Cisco Disrupts the Telepresence Market with $3 Billion TANDBERG Buy

| Oct 2, 2009 | Enterprise Technology and Software | Competitive Intelligence Report

| Analysts: Brad Shimmin, Rob Arnold

Current Perspective: Very Positive
Vendor Importance: High
Market Impact: Very High

Event Summary

October 1, 2009 -- Cisco announced a definitive agreement to acquire TANDBERG, a global provider of video communications, including a broad range of video endpoint and network infrastructure solutions with intercompany and multi-vendor interoperability. With the proposed acquisition, Cisco will expand its collaboration portfolio to offer more solutions to a greater number of customers, further accelerating market adoption globally. Under the terms of the agreement, Cisco will commence a cash tender offer to purchase all the outstanding shares of TANDBERG for 153.5 Norwegian Kroner per share for an aggregate purchase price of approximately $3.0 billion. The acquisition is expected to close during H1 CY 2010 and it is subject to customary closing conditions.

Analytical Summary

• Current Perspective: Very positive on Cisco's announced intent to acquire TANDBERG for approximately $3.0 billion, because it will significantly expand Cisco's installed base of telepresence customers within the European region, create up-sell opportunities for its video-enabled infrastructure products, bolster its WebEx video capabilities, and broaden its entire video collaboration portfolio. After the acquisition closes sometime in H1 2010, the end result will be a collaboration solution set capable of spanning desktop to boardroom, and serving both businesses and (via Cisco’s previous acquisition of Pure Digital Technologies) consumers. In the short term, however, significant product overlap and partner ecosystem instabilities will occupy the companies after the deal closes.

• Vendor Importance: High to Cisco, because TANDBERG's proven adherence to audio and video interoperability standards gives Cisco the opportunity to reverse its perception within the marketplace as a vendor that pays only lip service to industry standards, creating only limited parity and coherence within multi-vendor enterprise environments. This acquisition also shores up a significant hole in Cisco's telepresence sales and support channel, potentially granting the vendor a lower-touch channel with a smaller services component and a more scalable distribution model that is well-tuned to scaling deployments within a given customer.

• Market Impact: Very high on the videoconference and telepresence market, because this acquisition will immediately create ripples of instability and decline across a wide array of vendors that either partner with or depend upon TANDBERG. Most notable among these are Microsoft, Avaya, Siemens Enterprise, Communications, Nortel, and HP, all of which now find themselves in an uncomfortably close association with a more direct competitor. Conversely, given investments made by both Cisco and TANDBERG in working with telecom service providers and service exchanges such as BT, AT&T, Tata Communications, and Glowpoint, this acquisition will create significant opportunity for Cisco to solve the potentially lucrative problem of enabling inter-company immersive video collaboration.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Enterprise Communications, Collaboration and Conferencing

Recommended Competitor Actions

• All rivals within the telepresence and videoconference space, particularly LifeSize, Teliris, Polycom, and HP, should position this acquisition as a land grab in which Cisco aims to market its "video-enabled" network infrastructure to TANDBERG's customer base. Rivals should also position it as a highly disruptive event for Cisco, stemming from the high degree of product overlap between Cisco and TANDBERG. Cisco has stated its intent to integrate TANDBERG's technology, but to do this, Cisco will need to expend significant engineering effort, as TANDBERG and Cisco employ a very different video delivery architectures: TANDBERG's Codian-based MCU vs. Cisco's switching-oriented MCU.

• This acquisition will significantly raise the stakes for Polycom, which now finds itself standing face-to-face with a competitor in possession of a much stronger balance sheet, a much broader portfolio, and a much deeper technological foundation. In response, Polycom should seek to differentiate based upon its partnerships with Microsoft and IBM. The company's most notable opportunity to compete is on the desktop, where it and Microsoft have worked together to launch the CX5000, a room-based video system that leverages Microsoft's Office Communications Server 2007 and Live Meeting Service.

• HP should treat this acquisition as a direct threat, more than a mere shot across the bow, as Cisco now stands poised to disrupt HP's joint resale efforts with TANDBERG and its use of and support for TANDBERG telepresence infrastructure within its Halo Video Collaboration Service. In response, HP should lessen its exposure to TANDBERG interdependencies, but it should also seek to expand its partnership Microsoft, creating further points of integration between its desktop video (SkyRoom) and telepresence (Halo) solutions and Microsoft UC environments.

• RADVISION needs to take immediate action, as Cisco is its largest single customer, supplying RADVISION with a wide range of OEM videoconferencing technologies. The company's best chance is to take advantage of the slow-moving nature and sheer size of this acquisition, which is not expected to close until sometime during H1 2010, to recast its portfolio, making it more independent of Cisco. As part of this, RADVISION should tighten its bonds with TANDBERG partners in the UC space that may be alienated by the Cisco acquisition.

• Web conferencing vendors Adobe, Microsoft, Citrix, and even IBM should see this acquisition as particularly threatening, owing to Cisco's desire to leverage TANDBERG video technologies within its WebEx collaboration portfolio. This will give Cisco a pervasive HD video platform deliverable on-premises, as a managed service and as a software-as-a-service (SaaS) offering, all tied closely in with Web conferencing capabilities. Moreover, with the company's creation of the WebEx Connect platform, which is geared toward service provider partners, Cisco will be able to build out a strong service provider partner ecosystem scaling from Web conferencing to telepresence.

• Cisco competitors in the UC space – Aastra, Alcatel-Lucent, Avaya, Microsoft, Nortel, Siemens Enterprise, and others – should reinforce their relationships and integrations with video solutions from Polycom, RADVISION, LifeSize, and others. While it is too early to suggest that ties with TANDBERG should be severed completely, lessening reliance on the to-be-acquired video company is a necessary precaution.

Recommended End User / Customer Actions

• Enterprises with investments in Tandberg solutions should press Cisco on its commitment to continuing existing TANDBERG equipment offerings, particularly TANDBERG's telepresence infrastructure based upon Codian technology, as this area represents an area of functional overlap and technical disparity between the two companies. It is not known at this time whether existing TANDBERG investments will be protected or become obsolete after the acquisition closes.

• Customers considering the purchase of Cisco or TANDBERG high-end telepresence solutions should adopt a very precautionary stance toward both companies. Cisco cannot comment on or commit to any product rationalization or integration plans at this time, leaving as much as eight months of uncertainty before any sort of finality can be pinned to Cisco's product roadmap.

• Existing Cisco customers employing the company's high-end telepresence equipment should welcome this acquisition and immediately inquire as to how TANDBERG desktop and personal video equipment can complement existing video investments. It is unlikely that Cisco will compromise TANDBERG's low-end video gear going forward.

• Potential customers with nine-month or longer product purchase plans on the horizon should strongly consider Cisco. They should seek to establish a strong rapport with the vendor to secure both early access to product development plans and potentially advantageous pricing.

• Potential customers concerned that Cisco will abandon TANDBERG's commitment to interoperability, given its history of favoring a more closed approach to standards adoption, should rest easier in the knowledge that Cisco has given over ownership of its entire telepresence portfolio to TANDBERG’s current CEO Fredrik Halvorsen, who will lead Cisco's new TelePresence Technology Group out of Oslo, Norway. Mr. Halvorsen has shown himself capable of achieving success competing with giants such as Cisco and HP, posting double-digit growth since taking the helm in 2005.

CLIENTS ONLY

Current Perspective

Competitive Positives and Concerns

Recommended Vendor Actions

| Client access - Full report in Enterprise Communications, Collaboration and Conferencing

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