Telepresence YankeeGroup-FocusReport by Paul Langer

June 2011

Polycom Invests, HP Divests

by Zeus Kerravala, Senior Vice President and Distinguished Research Fellow, zkerravala@yankeegroup.com

The Bottom Line June started with a bang in the corporate video communications market, with Polycom making several announcements, including that it is acquiring HewlettPackard’s Halo business to strengthen its competitive position against Cisco. Although the news increases the potential for Polycom to gain on market leader Cisco, Polycom needs smart execution to turn potential into share gain.

Polycom Expands Its Video Portfolio On June 1, corporate video solution provider Polycom made a series of announcements: • It is acquiring Hewlett-Packard’s (HP’s) video

Cisco’s broad line of video solutions includes its broad telepresence and conferencing portfolio (some homegrown and some gained from its Tandberg acquisition), Callway, WebEx, Cisco TelePresence Exchange (CTX) and the upcoming Cius silo, a strong lineup that has effectively distanced itself from Polycom and HP.

collaboration business unit for U.S.$89 million. This

In fact, Yankee Group’s Anywhere Enterprise: 2010 US Unified

includes HP’s telepresence solution Halo and the associated

Communications (UC) FastView Survey shows that 45 percent

managed services business. The two companies also agreed to

of respondents are more likely to buy a Tandberg solution post

make Polycom the exclusive provider to HP for telepresence

acquisition (see Exhibit 1 on the next page).

and video solutions. Additionally, HP will integrate Polycom video applications in HP’s webOS-based TouchPad tablet. • It is creating the Open Visual Communications Consortium. Designed to greater enable B2B video

With Cisco’s growing strength in the market and broad product portfolio, it will be increasingly difficult for a niche vendor like Polycom to compete effectively. These latest announcements appear to be a way for Polycom to take some momentum from Cisco.

communications, the consortium is an open exchange with 14 service provider members. The initial list of service providers includes AT&T, Orange Business Services, Telefónica, Telstra and Verizon. Polycom is claiming this is an industry first, but its primary rival Cisco also offers a B2B telepresence video exchange initiative.

Impact to Polycom The HP announcement came somewhat as a surprise. When Cisco announced that it was purchasing Tandberg, the speculation in the industry was that Polycom, the only other corporate video

• Two upcoming unified communications (UC)

player of significant size, would be acquired (see the October

“breakthroughs.” Polycom said it is expanding its

2009 Yankee Group blog “Cisco Opens Up the War Chest to

strategic partnership with Microsoft to deliver two new UC

Bolster Its Enterprise and Carrier Positions”). The list of possible

“breakthrough” products. It provided no real details, however.

acquirers included Dell, IBM, Avaya and Siemens, with HP being

Polycom claims the announced initiatives will transform the video and UC industry, but its real motivation is to close the video communications gap with Cisco, which has the broadest video and UC line of products in the industry. Yankee Group does not

the front-runner. So the fact that Polycom was the acquirer—not the acquired—was unexpected. The purchase price of $89 million seems high for the following reasons: • Halo is no billion-dollar business—at least not yet.

actually recognize Polycom as a UC solution provider because it

Although HP was first to market with its Halo telepresence

does not have two of the foundational elements required by our

solution, it hasn’t grown into the billion-dollar business Cisco

definition (call control and presence), so we see the biggest noise

has with TelePresence. The $89 million Polycom is paying is

from Polycom revolving specifically around visual communications.

close to the estimated annual revenue from Halo, which means Polycom paid about 1 times future revenue.

Polycom Invests, HP Divests

Exhibit 1: Customers Are More Likely to Buy a Tandberg Solution Now that Cisco Owns It Source: Yankee Group’s Anywhere Enterprise: 2010 US Unified Communications (UC) FastView Survey

How does the acquisition of Tandberg by Cisco change the likelihood of your buying a Tandberg solution? Less likely to buy

10% Unsure

More likely to buy

45% No change

43%

• Polycom doesn’t need the products. Polycom’s current

the “network effect,” in which value increases with the number of

telepresence products are superior to Halo so the acquisition

connected endpoints. However, driving an initiative of this type is

seems to be purely for the customer base. Polycom will likely

very difficult to do historically, so for now it remains an initiative

end-of-life Halo in favor of Polycom’s own RealPresence

with promise but no proof points.

Experience (RPX) solution. • Early adopters are abandoning ship. Many of Halo’s early

Lastly, with respect to the expanded Microsoft relationship, Polycom released few details about what’s in the works. Industry

adopter customers such as Pepsi and Procter & Gamble have

rumor is that Microsoft and Polycom have been building a room-

switched to Cisco solutions.

based system that will run off Microsoft’s Lync call control server.

• Competitive issues are sticky. HP’s managed services business is directly competitive with Polycom’s channel. The most compelling part of the evolving relationship with HP is that Polycom is now HP’s exclusive video partner. Selling Polycom products through HP distribution could have a huge impact on Polycom’s business.

To date, the only potentially impactful product that has come out of the Polycom/Microsoft relationship is RoundTable, but overall, it largely remains an initiative with promise but no proof points. In summary, Polycom’s series of announcements does help close the gap on Cisco, but Cisco still has a broader product line and has set the vision for video over the past few years.

The new Open Visual Communications Consortium has some potential. Video today exists in islands of deployments. Unfortunately, if the islands aren’t connected, video cannot realize

June 2011

Impact to the Marketplace

the demand for Cisco/Tandberg dwarfs HP and Polycom (see Exhibit 2). The potential impact to Cisco caused by Polycom

Yankee Group sees the Polycom announcements affecting market players HP, Vidyo, Cisco and Microsoft, although Cisco will see the least impact:

announcing deepening relationships with HP and Microsoft is minimal because these three companies have already been targeting Cisco as their primary competitor in video and UC for years anyway. Cisco has been the primary evangelist for

• HP can now focus on its core business. Selling off the video unit signals that HP is unlikely to enter the UC market

corporate video for the past few years and that’s put it into a

any time soon. Because of its competition with Cisco, most

market-leading position that will be hard to unseat through a

in the industry speculated that HP would add UC to its set of

series of partnerships. The potential is there, but Polycom will

products, allowing HP to compete with Cisco across a broader

need to find a way to get HP and Microsoft to focus on this

set of features. Divesting itself from the poor-performing video

market. With all the challenges and restructuring going on right

business means HP can focus more on core areas such as cloud

now at both HP and Microsoft, it’s unlikely competing with Cisco

computing and data center transformation.

in the video space will be top of mind for either of them. • Microsoft’s positioning in this market is slightly

• Vidyo is losing a channel partner. The one solution provider that will be hurt by the expanded HP-Polycom relationship is startup

improved. Microsoft has a robust UC solution with Lync but it

Vidyo. Vidyo launched at Enterprise Connect 2011 with a scalable

lags in several areas including cloud, video and mobility. Microsoft

video conferencing (SVC)-based solution. At time of launch, it also

acquired Skype to help bolster its cloud positioning (see the May

announced that HP would OEM the solution and sell it as the HP

2011 Yankee Group Report “Microsoft Buys Skype: Big Bang

visual collaboration desktop, with Halo-Vidyo interoperability coming

for UC; Big Bust for Consumers”) and it can use Polycom to

by the end of 2011. HP divesting itself from the video business will

strengthen its position with video via some innovative products.

likely lead to Vidyo losing HP as a channel partner.

However, to date, the only joint product we would put in the

• Cisco will see minimal effects. Despite the numerous press releases and the addition of the Halo business to Polycom, the

“innovative” category is RoundTable. Again, the potential is there, but it’s difficult to sell potential instead of products.

impact to Cisco is minimal. Our 2010 UC FastView Survey shows

Exhibit 2: Cisco Demand Dwarfs Polycom’s and HP’s Source: Yankee Group’s Anywhere Enterprise: 2010 US Unified Communications (UC) FastView Survey

Who do you consider your primary video provider? Cisco/Tandberg

74%

Polycom HP

18% 8%

Polycom Invests, HP Divests

Conclusions and Recommendations Polycom kicked off June with some potentially big news in a market that is already red hot. Corporate video has seen many false starts before, but it appears that improvements in technology combined with strong marketing by Cisco in particular and an economy that has forced companies to find news ways of working has finally given video conferencing long-term sustainable legs. Video is rapidly becoming one of the key competitive points in UC, so more M&A activity in this space is likely. With that in mind, Yankee Group recommends: • Polycom should stop focusing on Cisco and execute its own strategy. Polycom’s announcements have potential, but customers do not buy potential. The company has been obsessed with Cisco ever since the Tandberg acquisition and has largely made moves solely to counter Cisco’s. The Open Visual Communications Consortium is a great example. Polycom is launching this about a year after Cisco announced its own B2B exchange service. Considering Polycom is the largest pureplay video vendor, it should be leading this market instead of reacting to it. Polycom should acquire either Magor or Vidyo and establish a market called “telecollaboration,” a superset of telepresence and video. Chasing won’t help Polycom overtake Cisco, but changing the game will. Polycom should also either spin out or sell off the managed services business it acquired from HP to remove the potential channel issues.

• Cisco should evangelize the benefits of a video culture. For all the talk of execution excellence, Cisco gets a B grade at best on its video execution to date. Considering its portfolio includes video solutions to address desktop video, room systems, immersive systems, digital signage, vertical solutions and an upcoming tablet, Cisco should be evangelizing the concept of “building a video culture.” If video is truly the new voice, as Cisco likes to market, then Cisco needs to use its industry position to demonstrate the best way of inserting video into business processes. Cisco should take the communicationsenabled business process concept, focus it on video and develop a video-enabled business process (VEBP) strategy. • HP should continue to shift its strategy to software and the cloud. The competitive intensity between HP and Cisco has never been stronger, and this is giving rise to speculation that HP will continue to add areas in which Cisco is strong to its portfolio. HP got lucky with ProCurve because it came to market when the industry lacked a credible No. 2 and it filled that void, but catching lightning in a bottle twice is unlikely. The world is living increasingly in the cloud, and HP’s portfolio and services strength puts the company in a position to be one of the dominant cloud enablers. To do this, HP needs to take a hard look at its other businesses and decide whether they are core to the cloud or not. If not, they should be divested like Halo.

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Zeus Kerravala, Senior Vice President and Distinguished Research Fellow Zeus Kerravala, senior vice president and distinguished research fellow, leads the Research Council and is chartered with the responsibility of providing thought leadership to the research organization. Comprising senior research leaders, the Research Council provides outreach to clients and the broader Yankee Group community, as well as ensures that the company’s research agenda addresses the needs of business leaders. Kerravala drives the strategic thinking of the research organization and helps shape the research direction. Much of Kerravala’s expertise involves working with customers to solve their business issues through the deployment of infrastructure technology.

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