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Polycom Bombshell

By Andrew W. Davis, Wainhouse Research / No Jitter
June 14, 2011

June 1 began with a Polycom bombshell. Following is a synopsis of the announcement and some preliminary thoughts on the implications.
1. Polycom will acquire the Visual Collaboration Business (assets) of HP, including the Halo products and the managed services business, and at the same time become an EXCLUSIVE partner to HP for telepresence and certain video solutions, including both resale and internal HP deployments. Polycom will also integrate its video software into HP's WebOS platform. It was reported that the deal cost Polycom $89M in cash, which would be our estimate of HP's annual revenues from Halo products and services.

2. Polycom has established an Open Video Communications Consortium (OVCC) with multiple service providers. This is intended to be an open video exchange cloud--think B2B. At the outset, OVCC includes participation by 14 service providers, including AT&T which, unlike the 13 others, is new to the "open" game. This move is an open shot at Cisco's move to create B2B exchanges focused largely on Cisco's telepresence portfolio. OVCC is yet another consortium that may or may not lead to any real progress in the market or deliver any customer value.

3. Polycom has expanded its strategic relationship with Microsoft. Details here are a bit murky, but the June announcement included mention of "Rally," which we believe is a Lync-compatible, dedicated room system from Polycom. While much of the Microsoft news appears to be delivering on old promises, we hope to go deeper into this area in a future article.

4 The company announced a 2/1 stock split. No comment.

The HP element is by far the most intriguing part of the announcement.

Under the terms of its agreements with HP, Polycom will provide expertise in software technology and UC infrastructure, covering the full continuum of integrated and secure mobile, desktop, room and telepresence solutions. HP will provide its expertise and leadership in go-to-market strategies for UC solutions and will resell Polycom's UC solutions including: personal and group UC devices, UC infrastructure, UC managed services, and audio/video software.

Here's What I Think
The Enterprise Services side of HP has been a strong channel partner for Polycom for a long time, and even more so since Cisco acquired Tandberg. But ever since the HP-Vidyo OEM announcement of June 2010 and HP's showing at Enterprise Connect in March 2011, HP has been saying the company wanted to be a major vendor in the video communications space, not just a niche supplier of telepresence suites. The Vidyo OEM deal made HP a Polycom competitor as well as a partner. Now that deal seems to have gone up in smoke.
But why a $130B behemoth would want to dive into the complexities of the tiny videoconferencing market was always a troubling question. The Vidyo connection, at least could be justified based on Vidyo's client-server software architecture that would port cleanly to HP's industry standard product and support businesses. So much for that story. Somebody at HP woke up and realized they should stick to their IT services and infrastructure knitting. The Polycom deal was a nice way to a) exit the proprietary videoconferencing hardware and managed services business, b) take in $89M in cash, and c) solidify a relationship with a key product and technology partner at the same time.

Winners and Losers
Cisco (loser): Seeing two of your collaboration enemies become intimate is never a pleasant event. Polycom is now cleanly allied with both HP and Microsoft and the overlap between the three is pretty much non-existent. Cisco may have seen its apogee in the visual communications industry as its main competitors align and bulk up via partnerships. HP (winner): Finally offloads Halo and its numerous distractions and can focus on its core business. Strengthens the video products it can offer HP customers by tying more closely to Polycom. Microsoft (winner): Assuming a competing cloud strategy doesn't upset the HP relationship, Microsoft has a clean, competent, and very competitive UC offering bolstered with Polycom's devices and HP's services.

Polycom (winner): While you might wonder why they had to do this deal at all, the cost is trivial to Polycom. Polycom strengthens a key reseller partnership, picks up the Halo business, and more importantly some key Halo customers. Polycom also removes one key competitor (HP) from the market and takes a lot of wind out of another customer's sails (Vidyo). Great strategic move, we think.

Nagging issues: Polycom will have to figure out how to support or migrate existing Halo customers (we believe Halo systems are based on proprietary Haivision codecs) as well as customers who bought in to the HP SVC product line. Count on a small upward bump in OTX and RPX shipments. Polycom also takes over the HVEN network and the HVEN managed services business. This would appear to conflict with several of Polycom's channels. Perhaps a divestiture is in the future much like when Polycom acquired the products side of Telesuite (to become the RPX product line) and left the services business to become iformata.

Vidyo (loser): Losing your flagship OEM customer is never a pleasant public relations move. We think the Polycom-HP deal will hurt Vidyo little in the short term because the HP revenues were not significant, but long term Vidyo becomes less attractive, despite its interesting and unique SVC technology.

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