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Summary:

Cisco’s entrance into the consumer telepresence market hasn’t gone as smoothly as it had hoped, so it introduced new, lower-priced Umi products and lowered the price of the service. Unfortunately, the new pricing will do little to make Cisco’s consumer video chat offering into the mainstream.

Cisco UMI

Cisco is introducing new, lower-priced Umi video conferencing devices and reducing the price of its video chat service. This  may sound like good news for consumers, but it’s really just more evidence that the company’s consumer telepresence strategy is failing.

When its Umi telepresence service was introduced last November, we argued that Cisco would have a difficult time with consumer adoption due to the high price of the hardware and for the service. Predictably, at $599 for a dedicated set-top box and $24.99 a month to use the service, Cisco hasn’t hit the mainstream; a blog post today notes that “thousands” of people have chosen the technology. The problem is that success in the mainstream consumer realm isn’t defined by having thousands of users, or even tens of thousands of users, but by having millions of users.

Here are just a few of the problems with Cisco’s consumer telepresence strategy both at launch and now:

Competing with free

While Cisco is charging for consumer telepresence in the living room, multiple other providers are making their basic video chat services available for free. We’ve already seen Cisco pull back from this strategy to some extent, slashing the price of the Umi service from $24.95 to $9.95 a month or $99.95 a year. And the Mac and PC clients that Cisco plans to launch later this year will be free. At the same, however, Skype is aggressively making its free video chat service available on TVs and connected devices from the likes of Panasonic, Samsung, Sony and Vizio.

No market for a standalone box

Cisco’s hardware strategy is also a limitation for the company; its business model relies on selling standalone boxes that enable high-quality video chat on TVs. Umi telepresence theoretically makes any TV into a chat-enabled TV, but the market for standalone devices is quickly disappearing. As noted above, TVs from multiple manufacturers are being sold with Skype and other video chat services as a feature, with the purchase of a compatible USB-powered video camera. At some point, we expect Umi to be integrated into Cisco set-top boxes that are deployed by pay TV operators like Verizon, but until that happens, it’s difficult to justify buying another box to use the service.

“Good enough” is good enough for most consumers

Other entrants in the market might not boast the 1080p HD video quality that Cisco is selling with Umi — but then again, they don’t have to. Cisco has perhaps even realized this, with the release of its lower-priced 720p offering. Part of the issue is that many consumers don’t have enough bandwidth to fully take advantage of the 1080p HD quality delivered by Umi. That has been corrected, in part, with a 720p option that tops out at 1.5Mbps upstream. But even that quality might be aggressive for most video conference users, even those who are chatting on a big-screen TV. When forced to choose between a high-quality offering that they pay for and a lower quality offering that is free, most consumers will go for the free, “good enough” option.

Cannibalizing its enterprise telepresence business

While we’ve argued that Umi’s price tag has held it back as a consumer offering, the biggest issue with the service isn’t that its price was too high for consumers, but that it has the potential to cannibalize Cisco’s high-margin enterprise conferencing business. Cisco only reinforced that issue, making Umi interoperable with its enterprise product, and therefore an even more attractive alternative. No longer will enterprises have to choose between Cisco’s full-featured telepresence suite or to deploy the lesser Umi system; it can now deploy telepresence rooms in main offices and use Umi for remote networking with home offices. That might sound like a win for Cisco, but it also means that some businesses will eschew the enterprise product and choose solely to roll out Umi’s consumer offering instead.

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  1. Recently become a fan of Clayton Christensen (who coined the term disruptive innovation). His axiom is that companies almost always invent better, higher priced products and therefore risk being undercut by disruptors.

    If Cisco plays this correctly their disruption of themselves (aka cannibalism) is their path toward innovation.

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  2. I remember being very amused by the umi strategy at its launch. When I was growing up, my family had a TV that could act like a giant speakerphone. Taking phone calls in the living room while watching Miami Vice was great fun…for a while. But eventually you realized you really wanted to watch TV. (Or, these days, play games, surf the web, etc.) Or maybe somebody else wanted to watch TV and you were hogging it for a call. Regardless, after the novelty wore off, we stopped using the “phone” function. That took about 2 months.

    In addition to the above “novelty product” problem, Cisco added a hefty price tag and an ongoing service charge! Perhaps it was never meant for consumer use in the first place? One reviewer suggested it would serve as a cheap back-door way to introduce telepresence to smaller businesses.

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  3. Hi Ryan,

    During Q2′FY11 Cisco’s much ballyhooed collaboration sales (which include the sales of Cisco’s telepresence, Tandberg and unified communications products) sequentially declined by -$39 million.

    Interestingly, during Cisco’s Q2′FY11 earnings call, Cisco EVP and Chief Financial Officer – Frank Calderoni, conveniently omitted that Cisco reduced its outstanding share count by a mere 44 million shares (i.e. 5,577 billion – 5,533 billion = 44 million) during Q2′FY11.

    That means a whopping 45 million shares (i.e. 50.56% and/or $910 million) of Cisco’s total Q2′FY11 stock buybacks went to support Cisco’s dilutive management compensation practices!

    Revealingly in my opinion, stock buybacks were first authorized by Cisco’s board in September 2001. So over the past 10-years the number of Cisco shares outstanding has decreased by 1.768 billion shares, however, Cisco has actually repurchased a total of 3.329 billion shares at a a weighted average price per share of $20.81

    That means a staggering 1.561 billion of Cisco’s shares that were repurchased (i.e. $32.484 billion of Cisco shareholder cash), went to support Cisco’s dilutive management compensation practices over the past 10-years.

    Sincerely,

    Brad Reese

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  4. On a related note, whatever happened to Cisco’s Cius tablet? Remember last year when Cisco had to act pompous and they were jealous of the attention given the iPad so they came out with a press release about the Cius (vapor vapor vapor)! The world will not accept Cisco’s bogusness when it comes to Cius etc.

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    1. It was my understanding Cisco’s CIUS play was targeting ‘corporate business’ not consumer channels. From what I gathered, Cisco knew targeting the CIUS as a competitive product against Apple/Ipad, and to a lesser degree other Android/tablets…was not the best approach.

      Rather, it looks like Cisco is using their CIUS as an all-inclusive Addroid business tablet, that is a front-end to an entire back-end ‘collaborative’ corporate/enterprise open solution

      From what I can tell, Cisco’s recent announcement of their XMPP client ‘Cisco Jabber’ is the culmination of Cisco illustrating that its not solely the end-user hand-held device (apple/rim/android/symbian/windows) that is the key to business adoption. Rather its the device and the ‘network collaborative tools’ that are the key to enterprise adoption of a smartphone or tablet for business/corporate use. It is amazing that the Cisco Jabber client is compatilble with every phone and tablet OS out there

      I saw an example of the Cisco Jabber used on apple/rim/android/symbain/windows here at the ‘enterprise connect’ conference last week, here: https://www.myciscocommunity.com/videos/7304

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  5. Blame it on Pricing.. $599 for the box and $29/mo

    a) Device Fee. $99 is the magic number for a utility box. Some observations from the STB market..Apple TV went from $250 (?) to $99, Roku $59-$99 – that’s what seem works for the consumer devices. Logitech Revue $199.. again a lot.

    b) Subscription Fee. Unless it’s niche or rare content, the magic number here seems to be max $9.99/mo. Netflix, Amazon Prime, etc.

    I like Skype’s freemium model. If the device is required they throw it for free for 1 or 2 yr contract, like DISH and DirecTV do on their DVR STBs.

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  6. That said, I think SMBs are a great market for Cisco Umi with its current pricing.

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  7. Cisco have a lot to answer for. I was recently made redundant #fail

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