Attendees at today's SaaS Summit in Monterey — where I arrived last night after a mammoth 19-hour journey via London underground, Virgin Atlantic and Hertz rental car — were feeling bullish but bemused at the news that Cisco has bought WebEx for $3.2 billion. Knowing that WebEx sold for close to a 10x multiple of revenues is a boost for the valuation of any SaaS vendor. "The valuation premium on recurring revenue is clear," was the verdict of one well-known ISV that has recently entered the SaaS sector.
The deal had come as a bolt from the blue, though, and no one was sure quite why it had been done. By sheer coincidence, I'll be on site at WebEx tomorrow for the first in a series of webcasts I'm recording with some of the company's customers (WebEx is a client — see disclosure page). But until the deal has formally closed, I'm not likely to find out any more than has already been publicly stated. So I may as well publish my thoughts on the acquisition tonight. I'll limit myself to three quick points.
- Look at how Cisco chooses to describe WebEx's offerings in its press release: "technologies and services that allow companies to engage in real-time and asynchronous data conferences over the Internet as well as share web-based documents and workspaces." At WebEx, 'asynchronous' is the term used for its WebOffice service — the former intranets.com offering — which, along with the new Connect platform, is where customers 'share documents and workspaces'. So I agree with Om Malik that Cisco has bought WebEx to go head-to-head against Microsoft's newly announced Sharepoint strategy (and if I were Microsoft I would be really worried today).
- The next sentence in the press release states that "WebEx's subscription-based services strategy has been key to its success." As CNET's news coverage reports, Cisco's chief development officer Charlie Giancarlo elaborated on this later today: "Giancarlo said it was important for Cisco to have a team that understood how to make such a business work ... 'When we go into new areas that we've never been before, like providing subscription services, we feel it's important to acquire the experience of a company that is already executing well.'" So this acquisition heralds Cisco's adoption of the subscription business model.
- Finally look at this sentence from Giancarlo's statement about the acquisition: "Clearly, our view is that most forms of communications and collaboration will be provided by the IP network." This is true, and it's a development that was about to start putting WebEx under pressure in the SMB market because lower-cost webconferencing alternatives are starting to bubble up from the likes of Skype, Citrix, Adobe and others. As part of Cisco, WebEx can now embrace the move to IP-based teleconferencing and add value to its new parent instead of losing revenue to new competitors. Meanwhile, Cisco gets to boost revenues and margins by moving up the stack into high-growth application services.
It will be interesting to see whether WebEx Connect will continue to get investment once Cisco takes control, and what will happen to the Cordys relationship that provides some of the underlying technology. My take is that it's Cisco's view that the Connect and WebOffice side of the WebEx business is where the greatest value remains to be unlocked.
PS [added 7am Mar 16th]: David Terrar points me to Frank Gens' short commentary, which highlights the SMB angle in this, which is important. And I see Kevin Werbach has posted an interesting verdict: "Cisco is either being brilliant or idiotic. I incline toward the former ..."
PS [added Mar 17th]: Tim O'Reilly makes some good points in his reaction to the acquisition. In particular, he picks up on Steve Borsch's posting on Connecting the Dots about the relevance of WebEx's MediaTone network to Cisco, and endorses the intriguing suggestion that Cisco could make MediaTone available as a utility service in a similar way to Amazon's S3 and EC2 services. That would certainly be a really interesting outcome.