About two weeks ago Cisco announced that it was purchasing WebEx for $3.2 B ($2.9B minus the cash that WebEx has). The title reflects my confusion about this acquisition.

In the last 4 months Cisco has been gobbling up collaboration companies at the rate of one a month. They bought Five Across in December and purchased Tribe in February, and now WebEx in March. Sounds like they have a real agenda going? One of the things that really puzzles me is not why Cisco would want WebEx, but why especially now? A few months ago WebEx stock was at $25/share, Cisco is paying closer to $50/share for WebEx. There are a lot of inconsistencies to this deal that I would like to explore.

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Where’s Latitude?

About three years ago Cisco bought (at a much lower price) Latitude, another web conferencing company. Latitude (through Cisco) has been offering web conferencing on a pay-as-you-go basis and charging per/minute for web conferencing. So why would Cisco (even though they are cash rich) buy another web conferencing company?

The overlap gets bigger. Cisco did a deal with IBM to re-sell SameTime an IM product that has good traction in the government and in some enterprises. However, WebEx just built an IM product with AOL (called AIM Pro) and announced it last fall, and it is positioned as "secure IM" for the enterprise. So there is bound to be some confusion with Cisco customers as they sort out these overlaps.

Unified Strategy

In the analyst call, Cisco talked a bit about their strategy for unified messaging. Unified messaging includes, audio, video, VoIP, e-mail, IM, fax, etc. and web conferencing is also a part of this. But Latitude has already been integrated into the Cisco unified messaging solution, so again, why WebEx? Well, Latitude was never a market leader and WebEx is (with 2 million subscribers), and has been for quite some time in the web conferencing arena (see: 2006 RTC report from Collaborative Strategies). So did they buy WebEx just for the customer base? This also has a confusing answer.

Is it all infrastructure?

Cisco is known as an infrastructure company, they make routers and help support the network. Over the last five years Cisco has been trying to turn its self into more than an infrastructure company through the acquisition of a variety of software applications, with WebEx being just the latest.

However, there might also be an infrastructure component to the acquisition of WebEx. From the beginning WebEx has had their MediaTone network as one of their big differentiators from other web conferencing vendors. We even wrote a white paper about the Media Tone network for WebEx last year called The Drive Towards On-Demand Collaboration in which we discussed some of the advantages having your own network gives you if you’re a web conferencing company.

Some analysts have suggested that Cisco was bought just for their network, but I am not one that agrees with this. Their argument is that the revenues of Akami and Limelight (and other network infrastructure companies) would justify the price Cisco paid for WebEx. In talking with WebEx we know that they are planning to run other content over this network, and my guess is that was one of the synergies Cisco’s strategy had with WebEx.

SMBs vs. Enterprise

Another thing Cisco talked about in their analyst call announcing the acquisition was the fact that WebEx offered its software as a service (SaaS), which we agree with, most of WebEx revenue came from this hosted-subscription model for revenue. What we don’t agree with is the target market. Most of WebEx’s revenue (we believe) still comes from enterprise customers, and a relatively small fraction comes from the SMB market.

About 18 months ago WebEx acquired Intranets.com which did help WebEx balance out it’s offering from just RTC (real time collaboration) into the asynchronous collaboration space. We applauded this acquisition by Cisco at the time and still think it was a good idea. Intranets.com eventually became WebEx Office, and Rick Falk (the former CEO of Intranets.com) became the CMO at WebEx and Karen Levitt is still running the WebEx Office division which did a great job of bringing on board SMB customers. Could this be the talent and direction that Cisco was hinting at in their analyst call? Siamak Farah, the CEO at InfoStreet, has been in this business almost as long as I have. In a conversation with him, where I posed a number of questions about this deal; he replied “I believe that along with the web conferencing and the network capabilities of WebEx, CISCO is very interested and highly values the Web Office (used to be Intranets.com) portion of the business, because of their reach into smaller sized companies.”

Although Both Cisco and WebEx are really focused on enterprise deals, and I don’t think that has changed with this acquisition, Siamak noted that “In the case of both Cisco and WebEx, the enterprise revenue, I believe is not growing at the speed potential that SMB has.”

Platform for the people

Cisco is building a platform for collaboration, and they are building one that a CIO in an enterprise would be willing to implement. Much of the innovation in Web 2.0 today, and in the open source world is not something that a CIO would consider (maybe in a few years), but is a direction that SMBs (without significant IT resources) are looking and voting with their wallets. Could Cisco be positioning its self to be a platform for online community and social networking as well as unified messaging and collaboration? The answer is yes.

Why is this good for WebEx?

Besides the share price doubling, WebEx, as the market leader in web conferencing is under attack from all sides. In our last RTC report we found no less than about 200 companies competing with WebEx in a web/data conferencing market that is becoming more and more commoditized. There are even a number of Web 2.0 start-ups like DimDim, Vyew, Slideshare, etc. that are trying to disintermediate WebEx which is one of the most expensive web conferencing solutions offered.

WebEx also has Microsoft on its tail. Microsoft bought Placeware about three years ago (now called Microsoft LiveMeeting) and has steadily been gaining ground on WebEx in market share and revenue. Partnering with Cisco gives WebEx more resources with which to combat Microsoft and stave off the attack of the web conferencing Lilliputians. Is this a strategic move to compete with Microsoft in the SaaS market? Microsoft just acquired TellMe, which is a company that was in Cisco’s marketplace, so there seems to be a real battle shaping up between Cisco and Microsoft (really Microsoft and everyone). Could Microsoft also have been in talks to acquire WebEx and consolidate themselves as the predominent player in the web conferencing market? That would explain a lot about both the timing and the price Cisco paid for WebEx.

Just like being there!

Cisco, last year announced their Telepresence products, high-end immersive audio/video/web conferencing. It is our guess that Cisco will rapidly integrate this technology with WebEx. It seems like Cisco’s strategy is to fill in their product line, and the recent spate of acquisitions attest to that. “Cisco is known for boring plumbing, now diving into SaaS and Web 2.0. They would like to bring it all to you, similar to "From the Farm to your table" noted Siamak in my conversation with him. I have to agree, Cisco wants to be your communication/collaboration/social networking company no matter what size you are, and WebEx is just another piece of that strategy.