification, and innovation — that are adding new participants to the landscape.

Nicolas De Kouchkovsky is the principal of CaCube Consulting. You can track his 340+ company Inside Sales Landscape on VBProfiles.com.