CNET también está disponible en español.

Ir a español

Don't show this again

Christmas Gift Guide
Tech Industry

The Starting Line: Polycom sees industry strides

Polycom Chief Executive Robert Hagerty will tell anyone who listens: The videoconferencing market has come a long way.

Polycom Chief Executive Robert Hagerty will tell anyone who listens: The videoconferencing market has come a long way.

When the videoconferencing specialist first announced its plans to buy rival PictureTel, Wall Street was hardly impressed. Between May 24--the date the deal was unveiled--and Sept. 10, shares of Polycom fell 31 percent as the entire technology and communications sector tumbled.

But the skepticism about conferencing has changed for the moment, as videoconferencing stocks climbed this week when trading resumed following airline hijackings that destroyed the World Trade Center and part of the Pentagon. Polycom executives don't want their company to be seen as a profiteer off tragedy, but the fact remains that investors believe the conferencing industry will gain from air travel's decline in the wake of the attacks. As the largest maker of standalone video systems for conference rooms, Polycom is set to be the prime beneficiary.

And that revival of interest in the industry appeared just as federal antitrust regulators this past week approved Polycom's purchase of PictureTel, which happens to be the largest maker of PC-based conferencing systems. Now Wall Street thinks the marriage of market leaders in two videoconferencing niches is a great idea--Polycom's stock price gained 37 percent in the first week of trading after the terror attacks. Polycom expects to complete the acquisition in the fourth quarter; a tender offer for PictureTel shares closes Oct. 11.

Hagerty recently spoke to CNET about the acquisition and the growth of video conferencing in general.

Q: You previously described the acquisition of PictureTel as a marriage of complementary technologies. How much overlap is there between the two companies?
A: You have to dig into the technology itself to find overlap, and then also there's probably some sales coverage that's overlap. So let's talk about the two companies and their technology paths.

PictureTel has gone down the path of PC-based systems, so they sell cards that you put inside of a PC, and that's what's sold. So some percentage of the market, we estimate 15 to 20 percent of the market, is desirous of using a PC-based system. And PictureTel is the best PC-based system on the market, in our belief.

Our products are DSP (digital signal processor)-based systems. They're fixed function.

What we see is project teams using PC-based systems. What we see is corporate conference rooms being DSP-based. What this does is it gives us the breadth to cover the application; it covers the need of our end-user customers no matter where it is.

The benefit is that both companies are writing a lot of software, so we'll be able to take the best parts of each one of our codes, combine that into both product families and give better features and functions faster to end-user customers.

How about in terms of personnel? Any cuts planned in G&A (general and administrative costs) or research?
Yeah, we would expect to have this accretive in one to two quarters. G&A looks to be the most redundant, and then probably sales after that, and no cuts anticipated at this point in research and development.

Any idea of what sort of related charges you might incur?
No, we haven't really gotten into how that's going to roll out. We haven't gone public in terms of that rollout, or given new guidance. That will come at the close (of the quarter).

You originally said the deal will be slightly accretive, and you said a few minutes ago it will be accretive in one to two quarters. Can you quantify that in terms of earnings per share yet?
No, we have not. That will come out at the (quarter) close.

With PictureTel, what's your market share in the total videoconferencing market?
I guess I don't know, it depends on how you slice it, how you dice it. We see leadership in both the PC-based systems and in appliance-based systems.

PC video conferencing is still a somewhat fragmented market, you've got Tandberg and WebEx and some other people out there.
There's a lot of different ways to approach the market.

Just in pure group video conferencing alone there are several competitors beyond Polycom and PictureTel. There is Vcon and Sony. So there's a number of them out there.

Are there any you see as your major competitors, your biggest ones, the ones you see most often in contract competitions?
I'll be a little cute. The major competition is the empty conference room, because if you look at the penetration rate in this industry, we've got a long way to go.

As you know, values of networks go up by the number of nodes connected. We're up from 1998, which was about 47,000 units, and in the year 2000 the industry did 77,000 units. So our connectivity is growing and as it grows that network becomes a lot more valuable. So we think the real game here is to get a lot more rooms connected.

Speaking of networks--as a percentage of sales in the second quarter, Polycom's network systems revenue shot to 25 percent compared with 11 percent the year before. Why is that?
We build the equipment that the RBOCs (Regional Bell Operating Companies) use. What drove that was an increase in conferencing calls that service providers and their enterprises were making. They needed more infrastructure equipment to balance out the amount of end-points they had, the amount of volume they were getting.

Some analysts have said that probably the biggest thing holding back an explosion or mass adoption of video conferencing is bandwidth. How much does the phone companies' sluggishness in rolling out broadband hold back not just your company but your industry as well?
We're in the DSL business, so we'd like to see faster deployment of DSL for sure.

But if you're talking about it in terms of video, I don't think that we've had much recognition of how far the industry has come. The price points have changed significantly. Five years ago you could have realistically expected to pay $50,000 an end-point. Today you can get a Polycom unit, a base unit, beginning system unit for less than $4,000. So it's been a dramatic change in price points.

I think bandwidth has become a lot more ubiquitous. There is a lot of bandwidth around. The cost even of ISDN calls has come down significantly. So we have two networks we can work over, the IP network or the ISDN network. The cost of that bandwidth is down.

When people are going with an IP-only system, they have to be cognizant of the amount of bandwidth they have inside their system and how many routers they have and how that system is configured, because for every unit you put on it, it's going to consume bandwidth. And you should have some level of quality of service...but you don't need anything fancy. The latest generation routers that have been shipped by many people are in good shape.

We suggest that if you're going to go open Internet as opposed to VPN or virtual private network, then you're going to want to have a service provider that can guarantee some kind of quality of service, and almost everyone can. Or if you're going to go big trunk, like our products, the VS4000 and the ViewStation FX from Polycom, will take a T1 line.

You also have a pretty robust audio-conferencing business. How much fear is there that video conferencing ultimately is going to cannibalize the other side of your business?
None. I think that what that represents to us is an opportunity to build out a better system. We're going to have systems that are similar to our triangular speaker phones. We already ship an audio device with every video device we ship, so we just see this as an opportunity to grow and build more robust systems for the conference room.

Obviously your sector's stocks have done well this week. How much interest have you seen recently in terms of new queries and that kind of thing?
Going back to the beginning of the year, we've seen a lot of interest, with the economic slump. Bristol-Myers-Squibb has come out in an article Aug. 20 from Forbes, where they're talking about saving $2.5 million a year on travel costs alone. That's pure cost, that's not talking about the opportunity cost of having those people away from the office and away from active business. Ernst & Young, same thing, $1.8 million to $2.4 million a year in travel costs.

So we had a heightened interest starting with the economic slump. There's real interest in this technology because it's simple, easy-to-use, low cost and high availability of network, and the price points for the end-users have come down significantly.

But you have seen an acceleration of that (interest) in the past week?
There's certainly been an enormous amount of interest. And we're seeing a lot of press calls and a lot of interest through all different avenues. But we're certainly not commenting in any way on the current quarter.

I'm not asking in terms of actual orders or sales, but has the sheer number of queries...
The sheer number of press calls has gone up significantly.

I'm sure (there are tons of) press calls, but how about potential clients?
Because it's close to the end of the quarter, I kind of want to stay away from that. It's obvious that with this kind of situation going on, you're getting the normal and obvious reaction, but I don't believe that will affect the current quarter.

Ultimately, what kind of effect on conferencing do you think these attacks will have in the long run?
I don't want to put it in terms of the disaster and benefiting from it. I think that the technology is marvelous technology. It works wonderfully well. I think that obviously a lot of people are interested in it, that's great. I think once you get a demo of it and see how well it does work, I think people will recognize, whether you're in business, education or in government, this is great technology and it works fabulously.

Without talking about profiting from obviously what is a terrible situation, video conferencing in the past has seen interest spikes after various events, but it hasn't really been sustained. Why do you think that is, and why do you think that will be different this time around?
I don't know that it's event-oriented. I do know that in the last three years, again, this has changed. This is a changed industry.

We have standards in place. We can interoperate between all the competitors who are delivering products. We've got network in place that's much more reliable and much lower cost than it's ever been in the past. And the products themselves are just lower cost.

So I think the price benefit is there. I think it's easily justifiable on an economic standpoint. I think any industry can quickly look at the ROI (return on investment) they can get out of this device.