SCORE=70% Cisco-TANDBERG Not About Innovation

A lot of analysis in the coming months will carp about the product overlaps, but will likely miss the strategic jewel at the heart of this acquisition - channel. You can quite reasonably have alternative channels for alternative products, and I suspect that that's exactly what Cisco will do. TANDBERG product for TANDBERG channel (indirect) and Cisco product for Cisco channel (direct). 

This deal will do nothing to introduce new product to new customers, since large organizations already have access to what they need, medium can get what they need from their local reseller and the Cisco offering is not particularly well respected by the audio-visual dealers who are most familiar and committed to TANDBERG and Polycom.

Here's the Brockmann analysis:

Cisco's acquisition of TANDBERG solves several major issues for Cisco, few of which were product related. Historically, Cisco's acquisitions were of small companies with great technologies and no distribution network. Acquisition meant adding a zero (10x more) or two (100x more) to revenues for these deals. But, as Cisco got bigger, so did the deals, where in fact it is no longer about the technology and all about the distribution network. Webex. Scientific-Atlanta. TANDBERG. These deals were about customers and new channels that would have cost billions and taken years to develop otherwise.

Since introduction in 2006, Cisco sold its brand of telepresence equipment through Cisco direct sales teams focused on the largest accounts in the world. Their penetration of this market is limited to the coverage and productivity of a direct sales person, which can only be justified on accounts purchasing say $5 or $6 million/year of Cisco-branded equipment. Given that most equipment have several years of useful life, that's a big account probably employing thousands of employees.

TANDBERG, on the other hand, has a completely indirect sales channel that sells through a network of well-established and trusted AV (Audio-Visual) specialists. This global network is the heart of the Cisco deal. Now, Cisco hopes to engage these resellers to carry more, sell more and bring the new Cisco-brand of 'TelePresence' to the medium enterprise market, a new growth space that neither company had been able to address to date.

Hopefully, TANDBERG will not be rolling out TANDBERG gear to Cisco's large and well-established router and switching channel. Cisco router and switching resellers have notoriously low margins, while Cisco products have consistently earned a premium price. I suspect that TANDBERG will keep the AV channel well supported.

Recessions are extraordinary times for the strong to get stronger, and John Chambers knows it. Now I understand why SilverLake wanted to buy TANDBERG: so they could sell

it to Cisco.

Enterprise customers generally have tremendous respect for Cisco products (they work) and Cisco support (it works fast). Video communications have generally been purchased from one or another brand. Polycom customers typically consider themselves Polycom customers and TANDBERG customers consider themselves TANDBERG customers. Growth in the past have been through technology upgrades such as SD to HD, low engineered video rooms to tightly controlled experience of telepresence suites, and expansion in terms of the number of locations and rooms in those locations that can be addressed.

TANDBERG customers have not been worried about the company's viability despite rumors of PE interest in the firm and this deal will only strengthen their confidence in the operation of the company.

A common tactic has been to split the business between vendors, or at least have two vendors bid against each other for an expansion or replacement project. By reducing the number of credible telepresence vendors, there will be more of this tactic involving Polycom, where the practice had been to make Cisco and TANDBERG compete.

Although Cisco will now have a bigger telepresence business to run, the deal alone will not be a significant booster to the size and growth trajectory of the market - yet. Only if the new unit is able to market some or all of the combined offering to new-to-video customers in the small business and pro-sumer space (which will require new product and new channels) will it be able to reach a higher-than-the-market-growth rate.