Cisco's WebEx buy: A big software bet

Cisco's acquisition of WebEx is perhaps its most aggressive move yet - and likely not the last - to transform the company from network hardware vendor to applications and software provider.

The $3.2 billion deal, announced last week, puts Cisco in Microsoft's face, as well as other software companies, and positions the company for a fight in the battle to supply corporations with unified communications tools and services, analysts say. And as the market for routers and switches matures - and Cisco's growth prospects dwindle - it behooves the vendor to move into markets that are expanding at a much faster clip than network hardware.

To maintain its ambitious 10% to 15% annual growth targets, Cisco has sought to push into higher-margin software markets, such as unified communications and high-end IP video systems. The last several acquisition moves by Cisco show the network vendor's appetite for Web 2.0 and collaboration-related software.

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Cisco's acquisition of WebEx is perhaps its most aggressive move yet - and likely not the last - to transform the company from network hardware vendor to applications and software provider.

The $3.2 billion deal, announced last week, puts Cisco in Microsoft's face, as well as other software companies, and positions the company for a fight in the battle to supply corporations with unified communications tools and services, analysts say. And as the market for routers and switches matures - and Cisco's growth prospects dwindle - it behooves the vendor to move into markets that are expanding at a much faster clip than network hardware.

To maintain its ambitious 10% to 15% annual growth targets, Cisco has sought to push into higher-margin software markets, such as unified communications and high-end IP video systems. The last several acquisition moves by Cisco show the network vendor's appetite for Web 2.0 and collaboration-related software.

"Some of [our] more recent acquisitions in this area bring out two themes," said Chief Development Officer Charles Giancarlo, in a conference call last week. One is the entire concept of social networking. In March Cisco bought Utah Street Networks, a social-networking company that runs Tribe.net - a free Web site that lets users set online communities around topics, post job openings or other activities. Almost a month before that, Cisco announced plans to acquire Five Across, a maker of software that lets companies set up social-networking features for a corporate Web site. (Terms of both deals were not disclosed.)

The other theme, Giancarlo said, is the WebEx deal as it addresses a move toward subscription-based services. "That's starting to penetrate more businesses - whether it's software businesses or subscription-based services," Giancarlo said. "Potentially, even some hardware-based businesses [could adopt this model], where they may [adopt] a more pay-by-the-drink model, rather than selling a piece of iron and getting one price at that point in time."

Frank Dzubeck, president of consultancy Communications Network Architects, says Cisco's software ambitions could also be seen as a survival tactic.

"It's the whole concept of 'get out of the hardware business'," Dzubeck says. "Basically, the only thing you can do [with hardware] is make it better or repackage it and make a platform out of it. So what do you do? You go into the software business."

Those already established in the corporate software business probably won't be supportive of Cisco's choice of midlife career change.

"This deal puts Cisco aggressively in the face of Microsoft," says Mike Gotta, an analyst with the Burton Group. "Cisco has become a multiheaded beast all of a sudden . . . [with] some assets in play. It might not know how to play them, but it puts them right in Microsoft's face."

Beyond Web conferencing, those assets include WebEx MediaTone Network (MTN), a global network and platform specifically designed for secure delivery of on-demand applications. Microsoft is trying to build the same thing with its collection of services under its Live brand.