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Video's Star Rises at Cisco

The WebEx deal points to an area of real growth.

Cisco

(CSCO) - Get Report

means business with its video push.

If last year's $6.5 billion acquisition of cable set-top box maker Scientific Atlanta didn't make that sufficiently clear, it should be abundantly obvious now with Thursday's

TST Recommends

WebEx

(WEBX)

deal.

Cisco's $3.2 billion all-cash offer for WebEx, representing a 23% premium over Wednesday's stock price, gives the Internet gearmaker an array of video conferencing products for office workers. (Please see our

video on the deal.)

WebEx is one of the leaders in what's called collaborative technology and video to the desktop.

Consider this: Web meetings you can attend via your office computer. Everyone in the virtual conference room can do pretty much what they would do in a conventional meeting, including doodle on a shared virtual whiteboard. It's a little like having PowerPoint in Sensaround.

Cisco fans are ecstatic over the deal. Not only will it give the San Jose, Calif., tech hardware shop an immediate lead over

Microsoft

(MSFT) - Get Report

in the field of unified office communications, it potentially opens a path to Cisco's video-everywhere goal.

"Cisco sees this as a way to sell video; that's the key for the next major leg of growth," says a hedge fund manager who is long Cisco.

Just as Scientific Atlanta supplies TV infrastructure for consumers, WebEx systems deliver Net video, voice and interactive document services to businesses. Observers point out that on a simple big picture level, both acquisitions are involved with creating and delivering more network traffic.

And this of course is good news if you're a company such as Cisco, whose main business is selling equipment that allows telcos and business to handle more data traffic.

As trends go, analysts like the growth potential for video.

"This is what it's all about," says one hedge fund manager who owns Cisco.

The TV business is undergoing a huge shift as telcos and cable companies upgrade to new set-top boxes to offer advanced digital services like pause and rewind of broadcasts and high definition videos.

In the office, video is even at an earlier stage. Web cameras and microphones are far from widespread. But industry watchers say that as the collaboration through virtual meetings gains momentum, users will opt for more improvements to virtual conference conditions. Technology such as high-definition video and audio will help make these meetings more realistic.

This ultimately pushes up the bandwidth demands and, as luck would have it, outfits such as Cisco are called on to supply bigger, faster Net gear.

Cisco's latest leap into Net video helped push up shares of other video-over-Internet system suppliers, such as

Radvision

(RVSN)

, which rose $1.31, or 6%, to $22.83 Thursday.

Despite a collapse of the IT market in 2002 and Microsoft's entry into unified communications in 2003, analysts say WebEx has managed to succeed.

"Microsoft didn't kill them, as people expected," says one Boston-based investor who owns Radvision.

Now it will be Cisco and Microsoft that square off on office video. And observers say both will need to make more acquisitions to be effective.

Cisco shares were down 4 cents to $25.81, and WebEx was up $10.25, or 22%, to $56.45.