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.
WebEx also has WebOffice, which runs on MTN and provides document sharing, calendars, databases and Web meetings. WebOffice is designed for small businesses, project teams and departments, much like Microsoft's recently introduced Office Live solution.
Integration plan
One analyst does not see the acquisition as a dramatic shift by Cisco to become a software vendor, but more of a way for the company to enhance the strategic value of the network overall - including its hardware, such as the new Telepresence videoconferencing system.
"Existing WebEx customers stand to gain, as Cisco integrates the WebEx tool set into its other communication and collaboration offerings, such as Cisco Telepresence," says Chris Silva, a Forrester Research analyst. "The union of the two firms will pave the way for customers to grow into more complex, infrastructure-centric collaboration solutions."
Some users of the popular WebEx service - which has more than 2.2 million registered users, agree with this notion.
"If I was Cisco, I'd take the video they already support and their VoIP technology, tie it into WebEx and, bam, you have an unbelievable suite optimized for your organization," says Mark Lynd, president of FireScope, a software company in Los Angeles that uses WebEx and Citrix's GoToMeeting.
Cisco's Giancarlo alluded to the potential of expanding WebEx services with Cisco IP VoIP and video but tempered the idea of a quick integration.
"We do think there are synergies for integrating voice and video into the WebEx offering to continue to improve the experience there," he said. But such "technology synergies are a little bit further out in time."
The Yankee Group analyst Zeus Kerravala expects to see integrated WebEx and social-networking offerings from Cisco sooner than later.
"Acquisitions such as Five Across and Utah Street give Cisco a whole new experience to offer enterprises. Combined with a service-delivery platform such as WebEx, it will be interesting to see what Cisco comes up with when they combine all this stuff," he said.
Most experts don't think Cisco is done building out its plan. Expect more WebEx-type acquisitions as it looks to increase its presence in that market, analysts say.
"WebEx is only the first of many," Dzubeck says. "Collaboration is only a piece of an entire base of Web-based applications, like search, all based on adaptive Web technology. This is one of the foundational building blocks going forward into the networked-application world they're going to."
Forrester's Silva says WebEx gives Cisco a leg up on competitors in tightly coupling collaboration and unified communications applications with the underlying network infrastructure.
"Being a major infrastructure vendor, Cisco has a potential advantage for tighter integration of unified communications and collaboration tools with the network itself, something Microsoft does not have and something Nortel could develop were it to focus on uniting its hardware and software development resources internally," Silva says.
Ned Hooper, Cisco vice president of corporate business development, won't deny this notion. "We see the network, and the build-out of the network as a platform, certainly as a competitive advantage that Cisco possesses."
Network World Senior Editors Phil Hochmuth, Jim Duffy and John Fontana and staff writer Jon Brodkin contributed to this report.