In the latest unfolding of corporate melodrama to play out in the IT domain is the much talked about estrangement between the networking giant Cisco and one of its largest channel partners Hewlett Packard. How this happened and what we can expect in the industry because of this rift is what we’ll try and explore in this insight.

In the Good times

Below is a snap shot of the areas in which the two vendors had embarked to collaborate on. As Cisco’s partner, HP had access to proprietary information such as product roadmaps and was a preferred channel and Global Alliance partner with partner profitability initiatives. That status however, will come to an end on 30^th April 2010 when Cisco has decided to not renew its partnership with HP.

Scope of the alliance that was active from 1997 to 2010

Source: Frost & Sullivan – Information sourced from: Cisco Press release –Jan 15, 1997

When Organizational Visions Compete rather than Collaborate

What was once a symbiotic relationship increasingly became a competitive one when both Cisco and HP decided to build competencies organically and through acquisitions in areas that they had earlier relied on each other to complete their breadth of offerings. Cisco’s announcement in March 2009 to introduce the Unified Computing Server (UCS) – probably marked the beginning of the end, a move that decidedly positioned Cisco as competing against HP’s core products.

The playing field was leveled with HP’s acquisition of 3Com in Nov 2009 (one that is ongoing). 3Com’s networking platform has helped HP spruce its Procurve portfolio with the scale it needed to its existing networking portfolio, and have a standards based, interoperable and flexible infrastructure ecosystem that was necessary to compete with Cisco’s networking architecture.

So Cisco’s announcement of not wanting to renew its relationship with HP as an authorized reseller didn’t really come as a surprise. On the contrary, it merely marks the end of an increasingly hostile relationship and the beginning of a new adversarial one between the two players.

Detailing the Context

For the 36bn dollar networking giant –Cisco, who has a stake in close to every high growth market, and who conventionally enjoys strong partnerships, attested by the 12,000 certified partners that bring in about 80% of its business, it’s puzzling to see how its relationship with one of the biggest services companies has gone sour.

But in retrospect, it’s not all that hard to imagine that the lure of grabbing a share of the blade server market must be alluring enough especially with its renowned marketing, pervasive datacenter penetration, and almost $30 billion in cash that the vendor brings to the table.

Cisco’s vision is set on the blade server market that is dominated jointly by HP and IBM. 2009 saw a 10% to 15% decline in the server industry, and it seems like a difficult time to have entered the playing field. However in true Cisco style, the vendor is making in-roads with its partner BMC (with whom it has teamed up to bundle BladeLogic management software into the UCS solution) to boost the credibility of its foray into blade computing

Some of what works well for Cisco is that in an environment of shrinking IT budgets – energy management and automated provisioning are among the few innova­tions that can reduce costs without sacrificing efficiency. UCS, with its smaller hardware footprint (fewer switches, communication blades, management modules) promises to reduce energy consumption and provide easier administration.

However, it is evident that Cisco has entered direct competition with HP and is a matter of time when a similar fate will befall its other partner IBM, two companies with strong tech­nical leadership, effective marketing, and brilliant vision.

HP’s leadership in services, networks, servers, storage and desktops on the other hand is a formidable strength of power that Cisco will have to contend with in the playing field. A $115 billion company, with approximately $40 billion coming from services, is definitely going to have some weight with at least the large organizations who are more likely to purchase servers from market leader HP rather than Cisco, at least in the near term. But as UCS gains acceptance and traction – Cisco claims to have 400 customers to date for the platform, and expects $1 billion in revenue this year – its appeal will increase as well. That initial appeal will be from smaller companies and green field data center opportunities, and then expand into larger enterprises, which will impact HP.

HP’s strength in services – a key growth area that delivers much higher margins than hardware is likely to be Cisco’s ‘Achilles heel’. Unless it buys out a services organization in the near future, this aspect of client engagement is likely to suffer with two of the largest services partners turning foes.

Cisco’s leadership in the switching and routing space in the enterprise and datacenter may hurt HP who will no longer be able to provide its clients with partner enabled discounts while deploying Cisco’s products. However, this will also open up opportunities for other vendors like Alcatel Lucent who now partner HP to provide alternative solutions for HP’s clients.

Summarizing the Aftermath

Without overly dramatizing this event, let’s look at the customers for a moment. Given how broad and widely prevalent the Cisco/HP environments are, not much is going to change in that neither customers nor vendors will be able to shake that stack of mixed implementations in a hurry. If anything, the future is what is up for grabs.

Cisco with its success and leadership in the networking side connects data centers, while HP’s stronghold has been selling servers that populate the facilities. That both vendors are now trying to be the primary vendor to customers building data centers makes for an interesting challenge that both vendors seem poised to take on

However, one can be assured that this split is likely to change the landscape of how vendors will collaborate and each of the vendors will possibly take steps to ensure that, where it lacks equipment or expertise, it’ll partner up to fill in the gaps and continue supporting its customers effectively, alluding to the fast-emerging opportunity for customers also to perhaps build relationships with partners that are now an alternative to HP and Cisco.

Against the backdrop of a recessionary environment, both large and small businesses are expected to increase their spending on collaboration technologies to save costs and increased productivity. This has led big names in the IT industry such as Microsoft and Google to increase their reach in this market through consolidation and acquisitions, targeting both the business and consumer side. The planned acquisition of Tandberg by Cisco is the most recent example in this trend that is expected to continue as the market matures in the coming years.

Looking back, Cisco has made some very interesting acquisitions to strengthen its play in collaboration & unified communications:

• In 2007, Cisco acquired WebEx for approximately $3.2 billion

• In 2008, they acquired Post Path and Jabber for e-mail and presence solutions

• In March 2009, the company acquired Pure Digital Technologies, the maker of the popular Flip Video camcorders for approximately $590 million. The device, which costs between $100 and $229, depending on the version purchased, has built-in memory storage to take up to 30 minutes or 60 minutes of video. The integrated software also makes the device easy to upload video to PCs or Macs. More than 2 million total Flip video units were sold since the product first went on sale.

• In 2009, Cisco announces it will pay close to $3 billion for Tandberg, and another $2.9 billion for Starent Networks

What does this mean for Cisco?

These well-timed strategic moves position Cisco at the forefront of having an end to end unified communications & collaboration offering and further strengthening its portfolio of solutions in conferencing & collaboration. The telepresence market segment as a high-end video conferencing solution received a huge boost with the marketing push of primarily Cisco, and HP.

At the same time there will be overlap or even possible cannibalization in some offerings mainly with the investments made by both parties (Cisco and Tandberg) in Telepresence. Tandberg’s T3 telepresence is a very promising solution, and it will be interesting to see how well Cisco integrates this product with its own CTS3000 series high-end solutions.

Despite recent announcements of scaled down versions of the Cisco telepresence solution, its product line lacked depth. This missing link was more affordable video solutions that would encompass group and desktop conferencing systems, for it to be truly considered a major player in this market. The Tandberg acquisition is closing that gap very nicely for Cisco.

Adding to that, the company is doing a lot of work in making WebEx as a solid cloud offering with integration of WebEx with telepresence. Future integration with Tandberg’s product line is expected as a logical next step to support its vision of interoperability across networks. The Pure Digital acquisition would continue this vision by integrating Tandberg’s product line with its offerings including desktop video, group video, its WebEx solutions and telepresence and its IP phones.

The acquisition of Starent Networks strengthens its position in mobile infrastructure as an enabler of rich media communications over diverse networks such as 3G and WiMax and fits in with its broad overall vision around enabling collaboration. These recent acquisitions ties in neatly with Cisco’s overall strategy of pushing the network as a platform to drive high bandwidth applications such as video, which ultimately means more traffic on the network and drives the need for additional routers other networking gear in the market that Cisco is very well placed to offer.

Vendor interoperability key for higher adoption

Getting diverse endpoints of different manufacturers to talk to each other optimally in network environments that vary widely is undoubtedly a daunting task. Vendors have different ways of implementing the same function, such as HD video for example, and have worked hard to make their products stand out from the competition. This further exacerbates the issue. There seems to be a lack of agreement between vendors in supporting signaling standards, with some going in for SIP or H323-only implementations, while others following proprietary standards. The situation though has improved in the last 2-3 years, and popular endpoints of major vendors can interoperate with each other in simple point-to-point sessions. However when there is a need to connect a large set of multi point connections across different vendors and endpoint types (HD, SD,desktop software clients etc.), the experience can quickly degrade to unacceptable levels. Supporting mobile devices and their MPEG based codecs with H26x based ITU codecs is also a sticky issue. Service providers we have spoken to echo these problems, mentioning that true interoperability is still a ways off, and businesses may understandably adopt a cautious approach until this is solved convincingly. The vendor community needs to work within itself and with bodies such as the ITU to resolve these issues quickly to take advantage of the growing awareness and interest for video communications.

Cisco’s challenge in integrating the Tandberg line of products with its own should hopefully help in alleviating this issue for the broader market. On the interoperability between devices, Cisco is doing a good job with integrating its web platform WebEx with mobile devices and telepresence product lines, and this is expected to roll-on to Tandberg’s product lines in a phased manner next year.

Asia-Pacific Channel Analysis

Cisco has a range of existing partnerships for delivering UC & Collaboration solutions for on-premise as well as on-demand. It has channels ranging from resellers of WebEx services to system integrators, service providers, and potentially other partners around cloud services that might get integrated as part of a total collaboration offer (such as SalesForceDC). Hence Cisco needs to avoid channel conflict and channel erosion, and focus on how they can optimize these channels to maximize customer reach.

One of the major challenges of this acquisition would be to smoothly integrate the Tandberg channel network with Cisco. Reactions from Tandberg channels so far have been a mix of enthusiasm and trepidation, but most have a ‘wait and see’ approach to the development. For several channels this means good news.

Partners such as DataCraft, iVision in Australia, ECCOM in China and others who have worked closely with Tandberg and Cisco as part of their UC strategy, the news could not have been better. Their customers, who also use both Cisco and Tandberg’s solutions, will welcome this news. Same is the case with longtime Cisco partners such as Wipro in India, who have offered solutions in areas of IP telephony and voice access to enterprise segment and Unified dial solutions to service provider and corporate. Tandberg’s products are positioned as a premium video solution in the market, and this value proposition helped its channels enjoy healthy margins (20-35%, according to LifeSize CEO Craig Malloy speaking to an online journal) on its products. However, if Cisco decides to tweak the value proposition of Tandberg products into a strategy that aims to broaden video adoption in the enterprise while adjusting channel margins, this may not go down very well with Tandberg’s current partners, opening a gap for vendors such as Lifesize to capitalize.

Tough choices for multi-vendor channels

The challenge will lie with other channels in the market that have a mixed strategy with both Polycom and Tandberg or who have taken the decision to only work with Polycom and Cisco for their video and collaboration strategy. Channels such as Digital China and Postel in China, Telstra in Australia come to mind. Decisions will need to be made in the next few months if they should continue offering both solutions or get themselves more tightly integrated with Cisco offering. For some of these organizations, it means also re-looking at the investments that have been made with other large vendors, such as Polycom for example. For large global service providers like IBM, HP and Microsoft that have partnerships with Tandberg for example, this could pose a lot of more challenges given these companies now view Cisco as a competitor in the various markets. Carriers also have a lot to do growing the managed services business for video and additionally by playing an important role in monitoring the network; most carriers have aligned themselves with Cisco and Microsoft as part of its UC and Collaboration strategy. For carriers in the Asia-Pacific region such as Telstra, SingTel, Bharti-Airtel Optus/Alphwest and others, the news is great for those that have a tight strategy with Tandberg and Cisco. For those working with Polycom, decisions will have to be made around the investments made so far in that relationship and if they would continue to offer Polycom as a complementary solution. Some carriers have indicated to us that they are seriously looking at their overall offerings to customers, and that may be troubling news for vendors such as Polycom, and will add to their challenge to maintain a good channel network.

Evolving competitive scenario and market outlook

Cisco has once again made a strong push in the collaboration and conferencing space with yet another milestone. Frost & Sullivan estimates that a combined Cisco & Tandberg would account for approximately one-fifths of the total web and video collaboration markets in Asia Pacific. The acquisition should make Cisco the market leader globally in video collaboration, and a monumental challenge for current Asia Pacific market leader Polycom and others such as HP and Radvision. HP is in a challenging position due to a more limited portfolio, while Radvision stands to lose its OEM business with Cisco. Polycom though, is strong in Asia Pacific; its products are considered the industry standard and have strong brand recognition across Asian enterprises. Short of being acquired by Google, HP, or Microsoft, Polycom’s best bet in Asia Pacific is to further increase its penetration with both local and multinational clients, in important markets such as China, Australia and Japan by improving its distribution and channel relationships in the region.With increasing Asian customers looking for either cutting investments or opting for cheaper solutions, vendors such as Polycom, Huawei, Lifesize and others can capitalize on this trend and offer aggressive price points to increase penetration quickly. Existing partnerships between Microsoft and Tandberg may be in jeopardy, so Polycom has the opportunity to form new partnerships and position itself as a key player offering compelling Unified Communications solutions, and focus on developing new solutions around these areas.

The collaboration industry has become increasingly important for major IT companies in their search for ever higher growth and existing market competitors have to constantly adjust their strategies to defend their turfs. Ultimately, this deal will affect Cisco and Tandberg customers depending on how the factors discussed above play out, but we believe this should be beneficial for the industry overall to customers and competitors alike in driving a wider and more pervasive usage of video technology across the entire spectrum of business users. Market competitors that have a well integrated and complete solution set, water-tight channel partnerships, local sales & support, and long term vision will be the ones that succeed in a future Asia where intensified competition and increasing consolidation will become the norm.