Videoconferencing Consolidation Puts All Eyes On Polycom

Consolidation in the networking, infrastructure and collaboration spaces is nothing new, but if planned acquisitions by Cisco and Logitech are successful, the videoconferencing space will be a whole new landscape in 2010 -- dramatically different than even a few months ago.

Where that leaves Polycom -- the lone videoconferencing player with the scale to be considered a contender -- is anyone's guess.

Cisco struck first, announcing on Oct. 1 that it intended to acquire Tandberg for $3.1 billion as part of a string of recent acquisitions that's continued unabated for years. It's one of many moves Cisco has made lately to broaden its collaboration and unified communications portfolio and compete with everyone from Microsoft and IBM, to its more traditional networking and UC rivals.

The Tandberg deal was stalled, however, as a group of shareholders collectively representing a 24 percent stake in Tandberg publicly called out Cisco for a lowball offer. Earlier this month, Cisco Chief Strategy Officer Ned Hooper addressed the Tandberg deal in a Cisco blog post, which seemed to indicate Cisco had no interest in raising its offer.

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"Our offer price reflects this balance and is based on a simple premise for both sets of shareholders -- fairness and value," Hooper wrote. "Is a 38.3 percent premium fair for Tandberg shareholders? Absolutely. Does it lock in a superior return for Tandberg shareholders and protect them from future market risk? Yes. Does it also fairly reflect risks borne exclusively by Cisco shareholders? Yes."

This week, however, Cisco did an uncharacteristic about-face, and sweetened the Tandberg offer by about $300 million, with the deadline extended to Dec. 1 for Tandberg's shareholder approval. The drama of the move was not lost on observers -- RBC Capital Markets analyst Mark Sue told The Wall Street Journal Monday that, "It's an embarrassing process for a well-oiled machine" -- and further suggests the increasing importance of video as center to a full collaboration portfolio.

With Cisco upping its ante for Tandberg, and Logitech's planned acquisition of LifeSize, Polycom effectively stands alone in videoconferencing, give or take a few point players -- such as New Jersey-based Vidyo -- that specialize in endpoints, or infrastructure pieces, or particular niches.

Is Polycom for sale? Joan Vandermate, vice president of marketing for Polycom's video solutions group isn't saying, although she offered that she "wasn't aware we're entertaining offers" and that Polycom is "excited to be the last one standing." But the implications for video are clear, she said in a recent interview, and the moves by Cisco and Logitech only further validate the strength of the market.

"Both the Cisco-Tandberg acquisition and the Logitech-LifeSize acquisition are very good signs for our industry," Vandermate said. "These signal -- signal very clearly -- that video is entering the mainstream, finally. Video's been the next big thing for decades, and now, on the horizon, is large-scale widespread adoption. We're clearly getting there. Video will not be relegated to a sidebar, nor to a niche application."

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Recent research on videoconferencing helps validate Vandermate's suggestion. For example, Wainhouse Research's most recent videoconferencing market update, published Tuesday, stated that video group system revenues, group system unit sales and infrastructure revenues all saw sequential increases of more than 8 percent in the third quarter of 2009 from the second quarter.

Looking at videoconferencing revenue by vendor, Wainhouse awards Tandberg a 44 percent share of the market, followed by Polycom at 32 percent, and Sony at 4 percent with a collection of other vendors at 20 percent.

In its research note, Wainhouse was also quick to note Cisco's continued advance into video -- saying that Cisco's video priority is "all well and good as it drives up network traffic and network upgrades" -- and said to expect the IT heavyweights to continue their push into the collaboration space.

"It certainly looks like all the tech giants are spreading their wings and getting into each other's airspace," Wainhouse researchers wrote. "In today's economy, many enterprise customers are looking to simplify their RFP and purchasing practices and to save money, as well as deploy more efficiently by buying more and more equipment from fewer and fewer vendors."

Wainhouse goes on to suggest that Cisco could potentially disrupt video the same way it once did PBX telephony. Traditional vendor partnerships all over the collaboration space will start to crumble as the big players -- Cisco, HP, IBM and others -- attempt to hold more of the trump cards.

"Cisco upset the PBX world long ago when it introduced IP-PBX which many scorned as providing low-quality voice," Wainhouse analysts wrote. "Fast-forward and Cisco is now the telephony leader and Nortel is in bankruptcy."

The idea that an HP would be considered an ideal suitor for Polycom wasn't lost on any of the videoconferencing solution providers interviewed by ChannelWeb in the past week -- even with HP already having made a dramatic move of its own, tendering $2.7 billion to acquire 3Com.

"HP has got to get itself some video. They don't have anything like a Tandberg or Polycom, and you know they have to be checking it out," said Don Gulling, president of Verteks Consulting, an Ocala, Fla.-based solution provider. "Polycom has been through some rough patches, but they're still huge in videoconferencing. It wouldn't surprise anybody."

Other solution providers were less charitable in describing Polycom, whose most recent quarterly results showed revenues down 12 percent year-over-year and that disappointed Wall Street with less-than-inspiring guidance for the current quarter.

"They're an easy pickup for an HP or someone that needs video," said one VAR, who asked not to be identified. "And how can you not need video now? If you're going to play in collaboration, you have to have some kind of stake in video."

For now, however, Polycom isn't saying a word -- and attempting to relish its status as the alternative in videoconferencing.

At the time Cisco announced its intentions to acquire Tandberg, Vandermate told ChannelWeb that the "monolith approach" by vendors has historically been failed. She reiterated as much in a recent conversation.

"We are the only remaining video player of scale," she said. "LifeSize was getting there, but it was small and without a complete solution -- really, just an endpoint player without certain infrastructure pieces. Plus, LifeSize focuses on the SOHO and small-business spaces where you don't see Polycom playing. It works out well for us."

For the moment, Vandermate said, Polycom is beefing up its channel sales team and attempting to lure away Tandberg VARs disillusioned by the acquisition or just looking for new opportunity in the video channel.

Polycom plans to revamp its partner portal early in the new year, Vandermate said, and Polycom solution providers will see additional channel program changes in Q1, such as a reduction in the number of Polycom SKUs and a "refresh" of other program elements.

"It's a good time to be a Polycom partner, and for our reseller partners we can open up a new world of potential partnerships. Polycom is the vendor of choice for other software vendors, from HP to Microsoft and IBM and Avaya/Nortel," she said. "History bears out that monolithic approaches don't hold up. The market will eventually choose a best-of-breed, best-in-class, mixed vendor model. The buy-it-all-from-me crowd -- yes, you've got one throat to choke, but that will be a minority."