Video conferencing -The video cloud research-Glowpoint
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Video conferencing -The video cloud research-Glowpoint

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Glowpoint, Inc. provides cloud managed video services to the global enterprise community requiring high-quality, reliable video conferencing and telepresence experiences for their business. The ...

Glowpoint, Inc. provides cloud managed video services to the global enterprise community requiring high-quality, reliable video conferencing and telepresence experiences for their business. The Glowpoint service offerings make the complexity of enterprise grade video communications as simple as
using the internet, between any technology, network or business. Using the Glowpoint Open Video(TM) cloud architecture, Glowpoint enables organizations of all sizes to adopt business-class video easily, scale instantly and collaborate openly, yet securely, across boundaries created by disparate technologies and IP networks - and realize the full value of visual communications.

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    Video conferencing -The video cloud research-Glowpoint Video conferencing -The video cloud research-Glowpoint Document Transcript

    •   Tavis C. McCourt, CFA (615) 665‐3644  Matt McKee (615) 665‐3864  November 28, 2011  The Video Cloud  Convergence of Disruptive Technologies, Business Models, and  Competitive Landscapes  Video Conferencing Today Video Conferencing In The Future Room‐Centric Hardware   Software‐based Apps on PCs/Tablets/Smartphones Transcoding‐Intensive MCUs   Virtualizated, X86‐based Infrastructure On‐premise Deployment   Cloud‐based Deployment Large Upfront Cost Recurring Fee Interoperability with Video Systems Interoperability with All Computing Devices Video Conferencing As A Business Video Conferencing As A Feature In UC Who Will Win The Cloud? Morgan Keegan & Co., Inc. does and seeks to do business with companies covered in itsresearch reports. As a result, investors should be aware that the firm may have a conflict ofinterest that could affect the objectivity of this report. Investors should consider this report asonly a single factor in making their investment decision. PLEASE SEE DISCLOSURES BEGINNINGON PAGE 2 AND ANALYST CERTIFICATION STATEMENT BEGINNING ON PAGE 2 . Page 1 of 23
    • Morgan Keegan Equity Research Summary Points 1) A number of factors are converging to create unprecedented opportunity and disruption in the traditional video conferencing market. These factors include the following.  Inter-company video supplanting the intra-company video model of today  New business models revolving around cloud-based solutions  Video being added as a feature in UC/web conferencing applications  Codec improvements that allow HD quality at below 1.5 Mbps  New video processing methods that lower the processing intensity of video bridging  Moore’s Law finally allowing cost effective x86 processing for transcoding  Cloud-based computing platforms beginning to be used for video processing  Tablets/Mobile Computing driving increased use cases for video in the enterprise  New employees bringing video into the enterprise without IT consent  SIP and MPLS substantially lowering the cost of bandwidth vs. T1s  New entrants taking advantage of one or more of these disruptions 2) We believe these factors are driving the industry to the creation of a “video cloud” for enterprise communications. We expect this to take many years, and in its first form be a series of competing “video clouds” that are ultimately linked through consortiums. 3) Traditional video conferencing equipment vendors, led by Cisco and Polycom, have substantial new opportunities open to them through the creation of a “video cloud,” but also unprecedented competitive and cannibalization risks as the age of large hardware- based sales is slowly replaced by free client software and recurring monthly fees. 4) Potentially as much as a $1.5 billion incremental opportunity annually for equipment vendors is available by selling into the “video cloud,” but in the near to intermediate term, a market in the hundreds of millions of dollars is more likely. 5) We believe there will likely be substantial merger and partnership activity for many years to come as video is added as a feature in the UC portfolio. Ultimately, one has to imagine a single vendor will be providing voice, IM, video, and web collaboration on a bundled software platform capable of running on any computing device, which may or may not be bundled with telecom service in a cloud deployment. No single vendor accomplishes this today (although Cisco comes closest). 6) It is too early to confidently say what vendors will create or destroy equity value in this transition, but it is clear that effective strategic leadership in understanding and managing through this generational shift in video consumption in the enterprise has never been more important.The Video Cloud November 28, 2011 Page 2 of 23
    • Morgan Keegan Equity Research Overview In the following report we are highlighting the investment implications of cloud-based video conferencing. Cloud-based video conferencing is a concept that has existed for decades with a pretty simple premise that it should be easier for users of video conferencing to set up conference calls with users outside their company. Despite this simple premise, over 95% of video conferencing deployments today are a completely on-premise based solution for both client end points and infrastructure. Historically, video conferencing systems were deployed within enterprise networks for companies to communicate between all of their branch offices. This has created “silos of video conferencing” within companies, which are rarely connected to the outside world. Although many of the technological issues to getting these silos to be able to communicate have been overcome, common directories, user interface and general business model issues have held back the cloud-based video conferencing concept historically. By deploying cloud-based video conferencing networks, vendors and service providers are now attempting to open up these silos of video conferencing by allowing any video conferencing end point globally to communicate with any other conferencing end point. This has dramatic investment implications as most eloquently put by Bob Metcalf’s “Metcalf’s Law,” which states the value of a network is proportional to the number of devices connected to the network. Put another way, as the number of nodes/devices on the network with which each end point can communicate increases, value creation for all end points should increase substantially. By dramatically increasing the number of nodes/end points with which a video end point can communicate, the usage of that end point increases, creating more value and ultimately new market opportunity for the end point provider, service provider, and every company involved in the value chain of making video work. Although the business proposition of cloud-based video appears obvious, there are a number of technical and business model hurdles that have to be overcome to make cloud-based video conferencing a reality. These include technical hurdles (how to functionally allow video streams coming from different devices and networks to interoperate securely through firewalls) and business model hurdles (creation of directories, SLAs, interconnection of networks). Put simply, the video conferencing industry and video in the enterprise generally is about where telephony was in the mid-1880s, and over the next 5-10 years it is likely to be catapulted across two centuries into the Internet era. Video In The Enterprise Today We make the case that video in the enterprise today is in a similar position to where the telephony was in the 80s - the 1880s. Today, companies use video conferencing largely in conference rooms to connect to other conference rooms within the same enterprise. Some truly forward thinking companies allow video on desktop computers to have video conversations with other desktop video users within the organization, but even in this case each enterprise is simply just a “silo of video communications.” If a company would like to have a video call orThe Video Cloud November 28, 2011 Page 3 of 23
    • Morgan Keegan Equity Research video conference with a client outside their network, they can call their service provider and through a series of labor intensive steps, set up a very expensive video call or video conference with outside parties. Alternatively, they can go to a third party room operated by a service provider. Because of the expense and headache in setting up an off-network video call, these service-provider based, or cloud-based video solutions are rarely utilized today. The video conferencing industry today is not that dissimilar to telephony in the 1880s with each enterprise today acting as its own small service provider. In the 1880s in Europe and the US, there were a very limited number of telephones in existence, and each could only speak to other telephones operated by the service provider who owned the network. To place an “off network” call, callers would have to call a “telephone exchange” that would set up a call through an intermediate exchange and finally with the service provider that owned the lines that the ultimate call recipient utilized. Even by 1918 this process of setting up a long distance call between operators took an average of 15 minutes. Ultimately, the AT&T monopoly combined with the technological innovation of the electromechanical switch solved this problem by putting every subscriber on their own network, and allowing long distance calls to be completed nearly instantaneously. By increasing the number of subscribers on the network, AT&T created more value for the consumer to own a telephone, and telephony subscribership exploded to near ubiquity in the developed world over the next 100 years. What telephony services looked like in the 1880s – 1930s As shown above, telephone usage was quite a labor-intensive affair at the outset with customers only able to call subscribers on the same telephone companies’ lines. If they wanted to call a subscriber on another telephone subscriber’s network, their service provider would have to call around to find out which service provider the ultimate subscriber belonged to, and then switch the call manually. Even by the end of WWI, this was a process that made the average set up time for long distance calls to be 15 minutes in length.The Video Cloud November 28, 2011 Page 4 of 23
    • Morgan Keegan Equity Research The original Cloud – PSTN opens and automates telephony services in the 1930s Starting with the invention of the electromechanical switch, telephone companies created the first “cloud” based service in the world. AT&T bought up most of the telephone operators in the US and integrated seamlessly with the non-AT&T providers, developed a directory system (phone numbers), and vastly increased the value for consumers and businesses to invest in telephones. Subscribership soared to near ubiquity within 20 years. Video conferencing services today Today, video conferencing is largely deployed in “silos of communications” within enterprises with video conferencing room end points connected to an MCU (multipoint control unit) to ensure interoperability between the end points. Even though the process is somewhat automated, many enterprises require users to call the IT department to secure time on the MCU and to schedule a video conferencing call. Many IT departments are responsible for originating and terminating video conference calls due to the complexity of the process. In other words, ad hoc video calling is still rare even within this silo of video communications. If a user in oneThe Video Cloud November 28, 2011 Page 5 of 23
    • Morgan Keegan Equity Research enterprise wants to hold a video conference with a user in another enterprise, they typically call a service provider, the service provider has to set up the call, make sure the end points and networks are interoperable, and pay an exhorbinant fee for the service. In other words, the same exact process and outcome that existed in the 1880s telephony world. The Future – The Video Cloud The future of video communications in the enterprise broadly, and video conferencing specifically, is a cloud-based infrastructure where users can set up video conferencing calls on an “ad hoc” basis without having to involve their IT department or a service provider support staff. Just like this transition in the telephony industry, which grew the market for telecom equipment as more subscribers were seamlessly connected to the network, the video conferencing industry has the same potential over the next 10-20 years. What Will The Video Cloud Look Like? It seems obvious that the enterprise video industry will transition from a model based on “silos of video” to one based on a service provider “cloud.” However, what is an open question is what technological architecture will be used and how this cloud will manifest itself. P2P Model – Hasn’t Skype already solved this issue? It has a reasonably universal directory with over 600 million users, availability on a broad range of end points, and its free. These are all valid points, but there are some real issues with Skype as it relates to the enterprise. First, Skype uses P2P technology, which is great for instant messaging, but provides less than perfect video performance because it is leveraging the processing power in your PC to process the video with no help from any centralized servers. This means that a 2 inch x 2 inch window of video may look OK, but when scaled up to high definition encompassing a 19 inch screen, there simply is not enough processing power in the PC to handle the video processing load. Additionally, as you add users to the screen real estate, you are now taxing the processor on the PC even more, meaning that “continuous presence,” or the ability to see multiple video streams simultaneously, on a P2P service like Skype is nearly impossible with today’s end point processing capabilities. Finally, there are technical challenges with firewall traversal,The Video Cloud November 28, 2011 Page 6 of 23
    • Morgan Keegan Equity Research interoperability, security concerns, and SLAs that P2P solutions will have to solve before broad-based enterprise adoption will follow. Lync is Microsoft’s version of Skype in the entperprise, and solves many of these issues, but it remains a proprietary client with limited interoperability and quality challenges However, if the technical challenges are addressed, P2P solutions like Skype, Lync, IBM Sametime, Apple’s Facetime, or any number of IM-based software clients have nailed the ease of use, user interface, and directory challenges that have plagued much of the traditional video conferencing industry since inception. Client/Server Model – There are basically 3 types of Client/Server architecture potentials for the video cloud that we have seen in the marketplace, all of which have their pluses and minuses. The first 2 types deploy with proprietary clients (either room- based systems and/or proprietary desktop/mobile application software), while the third utilizes a web browser as the client. Dedicated MCU Model – Instead of standardizing with client software (as a Skype or any P2P solution aims to do), vendors and service providers are now working in multiple consortiums to allow interoperability at the core network level across any end point. These solutions are largely “client/server” based solutions where the end user buys the client (PC, tablet, video conference room end point, etc.) and the service provider buys the server and charges a fee for its use to the end user. The server in this case is a proprietary MCU (multipoint control unit) and various other components needed to guarantee high quality video, interoperability, manageability and security. The advantage of this solution is that interoperability challenges have largely been solved by existing MCUs on the market, firewall and security challenges are more easily addressed in this architecture, and video quality can be much higher as the processing of multiple video streams can be offloaded to the core of the network rather than at the end points. Examples of this architecture include Glowpoint, Broadpoint, and likely the majority of large telecom service providers that enter this space. Polycom also recently announced that it will be launching its own cloud-based video network based on its own infrastructure, while Cisco’s Callway Service is much the same concept. X86-based MCU (Software MCU) Model – In this cloud-based model, similar to the dedicated MCU model, end users buy the end point (PC, room conferencing unit, tablet, etc.) and a service provider charges a fee to guarantee interoperability, firewall traversal and bridging between end points by offloading processing to the network. The difference is that in this model, the MCU is not a dedicated piece of hardware, but instead Intel x86-based servers combined with proprietary software. The advantage of this model is that interoperability, firewall traversal and security can be built into a software layer, owned by the service provider, while the video transcoding can be offloaded to any of a number of cloud computing vendors (e.g., Amazon cloud services). This architecture can theoretically be lower cost than the dedicated MCU model (especially ifThe Video Cloud November 28, 2011 Page 7 of 23
    • Morgan Keegan Equity Research virtualization is employed), while maintaining most of the benefits. Additionally, full transcoding would not have to be done on every video stream coming in and out of the cloud, lowering costs further. Especially interesting is if this model is combined with an SVC-based coding scheme, which requires far less processing power under any network architecture. Logitech Connections and service providers using Vidyo’s SVC (Scalable Video Coding) technology are good examples of this architecture, and we suspect this will ultimately be the architecture Microsoft will use as it merges Lync and Skype. Web-Based Cloud Model – In a web-based cloud model, there is no client software downloaded at all. Users are basically given a “room” on the web and other participants can meet in this room by logging into the same website. If a participant wants to join the video conference from a traditional room-based system, they are given an IP address to dial. This is probably the easiest to use cloud-based mechanism as video conferencing can be completely ad hoc without even involving an IT department (literally mimicking the audio conferencing business model). However, quality of service is more difficult to guarantee, and the cost is fundamentally no different than the other client/server-based cloud models. Citrix’s GoToMeeting, Cisco’s Webex, Bluejeans networks and Premiere’ Globals’ iMeet are all good examples of this cloud-based architecture. MCU-Based Cloud P2P (Proprietary or X86) Web-Based Client X86 – Logitech, Vidyo (SVC) Proprietary - Polycom, Bluejeans Network, iMeet, Examples Skype, Apple, Lync Glowpoint, Cisco Webex, Scopia, Citrix Pricing Free Higher Low Security Issues Most Secure More Secure Firewall Transversal Limited Best Yes Interoperability Little Best Yes IT Manageability None Complete Some Ad Hoc Ease of Use Best Some BetterThe Video Cloud November 28, 2011 Page 8 of 23
    • Morgan Keegan Equity Research OK, So Who Wins? Our guess is that there will be no one winner in the video cloud, but all participants have the potential to see their market opportunity increase as the value for enterprises and consumers to invest in video-enabled end points increases. We believe there will likely be 3 classes of services: 1) Free P2P is here to stay for consumer, small business, and ad hoc 1x1 video calls; 2) Client/server with web-based client for many businesses and vertical apps where IT control and quality is less crucial; or 3) Client/server MCU-based cloud for large businesses where IT control and quality are crucial. We believe this will transition from proprietary MCUs to x86-based MCUs over time. Additionally, just like in the audio conferencing business, where enterprises still buy bridges to move some audio conferencing on premise, we expect on-premise MCU sales to continue to exist in the video world as well. Aside from 3 deployment models each having a part to play in the market, we also believe cloud-based video conferencing brings together participants from at least 7 different end markets, and each will play a part in determining the future of cloud-based video. 1) Video conferencing equipment providers such as Cisco, Polycom, Logitech/Lifesize, and Radvision have a vested interest in ensuring that cloud-based services are additive to their opportunity rather than cannibalistic to on-premise MCU and end point sales. 2) IM/UC vendors such as Microsoft and IBM have an incentive to add an even more valuable feature (video) to their IM/UC application. 3) Traditional PBX vendors such as Avaya, Shortel, Cisco, etc. are adding video to their UC product lineup, and could see cloud-based deployments as a strategic opening to get into the market more aggressively. 4) Web conferencing vendors such as Cisco/WebEx, Citrix, and Microsoft would like to add more video as a feature to their apps to drive more adoption and pricing increases. 5) Audio conferencing service providers, including large telcos like AT&T and Verizon and independent players like West Corp’s Intercall and Premiere Global Services, see an opportunity to drive renewed growth from providing video services on top of the audio bridging services they’ve provided for years. 6) Video bridging companies that have been attempting to create this market for nearly a decade, such as Glowpoint, BCS, and BT Conferencing have an interest in making sure they remain relevant as video cloud finally become a reality.The Video Cloud November 28, 2011 Page 9 of 23
    • Morgan Keegan Equity Research 7) New entrants such as BlueJeans Networks, and cloud-based voice providers such as Broadsoft and 8x8 are taking advantage of this architectural change to enter the video conferencing market for the first time. Interesting Strategic Questions That Will Be Answered In The Next 2-3 Years It is unclear at this early stage of market development how all of these disparate market participants will react, but we expect multiple partnerships, and potentially mergers and acquisitions amongst these previously disparate groups of IT hardware, software and service vendors. 1) For instance, if Polycom, Cisco and LifeSize are launching their own cloud video services, aren’t IT departments going to want to bundle audio conferencing minutes as well? And if so, would it behoove these vendors to buy an audio conferencing service provider with a global telco network? Or to build one de novo? 2) Do software companies like Microsoft and IBM need to own video conferencing vendors to complete deep integration of video into their UC platforms? Or are their recent partnership initiatives enough? 3) How does Polycom, Cisco and Lifesize setting up their own cloud-based networks impact their relationships with large telcos who likely have long-term objectives to dominate such a customer offering? 4) Do traditional audio conferencing and web conferencing vendors now serve as large potential customers for the video conferencing equipment providers as they look to add video to their feature mix? Or are they head to head competitors? It is WAY too early to jump to any conclusions on how cloud-based video will impact the UC market, which is already in strategic flux.The Video Cloud November 28, 2011 Page 10 of 23
    • Morgan Keegan Equity Research Our assumption is that 10 years from now there will be 3-5 large vendors that will dominate on premise UC with most desktop PCs having IM, PBX, web conferencing, video conferencing capabilities on a single software client (one would have to put Microsoft and Cisco as most likely to succeed in this regard). We would then expect a large number of cloud-based participants to be able to succeed selling parts of the UC stack on a cloud-based basis (video, voice, IM, email, etc.) as IT departments look to outsource more, and employees look to improve their own productivity without having to wait for IT to make purchase and support decisions. What Will the Mix of On-Premise vs. Cloud-based Video Conferencing Ultimately Be? We believe the audio conferencing world has already answered the question of whether on premise or cloud-based solutions will ultimately win out for video conferencing. For the past 15 years or so there have been both cloud-based and on-premise based solutions for audio conferencing bridging. The vast majority of audio conferencing usage and revenues accrues to the cloud-based providers (i.e., service providers). We believe about 80% of worldwide audio conferencing usage happens on an outsourced (or cloud) basis, with about 20% taking place using on-premise equipment owned by enterprises. For audio conferencing equipment vendors, about ¾ of the market opportunity is in the service provider market, and only ¼ in the enterprise market. The logic behind this is largely due to availability and ease of use, as on a cloud-based offering, ad hoc conference calls are much more viable, while using an on-premise bridge requires scheduling ahead of time to make sure there are enough free ports on the bridge to satisfy all the participants. Additionally, the economics of cloud-based offerings are compelling as service providers can manufacture bridging minutes far more cheaply than even the largest of enterprises due to scale and purchasing power. We believe both of these dynamics will hold as the video conferencing market transitions to the cloud. We expect “ad hoc” video conferencing to become much more popular over time, and for the price of cloud-based services to continually drop, making the enterprises’ investment in hundreds of thousands of dollars of MCU resources make less and less sense. However, we note that today, many large companies have hybrid environments where regularly scheduled audio meetings are typically held on an on-premise bridge, while ad-hoc meetings are held using a cloud-service provider. We expect a similar dynamic to occur in video as well, leaving the IT department in charge of making sure regularly scheduled video conference calls are of high quality, while ad hoc video calls made by the sales department, human resources personnel, etc. may utilize a cloud services provider rather then going through the hassle of setting up time on a video bridge with IT.The Video Cloud November 28, 2011 Page 11 of 23
    • Morgan Keegan Equity Research How Will The Video Cloud Develop? In today’s world, a worldwide monopoly provider of video is highly unlikely (but possible when one considers the potential for a Skype-type service), but many of the same steps taken by AT&T to make it easier to place phone calls 100 years ago must be done on a consortium basis for video today. These steps include setting up common directories, interoperability testing and certification between telecom carriers and networks, and of course the technical challenge of ensuring that high quality video can be sent and received seamlessly to and from a heterogeneous mix of computing end points with vastly different processing capabilities. These endpoints include dedicated conference room end points, PCs, tablets, mobile phones, etc. The video conferencing industry has taken a turn of late and has largely come to the conclusion that waiting for telecom carriers to address all of these issues is a recipe for cloud-based video conferencing delays. Therefore, each of the major vendors and a number of smaller companies have pushed forward with deployment of their own “video clouds” for the enterprise. The idea with most of these is pretty similar in that enterprises that sign up for a certain video cloud service pay a monthly fee or per-minute fee and can simply access any other video end point in that cloud. If one would like to set up a call with a video end point outside of this video cloud, that end point will have to dial into a bridge as a guest. In a certain sense, we view these first generation video clouds as a baby step towards the ultimate industry solution of a universal video cloud, where all video end points would be easily discoverable and interoperable worldwide. The industry will move from millions of “silos of communications” within enterprises globally today to a few “silos of communications” managed by video conferencing vendors and a few service providers.The Video Cloud November 28, 2011 Page 12 of 23
    • Morgan Keegan Equity Research 1990s – 2011: On Premise Deployements with Limited Device/Network Interop 2011+: First Generation Clouds: Many Competing Clouds; Interop Somewhat Limited 2015 +: Ultimate Video Cloud: Consolidation, Consortium, Federation Will Create The True Video Cloud There are at least 2 significant industry consortiums built around setting the standards for a true global Video Cloud. 1) OVCC – Launched officially in early October 2011, the Open Visual Communications Consortium connects service providers to increase the adoption of B2B communications. The consortium, developed by Polycom, is an exchange designed to support open standards that will help drive increased B2B applications. The OVCC will support aThe Video Cloud November 28, 2011 Page 13 of 23
    • Morgan Keegan Equity Research variety of video formats and will have access to enterprises through private line QoS networks and public internet. A number of telecom carriers and video conferencing service providers have joined the consortium and will develop best practices and technical specifications based on industry standards in order to address interoperability and coordination issues. 2) UCIF – The Unified Communications Interoperability Forum launched in May 2010 with the goal of enabling interoperability of UC hardware and software across organizations. The forum will work on building a common communications framework through existing standards, publish guidelines, and interface with other standards groups and liaise with regulatory bodies. The UCI Forum has leadership from LifeSize, Microsoft and Radvision. There are numerous members from all areas of the UC industry. However, as in any industry consortium, we expect progress to be slow, and for the current slate of video clouds to become marketplace successes long before these consortiums agree on set standards. We expect these consortiums will ultimately be used as mechanisms to guarantee interoperability between the numerous video clouds that are likely to grow in the next several years. Market Opportunities The tremendous change that is occurring in the enterprise video conferencing space will likely create significant challenges and opportunities for a number of entities as outlined in the report. Estimating the potential market size that cloud-based video could have is challenging to say the least because of the tremendous changes in technology architectures, business models, and competitor dynamics that are likely to occur. However, we attempt to size the market anyway, and use a few assumptions to do so. 1) Traditional room-based conferencing end points will continue to grow, but likely less than the 20%-30% rates seen since 2006 as the HD upgrade is nearing completion, and companies divert more budget towards getting video on desktops/mobile devices. We note that we continue to believe room-based conferencing end points will grow, as many small companies with absolutely no reason to buy a room system today (nothing to connect it to), will be much more likely buyers in a cloud-based world. 2) Software-based end points – Whether the end points are put on desktop PCs, tablets, or smartphones, the price of the client will likely trend towards zero, and likely be bundled with infrastructure sales (either on-premise or cloud-based). 3) On Premise Infrastructure will likely stabilize after many years of strong growth as many large companies will likely continue to choose to deploy MCUs, but we suspect smaller companies and many ad-hoc meetings within large enterprises will eventually take place over cloud-based video networks. Additionally, infrastructure pricing will likely declineThe Video Cloud November 28, 2011 Page 14 of 23
    • Morgan Keegan Equity Research substantially as x86-based servers eventually replace dedicated MCUs and mechanisms such as SVC replacing AVC and the need to transcode. 4) Cloud-based video services will grow substantially off of a low base, and we presume will ultimately make up the vast majority of video conferencing usage. Gartner’s Forecast Research firm Gartner*, provided the following forecast for video conferencing revenue in a report earlier this year. Source: Gartner, Market Trends: Videoconferencing, Worldwide, 2011 Although the chart above does show nice growth from 2008-2015, the going forward CAGR from 2011-2015 is just 4.5% for all hardware categories as conference room end point and infrastructure businesses begin to mature. However, services revenues remain robust, at a 17% CAGR, driven by infrastructure services revenues (i.e., cloud-based video revenues) growing from $113 million in 2011 to $470 million by 2015. In general, this forecast makes sense to us, since it shows conference room sales growth slowing, but still positive, and infrastructure revenues transitioning from hardware-based MCUs to software-based MCUS and services. *All statements in this report attributable to Gartner represent Morgan Keegan & Co.’s interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this research report). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice.The Video Cloud November 28, 2011 Page 15 of 23
    • Morgan Keegan Equity Research Alternative Ways To Size the Cloud-based Video Conferencing Market Audio Conferencing Analogy - Another way to size the cloud-based video conferencing market is to use audio as an analogy, as the audio conferencing industry is decades down the path of a cloud-based deployment model. There are roughly 100 billion audio conferencing MOUs annually globally according to Wainehouse Research, and if we assume 5%-10% of these will utilize video as well when prices become reasonable, that is 5 -10 billion MOUs at $0.10/MOU ultimately, gets you to a $500 million - $1 billion market ultimately for video conferencing services. Top Down - In 5 years, voice minutes globally are expected to be 16 trillion annually based on data from the Telecommunications Industry Association. If we assume 5%-10% are video (3% of skype calls are video today, so 5% seems reasonable), that gets us to 800 billion - $1.6 trillion video MOU annually. In the audio world, roughly 1% of total end user revenues are for conferencing, with the rest for 1x1 calls. If we assume the same 1% ratio applies to video conferencing vs. 1x1 video, then 8 - 16 billion MOU of service provider-based video conferencing globally will ultimately occur. Using the same assumption that pricing goes to $0.10/MOU per bridge port, then there should ultimately be $800 million - $1.6 billion in service provider revenue from video conferencing services. What If Every Virtual Meeting Was Video? Just in order to gauge an upside scenario for the video cloud, what if we envision a world in which every virtual meeting included video and audio, which is certainly conceivable if every desktop and enterprise tablet is shipped with a high quality video client. The Audio conferencing market is relatively mature today, and as noted above, generates about 100 billion in MOUs annually. Assuming the same $0.10 ASP, this would equate to a service provider opportunity of about $10 billion annually. To support this volume of conferencing, the audio conferencing industry ships about 1.5 million bridge ports per year (Wainehouse), which would equate to the amount of video MCU ports that would need to be shipped to support similar levels of video conferencing volume. If we presume pricing comes down to $1,000/port (which could happen rapidly with software-based MCUs and/or SVC-based solutions) from $2,000-$10,000/HD port today, then this would equate to a market opportunity for equipment vendors of approximately $1.5 billion annually. What cannot be fully addressed is the potential for video to be simply added as a feature to full unified communications software portfolios, which over the long term, we expect will be the case. Whether this means that UC vendors will actually own networks, or other service providers would step in to provide video conferencing services is unclear at this nascent stage, but in this scenario, traditional video conferencing vendors would likely be serving a market consisting of selling various infrastructure to the UC vendors or service providers. Ultimately, the upside scenario for equipment vendors under this scenario would be the same as noted in the paragraph above ($1.5 billion) if every meeting ultimately became a video meeting. Market Opportunity Summary - Although it is quite early to attempt to size the market for cloud video services in the enterprise, we believe that a market opportunity growing to somewhere in the $500 million - $1 billion is a reasonable assumption based on Gartner’s forecast, and some quick math based on the experience of the audio conferencing market. Starting from a base of just over $100 million today, this represents tremendous growth, andThe Video Cloud November 28, 2011 Page 16 of 23
    • Morgan Keegan Equity Research explains why all video conferencing vendors are taking strategic action to address this opportunity. If video becomes a truly ubiquitous enterprise capability on all PCs and tablets, then we can estimate a potential best case scenario of upwards of $10 billion annually in service provider revenue from the video cloud and about $1.5 billion annually for equipment supporting that cloud. Video Cloud Initiative Summary Below, we summarize the video cloud initiatives from companies that have made announcements or launched service in the US. We note that we have left out traditional telecom service providers, many of whom have operated video bridging services for some time. Cisco – Cisco is the largest video conferencing equipment vendor, and the largest web conferencing vendor through its Webex service. The company recently re-launched its “Callway” service, which allows unlimited video calling between any standards-based video conferencing end point for $99/month for up to 12 participants. Cisco also integrates video into the Webex service, and for $49/month offers up to 25 online participants, and 6 video participants on a web conference. Cisco has positioned its CIUS tablet as an end point to integrate video conferencing into its IP PBX systems. We suspect Cisco desires the proliferation of video conferencing in part as a driver to sell its routers/switching equipment because of the substantial loads it could add to the network. Polycom – Polycom is one of the largest and most prominent players in the video conferencing industry. Polycom is increasingly marketing products and solutions aimed at SMB with easy to setup, lower cost systems. Its recent acquisition of HP’s Visual Collaboration Unit provided it with the Halo Video Exchange Network. Polycom recently announced that it will offer cloud video services on its own network (utilizing HAVN initially), but pricing has not been announced. Polycom is also working to increase interoperability in the video conferencing environment by creating the Open Visual Communications Consortium (OVCC). Glowpoint – Glowpoint provides cloud managed video services and telepresence solutions between any endpoint, network and business. Customers can choose between Glowpoint’s fully hosted services or its management of on-premise infrastructure and endpoints. The company supports over 6 thousand telepresence systems and more than 450 organizations directly connected with thousands more participating annually. LifeSize Connections – LifeSize Connections is a cloud-based HD video conferencing platform with immersive, enterprise-level quality. The solution offers seemless integration among meeting rooms, PCs and Mac computers, auto configuration of endpoints, integrated firewall traversal and encrypted, web-based administration and bandwidth control. Connections is a simple click-to-call solution with up to 9-way multipoint calling. Pricing is $30 per user per month for desktop clients or $100 per end point per month for room-based systems. Vidyo – Vidyo products utilize H.264 SVC, negating any need for transcoding via MCUs, and therefore creating theoretically far cheaper way to process video conference calls. Vidyo offers its fully integrated client/router solution to a number of conferencing service providers aroundThe Video Cloud November 28, 2011 Page 17 of 23
    • Morgan Keegan Equity Research the world, and also sells room-based end points and PC/Mobile applications based on its SVC technology. Generally, we would expect pricing from service providers utilizing Vidyo to be lower than those using full MCU transcoding when connecting to other Vidyo end points. Citrix – Citrix’s GoToMeeting enables online meetings for up to 15 attendees and up to 6 simultaneous video streams. Meetings can be joined from PCs, Macs, iPhones or Android devices. The software easily integrates with Microsoft Outlook and for meetings to be scheduled and started is just a few clicks of the mouse. The company recently announced its video add-on called HD Faces. Pricing for unlimited meetings is $49/month (video add-on is free.) Radvision – RADVISION is a traditional video conferencing equipment vendor with a broad range of conference room end points, infrastructure and desktop softoware. Scopia Desktop is RADVISION’s desktop client, which is also available on certain mobile platforms (Scopia Mobile). Scopia Mobile enables meeting participation from iOS devices with the ability to view shared documents, up to 28 meeting participants and easily control and administer meetings remotely. RADVISION has sold infrastructure to service providers for many years, and we expect that this is how the company will target the cloud market. Premiere Global Services – Premiere Global Services is a large audio conferencing service provider, and launched its iMeet and GlobalMeet web-based collaboration products early this year. iMeet provides an online meeting room for $40 unlimited audio/video/web collaboration per month. Participants setup their own conference rooms online and can communicate with up to 15 other participants simultaneously. Each participant is presented in their own cube, which glows when that person is speaking. Participants can also access meetings from their mobile phones. BCS – BCS is a UK based provider of managed videoconferencing and telepresence solutions. Its solutions span a range from video conferencing room rentals to desktop video to full telepresence suites. Its focus is on providing video conferencing as a service, and with its global video exchange, users can engage in video conferences regardless of endpoints or network infrastructure. The company’s management team has extensive experience in industry. CEO, Clive Sawkings has years of UC and telepresence experience. His previous experience includes Cisco, Avaya and Nortel. BlueJeans Network – BlueJeans Network provides a cloud-based video conferencing service, launched earlier this year. Available plans include $0.50/participant minute or $69/500min per month or $99/1,000min per month or $199 unlimited. Up to 25 participants can attend each meeting on all plans except unlimited, which has a 5 person limit. Participants are invited into the meeting through an email link, which directs them to the meeting web site, while room- based systems are given an IP address to dial into the video conference. Nefsis – Nefsis has been providing cloud-based video services for over a decade, and offers solutions ranging from free 1x1 desktop video to complete outsourced video conferencing for companies around the globe. The pricing for multiparty conferencing is separated into two options – concurrent service and named user service. For any 25 concurrent users the rate isThe Video Cloud November 28, 2011 Page 18 of 23
    • Morgan Keegan Equity Research $10,800/year ($36/month). For a named user, up to 100 participants can join for $2,500/year, or a user can sign up to only host calls up to 5 participants for $1,200/year ($100/month). BlinkMind – BlinkMind’s FlexBridge Video Conferencing solution is a cloud-based MCU that provides high-quality multi-person video conferencing solutions. Although the FlexBridge solution is software-based, preventing the need for expensive bridging hardware, there is a 16 participant limit (for active participants). Summary Points 1) A number of factors are converging to create unprecedented opportunity and disruption in the traditional video conferencing market. These factors include the following.  Inter-company video supplanting the intra-company video model of today  New business models revolving around cloud-based solutions  Video being added as a feature in UC/web conferencing applications  Codec improvements that allow HD quality at below 1.5 Mbps  New video processing methods that lower the processing intensity of video bridging  Moore’s Law finally allowing cost effective x86 processing for transcoding  Cloud-based computing platforms beginning to be used for video processing  Tablets/Mobile Computing driving increased use cases for video in the enterprise  New employees bringing video into the enterprise without IT consent  SIP and MPLS substantially lowering the cost of bandwidth vs. T1s  New entrants taking advantage of one or more of these disruptions 2) We believe these factors are driving the industry to the creation of a “video cloud” for enterprise communications. We expect this to take many years, and in its first form be a series of competing “video clouds” that are ultimately linked through consortiums. 3) Traditional video conferencing equipment vendors, led by Cisco and Polycom, have substantial new opportunities open to them through the creation of a “video cloud,” but also unprecedented competitive and cannibalization risks as the age of large hardware- based sales is slowly replaced by free client software and recurring monthly fees. 4) Potentially as much as a $1.5 billion incremental opportunity annually for equipment vendors is available by selling into the “video cloud,” but in the near to intermediate term, a market in the hundreds of millions of dollars is more likely. 5) We believe there will likely be substantial merger and partnership activity for many years to come as video is added as a feature in the UC portfolio. Ultimately, one has to imagine a single vendor will be providing voice, IM, video, and web collaboration on a bundled software platform capable of running on any computing device, which may or may not be bundled with telecom service in a cloud deployment. No single vendor accomplishes this today (although Cisco comes closest).The Video Cloud November 28, 2011 Page 19 of 23
    • Morgan Keegan Equity Research 6) It is too early to confidently say what vendors will create or destroy equity value in this transition, but it is clear that effective strategic leadership in understanding and managing through this generational shift in video consumption in the enterprise has never been more important. Public Companies Mentioned: Logitech (LOGI, $7.51, M-S) Cisco (CSCO, $17.92, O-M) Polycom (PLCM, $16.51, M-S) Radvision (RVSN, $4.90, M-S) IBM (IBM, $181.31, NR) Apple (AAPL, $376.51, O-M) Microsoft (MSFT, $24.79, NR) ShoreTel (SHOR, $5.89, NR) AT&T (T, $28.08, NR) Verizon (VZ, $36.19, NR) Premiere Global (PGI, $7.46, O-S) BT Group (BT, $28.33, NR)The Video Cloud November 28, 2011 Page 20 of 23
    • Morgan Keegan Equity Research ADDITIONAL INFORMATION AVAILABLE UPON REQUEST IMPORTANT DISCLOSURES The research analyst responsible for the preparation of this report does not hold investment positions of any nature in the securities of this issuer. The research analyst responsible for the preparation of this report is compensated in part on the firm’s investment banking revenue but is not compensated based upon specific investment banking services transactions. As of the date of this report, Morgan Keegan & Co., Inc. makes a market in LOGI, CSCO, PLCM, RVSN, and AAPL. Morgan Keegan & Co., Inc. expects to receive or intends to seek compensation for investment banking services from PGI in the next 3 months. PERFORMANCE RATINGS: O = OUTPERFORM (Expected to outperform the S & P 500* over the next 12 months) M = MARKET PERFORM (Expected to perform in line with the S & P 500* over the next 12 months) U = UNDERPERFORM (Expected to underperform the S & P 500* over the next 12 months) *REITs performance benchmark is total return relative to the NAREIT Equity Index. For regulatory purposes, our ratings of Outperform, Market Perform and Underperform most closely correspond to Buy, Hold and Sell, respectively. SUITABILITY RATINGS: S = SPECULATIVE (Business or balance sheet risk materially above that of the average U.S. public company) M = MARKET RISK (Business or balance sheet risk not materially different from the average U.S. public company) C = CONSERVATIVE (Business or balance sheet risk materially below that of the average U.S. public company) Morgan Keegan Companies Rated: Investment Banking Clients within last 12 months: Outperform / Buy 61% Market Perform / Hold 34% Outperform / Buy 17% Underperform / Sell 1% Market Perform / Hold 11% Not Rated 4% Underperform / Sell 67% Not Rated 6%The Video Cloud November 28, 2011 Page 21 of 23
    • Morgan Keegan Equity Research ANALYST CERTIFICATION The research analyst responsible for the preparation for this research report certifies that: (a) the views expressed in this research report accurately reflect the research analysts personal views about any and all of the subject security(ies) and issuer(s), and (b) no part of the research analysts compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. Twelve-month price targets for securities under coverage may be based upon various valuation metrics including without limitation: price/earnings, ratios, price/sales, EV/EBITDA, DCF, etc. Price targets are, as of the date of the report in which they appear, subject to change and imply no guarantee of performance. This research report may contain a short-term trading idea which highlights near-term catalysts or events affecting the company, its competitors or the market that should have a short-term price effect on the companys shares. Short-term trading ideas are not related to a stocks performance rating, which focuses both on a longer-term return and attractiveness for investment relative to the relevant benchmark. Short- term trading ideas are different from performance ratings and, by their very nature, will be more positive or more negative than the performance rating. This research report is not intended to provide personal investment advice and does not take into account the specific investment objectives, financial situation, or particular needs of any specific person. No security or investment strategy can suit all investors. Investors should seek financial advice regarding the appropriateness of their investing in any security or implementing any investment strategy discussed in this report and should understand that any statement in this report regarding future prospects may not be realized. ADDITIONAL DISCLOSURES The information contained in this report is based on sources considered to be reliable but is not represented to be complete and its accuracy is not guaranteed. The opinions expressed reflect the judgement of the author as of the date of publication and are subject to change without notice. This report does not constitute an offer to sell or a solicitation of an offer to buy any securities. Morgan Keegan & Co., Inc., a subsidiary of Regions Financial Corporation, and its officers, directors, shareholders and employees, and affiliates and members of their families may have positions in these securities and may, as principal or agent, buy and sell such securities before, after or concurrently with the publication of this report. Morgan Keegan & Co., Inc., member FINRA, SIPC, is a registered broker-dealer subsidiary of Regions Financial Corporation. Investments are NOT FDIC INSURED, NOT BANK GUARANTEED and MAY LOSE VALUE. For more information about Morgan Keegan disclosures, please go to http://mk.bluematrix.com/sellside/Disclosures.action *All statements in this report attributable to Gartner represent Morgan Keegan & Co.’s interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, Inc., and have not been reviewed by Gartner. Each Gartner publication speaks as of its original publication date (and not as of the date of this research report). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice. The Video Cloud November 28, 2011 Page 22 of 23
    • RESE ARCH STAFF CONSUMER SERVICES INDUSTRIAL/CONSTRUCTION Restaurants Distribution Robert M. Derrington 615.665.3656 Brent D. Rakers, CFA 901.579.4427 Destin M. Tompkins, CFA 615.665.3648 Anjali R. Voria, CFA - Associate Analyst 901.531.3345 Joe Drake - Associate Analyst 615.665.3638 Manufacturing Auto. Aftermarket/C- Stores/Specialty Retail/Spec. Sit. J. Keith Johnson 901.531.3429 John R. Lawrence 901.579.4203 Benjamin Brownlow - Associate Analyst 901.531.3366 REAL ESTATE Pete Watson – Associate Analyst 901.579.4584 REITs Stephen C. Swett 212.508.7585 ENERGY Jason M. Payne – Associate Analyst 901.531.3327 Energy Infrastructure/MLPs Matthew W. Cantrell – Associate Analyst 901.531.3397 John D. Edwards, CFA 713.840.3622 Scott K. Fogleman - Associate Analyst 713.840.3648 SECURITY & DEFENSE Dan H. Hinds, Jr., CFA, CPA – Assoc. 713.840.3689 Brian W. Ruttenbur 615.665.3622 Peter K. Kostiuk - Associate Analyst 615.665.3658 Energy Services Roger Read 713.840.3656 TECHNOLOGY Lauren Hendrix - Associate Analyst 713.840.3628 Communications Equipment Exploration and Production Simon M. Leopold 212.508.7566 Chris Pikul, CFA 303.893.6904 Victor W. Chiu – Associate Analyst 212.508.7588 J. Douglas Atkinson - Associate Analyst 303.893.6928 Georgios Kyriakopoulos – Assoc. Analyst 212.906.3707 Communications Technology FINANCIAL SERVICES Tavis C. McCourt, CFA 615.665.3644 Regional Banks Matthew P. McKee – Associate Analyst 615.665.3864 Robert S. Patten 212.508.7573 Ebrahim H. Poonawala 212.508.5241 Enterprise Software Ravi Gill, CPA – Associate Analyst 212.508.5214 Michael B. Nemeroff 212.909.4029 Michael J. Anderson – Associate Analyst 212.909.4030 Specialty Finance Robert J. Dodd, Ph.D. 901.579.4560 Infrastructure Software & Security Robert M. Ladyman – Associate Analyst 901.531.3331 Jonathan Ruykhaver, CFA 415.293.8172 A. Dixon Braden – Associate Analyst 901.531.3461 Aleksandr Zukin – Associate Analyst 415.293.8171 HEALTHCARE Internet & e-Commerce Healthcare IT Justin T. Patterson, CFA 615.665.3654 Jamie Stockton, CFA 901.579.3501 Samuel A. Cashiola – Associate Analyst 615.665.3861 Stephen Lynch – Associate Analyst 901.531.3242 Semiconductors/System Area Networks Healthcare REITs/Healthcare Services Harsh Kumar 901.579.4534 Robert M. Mains, CFA 518.581.8159 Will Covington - Associate Analyst 901.531.3348 Chad Vanacore – Associate Analyst 518.581.8370 Transaction Processing Hospital Supplies & Equipment Robert J. Dodd, Ph.D. 901.579.4560 Lawrence S. Keusch 617.790.3058 Robert M. Ladyman – Associate Analyst 901.531.3331 Konstantin Tcherepachenets, CFA – Assoc. 617.790.3063 A. Dixon Braden – Associate Analyst 901.531.3461 Medical Devices TRANSPORTATION Jan D. Wald, Ph.D. 617.790.3059 Air Freight/Intermodal/LTL/Railroads/Trans. Equipment Erica Layon – Associate Analyst 617.790.3052 Art W. Hatfield, CFA 901.579.4868 Charlie Wang - Associate Analyst 617.790.3041 Derek Rabe, CFA - Associate Analyst 214.365.5518 R. Alex Scott – Associate Analyst 901.531.3461 E. Elkan Scheidt Director of Research Maritime Shipping/TL Carriers 901.579.2702 Chaz G. Jones 901.531.3417 Mark Lamarre Assc. Director of Equity Research 901.579.4269 www.morgankeegan.com WATS: U.S.: 1.800.366.7426 MORGAN KEEGAN was founded in 1969 to provide sound investments for investors and to raise capital and provide advisory services to corporations, governments and institutions. As a result of the success of this original mission, Morgan Keegan has developed an international business with specific focus in the following industry sectors: consumer, energy, healthcare, transportation services, technology, real estate and financial institutions. Morgan Keegan has focused its research, investment banking and trading resources in these sectors and will continue to build depth of service in these sectors for the benefit of investors, corporations and institutions. Page 23 of 23