Cisco struggle to move TelePresence down market prompts Tandberg buyout

Video conferencing blockbuster: Cisco jumps from leader in telepresence to tops in overall video conferencing

Cisco's $3 billion bid this week for Tandberg is a gamble that video conferencing can take off in the small/medium business and consumer markets, which to date haven't embraced Cisco's TelePresence systems.

With the deal, Cisco would catapult itself from the leader in telepresence – which represents just 1% of the video conferencing units sold – to the clear leader in all of video conferencing, says Ira Weinstein, an analyst with Wainhouse Research.

"The breadth of what they can deliver has been massively expanded," he says.

Tandberg, based in Norway, makes video conferencing systems for desktops and personal computers, as well as higher-end units, and owned 40% of the $2 billion worldwide market in Q2. Cisco TelePresence systems, meanwhile are predominantly for conference rooms and can cost hundreds of thousands of dollars, though lower end versions have been introduced as well. 

Cisco has pegged telepresence as one of its Advanced Technologies, defined as those technologies with the potential to develop into a $1 billion-a-year business. But the deal is an admission by Cisco that it has been challenged in bringing TelePresence systems down market, analysts say. About 18 months ago, Cisco rolled out the TelePresence 500 system for "personal" virtual conferencing in private offices, but analysts say that system has had a hard time cracking a market already well served by Tandberg, Polycom, LifeSize and others.

"They've struggled," says Vanessa Alvarez, an analyst at Frost & Sullivan. "They weren't going to capture a significant share. So if you can't beat them you might as well join them."

Another challenge for Cisco will be to bring all of its different piece parts of video conferencing and telepresence together, says Ken Dulaney of Gartner.

Chart of a combined Cisco-Tandberg company

"It's not clear that people want to buy a lot of pieces," Dulaney says.

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He compares Cisco's portfolio to that of Microsoft's, which starts from a common base of Exchange and features an integrated client.

"Those endpoints will be difficult for Cisco to achieve," he says.

The key to success with the deal is for Cisco to embrace Tandberg's leadership in adopting standards that make interoperability with other vendors' telepresence gear simpler, says Henry Dewing, an analyst with Forrester Research.

Without such interoperability business-to-businesses conferencing won't proliferate, and that will limit demand for the gear, he says.

So far, Cisco has been lagging.

"There's lots of different standards Cisco meets to get [traffic from other vendors' gear] into Cisco telepresence rooms," Dewing says. "But getting it out to anyplace else is hard."

In 2007, Tandberg bought Codian, which developed video bridge technology to simplify interconnecting devices that use different codecs and other interfaces, Dewing says. Tandberg's bridge technology is more advanced than Cisco's, he says.

One Cisco TelePresence customer contacted by Network World says the deal is good news. The international law firm DLA Piper installed Cisco gear earlier this year and would like it to work with the video conferencing equipment it already had in place. "I have a lot of legacy Tandberg equipment, and the merger will likely ensure tighter integration in the future. Plus, I think it will address some of my interoperability concerns a bit more quickly," says Don Jaycox, CIO of DLA Piper's USA division.

Cisco will have some product overlap issues with which to contend, as the vendors' telepresence offerings overlap. But customers that Tandberg would fight over with Polycom will now become deals that Cisco can participate in because it will have more lower-end products. Tandberg also has very strong sales partners in videoconferencing that Cisco will benefit from, Weinstein says.

Tandberg alliances with Avaya and Microsoft will likely languish with Tandberg as part of Cisco, Weinstein says. Cisco competes with Avaya in telephony and Microsoft in unified communications, so it is likely the two will back off the arrangements, he says. "If you're Avaya, buying Tandberg puts money into the pockets of Cisco," he says.

 Video as a killer app

Dulaney says the acquisition indicates that Cisco believes video will be a killer app – and fuel sales of its routers and switches.

"They're making a big bet on video to protect themselves from commoditization," Dulaney says. "If you're going to make a bet you might as well own all of the properties."

Dewing agrees. He says Cisco wants to do all it can to drive telepresence and video conferencing because that will create more demand for network capacity.

"They want as much video on the network as soon as possible because it eats up the bandwidth," Dewing says. "That will create demand for switches and routers and other network devices and that is the light on the horizon for Cisco."

Through its own internal research, Cisco found that global IP traffic will increase fivefold by 2013 due in large part to new forms and expanded usage of interactive media, and the "explosion" of video content across multiple devices. By 2013, the sum of all forms of video - TV, VoD, Internet video, and peer-to-peer -- will exceed 90% of global consumer IP traffic, according to Cisco's Visual Networking Index. Video communications traffic -- video over instant messaging, and video calls -- will increase 10-fold from 2008 to 2013, the Cisco VNI found.

Moving TelePresence down market is key to Cisco's vision. But doing it through internal development would be harder for Cisco than acquiring product and share, says Irwin Lazar of Nemertes Research.

"They looked at the market and discovered it would take a while and cost a lot of money, and they'd still face vendors much further along," Lazar says.

Acquiring Tandberg and placing all small- and medium-sized video conferencing and TelePresence responsibilities with the Norwegian firm "accelerates R&D significantly" for Cisco, Lazar says.

A downside for enterprise users, however, is that there are now only two major players in business video conferencing: Cisco and Polycom, Lazar says. He says he expects more consolidation in the market with HP, Avaya or Microsoft possibly interested in snapping up Polycom or LifeSize or other smaller players.

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