Martin Hingley's Blog

Cisco Acquires Tandberg – Highlights

• Cisco will be able to grow its low-end business through adding Tandberg
• Tandberg’s CEO will take over Cisco’s existing Telepresence videoconferencing business
• The additional headcount, revenues and profits will not have a significant effect on Cisco’s results
• The high capital investment costs of high-end solutions has prevented videoconferencing from beating the ITC downturn
• Though small Tandberg has outperformed the other videoconferencing suppliers in recent quarters

Adding Tandberg Shows Cisco Is Investing During The ITC Downturn

Cisco announced its acquisition of Tandberg this week, paying 17.2 billion krone ($2.97 billion) for the Norwegian company, which nevertheless trades in the US and reports its financial results in $US. Fredrik Halvorsen, Tandberg’s CEO is expected to take charge of Cisco’s Telepresence business along with his existing responsibilities.

Tandberg has around 1,500 employees and had revenues of $839 million in the year ‘til the end of June 2009. It’s videoconferencing products start at $7.5k – significantly less than the $250k it costs for Cisco’s current solutions.

The move brings Cisco’s acquisition spending to $4.22 billion for 2009 to date (Figure 2), demonstrating that it is continuing to spend some its massive cash reserves. Like other vendors it is using the downturn as a good time to restructure its business. Tandberg’s results are dwarfed by Cisco’s, making most graphical comparisons uninteresting. There will be no significant changes in regional business, overall revenue or profitability of the combined company, even if the addition of this non-organic business has a positive effect. One interesting comparison is the growth in revenues (Figure 1) which demonstrates the success Tandberg has had in comparison with Cisco in recent quarters.

High-End Capital Costs Is Why Current Video Conferencing Isn’t Beating The Downturn

While studying the ITC downturn I’ve been looking for areas which should be outperforming others. Videoconferencing is a very good candidate because travel avoidance can be a big cost saver for all user organisations and most businesses have banned travelling to internal meetings as a way of cutting expenses. The difficulty, however, is that setting up high quality studios is an expensive capital investment. With each one costing around $500k and the need to purchase at least two (if not multiple) suites, investments have died to a virtual down still along with other major purchases. There are additional challenges in the proprietary nature of the solutions (can you interact between HP, Cisco, Polycom and Tandberg offerings?) and in the slim possibilities of connecting between organisations – as opposed to within the same company. I’m sure many of us know of video equipment in conference rooms unused and gathering dust ever since the initial enthusiasm has died down. There are now many smaller solutions from Skype and mobile phones upwards and I’m sure there will be many new initiatives associated with Windows 7 once introduced on October 22^nd. However the results of companies in these areas are difficult to distinguish from other businesses.

Polycom, HP, Cisco and Tandberg are the major suppliers of video conferencing in the world. While sales have typically been better than overall ITC and business ITC in the last few quarters, vendor performance has been varied. In particular:

• I haven’t found any references to HP’s Halo sales in the last quarter’s results, which I’m sure we would have heard about if they were strongly positive
• Cisco itself reported ‘video’ sales – which I guess is where its Telepresence business lies) down 30% in its Q4 FY09 period
• Polycom’s overall revenues were down 15% to $231 million for Q2 2009, with Video solutions down 9% at $169 million
• Tandberg has, therefore, probably been doing the best. Its revenue growth has declined each quarter, but remained positive at +5% for Q2 2009, accounting for $205 million.

There are two major ways of making this business more successful. Firstly suppliers should offer access to their high-end systems through pay-as-you go offerings, as Cisco has done by encouraging Telecom vendors and hotel chains to install its Telepresence solutions. Secondly lower priced solutions for Small and Medium Businesses (SMBs) will sell in greater numbers – at least until large organisations begin to consider capital investments once more.

Tandberg Will Enhance Cisco’s Telepresence Campaign

By acquiring Tandberg Cisco will not only increase its market share, but also extend its offerings downwards from its current line of Telepresence solutions. Telepresence remains one of Cisco’s key strategies and it announced numerous initiatives. In particular:

• February – ESPN and NBA used it Technology to deliver coverage if American football
• March – It demonstrated it to ‘suburban executives’ in Nigeria, it worked with AT&T to enhance older teleconferencing systems, it announced that BAE Systems had signed up through AT&T
• April – Cisco announced a collaborative activity with PLDT and Tata in the Philippinea and Single Buoy Moorings chooses Orange to for deployment:
• June – it signed up Portugal Telecom, AT&T announces enhancements to its managed solution, BT successfully demonstrated the first exchange to exchange call, it signed up Starwood Hotels and Tata Communications to put Telepresence in hotel rooms across the globe
• July – Cisco, AT&T, BT and Tata demonstrated the first TelePresence call across multiple carrier networks
• September – Telemex announced that it was to sell an intercompany service in Latin America and Cisco announced its global TelePresence network

It’s clear that most of these stories were about developing partnerships with Telecom suppliers and demonstrating solutions, rather than in customer sales. It will be interesting to see the extent to which it modifies its go to market approach as the result of the acquisition.

Are you a user of Telepresence or Halo solutions? Are there other ways in which these offerings be made more attractive or help make genuine savings during the downturn? Let me know by commenting on this article.

Filed under: Cisco, Tandberg, Videoconferencing Tagged: | AT&T, BT, Cisco, Fredrik Halvorsen, HP, Martin Hingley, Microsoft, Polycom, Portugal Telecom, Pure Digital, Skype, Starwood Hotels, Tandberg, Tata Communications, Telemex