Cisco Eyes Subscription Business With WebEx Buy

Cisco Systems is making a play for subscription-based services with its $3.2 billion deal to acquire WebEx Communications, the Web conferencing market leader.

"WebEx's network-based technology is a natural extension of Cisco's vision for unified communications and collaboration," said Charlie Giancarlo, chief development officer at Cisco, San Jose, Calif., in a conference call. "This vision is to give users inside and outside the workplace the ability to interact collaboratively over the open platform of the Internet [and] to personalize, scale, send, receive or collaborate on content whenever and wherever they wish on whatever device and through whatever medium they choose."

Santa Clara, Calif.-based WebEx provides subscription-based conferencing services to 2.2 million registered users. The publicly traded company reported $380 million in revenue last year and has nearly 2,200 employees. It's the No. 1 Web conferencing provider, with a 67 percent share of the market, according to Forrester Research.

"Cisco will preserve all aspects of WebEx's subscription model, as this is one of the key differentiators for the company," Giancarlo said.

Subscription-based services stand to play a bigger role for businesses in general and Cisco in particular, he noted.

"It's a theme that's starting to penetrate more and more businesses, whether its software businesses, subscription-based businesses such as we're talking about today with WebEx, and potentially even some of the hardware-based businesses, where there are maybe more models for 'pay by the drink' rather than specifically selling a piece of iron and getting one price at that point," Giancarlo said. "While I don't think I can say at this point in time that its going to drive an entirely new business model for Cisco -- I think we're far away from that -- I do think as a theme we'll be seeing it touch on more of our business over time."

The WebEx acquisition also adds fuel the competitive fires between Cisco and Microsoft, which holds the No. 2 spot in the Web conferencing market. Microsoft bought WebEx rival PlaceWare in 2003 and is beta-testing new Web conferencing capabilities for its upcoming Office Communications Server 2007. Cisco and Microsoft both partner and compete with each other in the IP communications space.

The WebEx deal reflects another recent theme of Cisco's acquisition strategy: technology that allows people to collaborate regardless of location, Giancarlo said. Cisco earlier this month closed acquisitions of two social networking companies, Five Across and Utah Street Networks. Those purchases will allow consumers to "play together," while WebEx lets people work together, he said.

NEXT: Complementary channel strategies

Giancarlo said Cisco and WebEx complement each other in several areas, including Cisco's push into the small- and midsize-business market.

Over the longer term, Cisco aims to integrate its VoIP and IP video technology, including its TelePresence high-definition videoconferencing, with the WebEx environment, he said. And in the near term, the companies will benefit from complementary distribution strategies.

Subrah Iyar, CEO of WebEx, agreed. "From a distribution perspective, our service is proven in the market. We have presence in the SMB, of course, in enterprises and globally. But our enterprise presence is only 20 percent at the present time, and our global presence is also under 20 percent," Iyar said. "With Cisco's strong distribution capabilities, we can drive [our service] all over the market, and we are proud to be able to support Cisco's progress into the SMB market with our channels."

Solution providers lauded Cisco for pursuing the deal.

"I just knew it was a matter of time before WebEx got scooped up. Their technology is very robust," said Melissa Rangell, vice president of marketing at CT Networks, a Cisco partner in Hauppauge, N.Y. "It's a smart move."

Adam Eiseman, CEO of Lloyd Group, a Cisco partner in New York, said the acquisition complements Cisco's TelePresence technology, which he had just seen demonstrated a few weeks ago. "It goes along with what they're trying to do," he said.

Under the terms of the acquisition, expected to close in Cisco's fiscal fourth quarter, the networking giant will make a cash tender offer to buy all outstanding WebEx shares for $57 per share, for a total purchase price of about $3.2 billion. The deal nets out to $2.9 billion after factoring in WebEx's current cash balance.

Shares of WebEx closed at $46.20 on Wednesday and traded at $56.43 Thursday afternoon. Shares of Cisco traded down 3 cents at $25.81 Thursday afternoon.

The acquisition will be Cisco's largest since spending more than $7 billion to acquire set-top box maker Scientific-Atlanta in February 2006. Other Cisco acquisitions under way or completed this year include e-mail security vendor IronPort, XML gateway provider Reactivity, the two social networking companies, and storage virtualization player NeoPath Networks in a deal announced earlier this week.