Cisco's Big Videoconferencing Move

Carl Weinschenk

Carl Weinschenk spoke with Ira Weinstein, a senior analyst and partner for Wainhouse Research, about Cisco's planned acquisition of Tandberg.


Weinschenk: How does Cisco come into this?
Weinstein: Cisco obviously is a networking giant, with a tremendous footprint worldwide, and is in a very strong position with many of the largest companies and enterprises around the world. Its involvement in videoconferencing before this acquisition is much more limited. Specifically, Cisco is heavily involved in the upper portion of the space, which is called telepresence. It's an experience, it's a way of using videoconferencing technology to give the feeling that all the participants are in the same room. This is definitely the upper portion of the videoconferencing space. Telepresence represents about 1 percent of unit sales in videoconferencing. Cisco is the dominant player in that telepresence portion.


"Cisco is very tight with C-level managers, IT professionals in many companies. But videoconferencing is a separate little piece of the IT team. This gives Cisco access to the videoconferencing people."

Ira Weinstein
Wainhouse Research

Weinschenk: What does the rest of the sector look like?
Weinstein: Tandberg and Polycom are the two dominant players in the rest of the space. Between the two of them, they have roughly three-quarters of the revenue in the whole videoconferencing space [including telepresence]. The videoconferencing market size is about $2 billion. Telepresence is roughly 8 to 9 percent of the revenue of that space. The takeaway here is that this is a $2 billion market, and the main players in much of it are Polycom and Tandberg. The main player in the upper portion is Cisco. So Cisco is involved in only a real small part of the space. The key of this acquisition is that it gives Cisco access to the rest of this market.


Weinschenk: So it's playing catch up, but in a big way.
Weinstein: Cisco's initial push into this space focused heavily on the upper portion. Its actions indicated that they thought that they would be able to expand into the rest of the space. To a point, they have had some success with that model, but they were limited by some product issues. More than anything else what they didn't include was strong enough interoperability with the existing systems in the field. Cisco's solution provides a great experience when it's a Cisco system calling a Cisco system. But it's designed to operate only between Cisco solutions. So the rest of the base is almost all not reachable. I say "almost" because you can gateway between them. But it's not the same as actually fully interoperating. You need to install additional equipment. If you try to include various systems, the entire call quality is degraded. There is a reason why these standards exist.


Weinschenk: What standards are we talking about?
Weinstein: For about seven or eight years now, there have been strong standards and tremendous adoption by the vendors. We are a standards-based industry today. The primary standard is H.323, which is the standard for IP-based videoconferencing.


Weinschenk: So a big historical driver of this deal is the fact that Cisco bypassed H.323.
Weinstein: Their communication between telepresence systems is proprietary. Our belief is that they considered the experience itself to be more important than the interoperability, than the standards compliance. In all fairness, there are some headaches in being fully standards-based. You are limited in some of the things you can do and the ways you do them. It is additional work to follow a standard What we also believe is that very quickly the market provided feedback to them that standards and interoperability were very important.


Weinschenk: So what does Cisco gain if the deal closes?
Weinstein: Tandberg is the sales market leader as of the second quarter of 2009, the latest quarter that we have data for. Tandberg has 40 percent of the revenue in the space. By acquiring Tandberg, Cisco has gained a number of things.


Number one, they gained access to the space because of Tandberg's standards-based product line. They essentially eliminate the interoperability problem.


Secondly, they gained access to Tandberg's exceptional channel network. Cisco channel partners are well trained in the networking and telephony world, but they are not videoconferencing-centric. It is not what those companies do for a living every day. This gives Cisco a videoconferencing-focused channel. That's a big, big item.


Number three is that they get the customer base. Cisco is very tight with C-level managers, IT professionals in many companies. But videoconferencing is a separate little piece of the IT team. This gives Cisco access to the videoconferencing people.


Number four, they get Tandberg's R&D power. They live and breathe videoconferencing. They have tons of experience developing those kinds of products. Cisco is able to beef up its R&D by pulling in Tandberg's engineers.


Weinschenk: And the down sides?
Weinstein: There is some minor product overlap, though it is not significant. But there is overlap at the upper end. Tandberg has an upper-level product called the T3. Before the acquisition announcement -- and today-they compete for telepresence product sales. There is some product reconciliation to do there. That really is the only down side here.


Weinschenk: What will be the first steps for the combined company if the deal closes?
Weinstein: There are a couple of to-dos. Cisco has to figure out the channel strategy going forward. They've got their Cisco partners, who we know from talking to them are very interested in getting more involved in videoconferencing. We have the videoconferencing people who are interested in getting more involved in networking and telephony. They have to figure out how to play together in a friendly and revenue-maximizing way. We believe this is resolvable, but there are transitional issues.


Weinschenk: What does this mean for Polycom?
Weinstein: Polycom will find the competition even harder at the street level. It will be a challenge to fight Tandberg now that it is backed by Cisco's name, reputation, sales force and C-level access. That's the down side.


Weinschenk: Is there an upside for the company?
Weinstein: The upside is we believe Polycom will enjoy increased partnering with other companies who previously partnered equally with Polycom and Tandberg ... for example, Avaya. They are less likely to want to partner with Tandberg once it is Cisco/Tandberg because they compete with Cisco in the telephony space. Microsoft is similar. They compete heavily against Cisco in the unified communication space. So Polycom will benefit, we believe, because they will have increased partnering opportunities, which will expand their distribution capabilities and access to visual collaboration deals.


Weinschenk: Is any other company significantly impacted?
Weinstein: The other company to talk about is Radvision. Radvision is heavily dependent on Cisco. Cisco is Radvision's number-one customer in that Cisco OEMs Radvision's videoconferencing products. After the acquisition, this is likely to change. Radvision, in effect, loses its number-one customer as a result of this acquisition.

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