Why Cisco Opted Not to Sell or Spin Off Webex

About a year ago, I wrote the No Jitter article, “Should Cisco Sell or Spin Off Webex?,” speculating in a slightly controversial hue why I thought Cisco should consider selling off or spinning out its Webex assets. In my conversations with current and former Cisco insiders, I’ve come to understand that the article may have partially influenced a reduction in force, with some Webex personnel leaving voluntarily and others being laid off.

 

Instead of divesting its collaboration business unit, Cisco has invested in new management and significant acquisitions. Leadership has made sweeping changes to the product, sales motion, and marketing since I wrote my article, compelling me to reexamine Webex’s position in the market and the technology’s future as the essential component of Cisco’s communications and collaboration strategy.

 

In this article, I’ll review the points I made last year, contrasting and comparing them to where Webex is today.

 

A year ago, the collaboration group at Cisco had seen three general managers over the period of a few months. Now, under the guidance of Jeetu Patel, EVP and GM – Security and Collaboration, and Javed Kahn, SVP and GM – Collaboration, management has stabilized and orchestrated a remarkable turnaround for Webex. The Webex service weathered the increase in COVID-19 traffic with very few hiccups, and the development team has introduced over 800 new features.

 

Couple this with multiple acquisitions — BabbleLabs (AI-based audio noise removal), IMIMobile (Webex contact center multichannel customer engagement), Slido (audience interaction platform), and Socio Labs (event technology to augment Webex Events) — and it is clear that these executives are not just sustaining Webex, but are strengthening and broadening it into a communications platform and hub. As I write this article, the team has fully integrated BabbleLabs and Slido with Webex and the IMIMobile integration will release this month.

 

We’ve seen the cadence of product updates and product briefings increase markedly over the past year, with new updates announced every month and product briefings held every four to six weeks.

 

I wrote a year ago that the “Webex” brand had been removed from the consciousness and vernacular of the masses in general and that the company needed to “rebrand Webex, since that name has lost some of its luster, and relaunch it to the market.” At one time, people used to say, “Let’s do a Webex meeting”; now they say, “let’s do a Zoom meeting.” Webex was the “go-to” product for remote collaboration by Boomers and Gen Xers, but many of the Gen Yers and Gen Zers and the rising Gen Alphas have never heard of it. Webex had become a stodgy, dated product for large, inflexible organizations, failing to take into account the influence consumers have on technology adoption and utilization.

 

Webex CMO Aruna Ravichandran and her team of marketeers is changing this image. Cisco is investing significant marketing dollars in a revitalization campaign for both the Webex branding and the product persona. The company is endeavoring to make Webex look modern, hip, exciting, and cool (see a related No Jitter article on the new Webex branding). It is also focused on expanding in the consumer space with new free offers and appeal.

 

The partnership with McLaren Racing is a good example of how Cisco is approaching its image challenge. This partnership is all about changing the Webex image from stodgy and old to hip and new. With this marketing initiative, Cisco is targeting wealthy executives who like racing with the messaging that Webex is as cool and fast as McLaren, and its use will make their companies cool and sophisticated as well.

 

Prior to this partnership, the McLaren team used only the basic capabilities of a competitive solution. However, Cisco didn’t just want a sponsorship opportunity. Rather, it wanted to build a real technology partnership in which Webex accelerated and enhanced the partner’s own business.

 

To that end, McLaren now supports interactive sessions between drivers and key fan groups using Webex, and it has launched a series of streaming broadcasts via Webex Events that has allowed McLaren to reach larger audiences than ever. The key demonstrable outcome is how a Webex solution can transform and optimize business overall, especially when the opportunity involves a strong consumer interaction aspect.

 

It this revitalization initiative working? Well, according to Cisco, between June 8 and June 30, the Webex-McLaren video ad chalked up 59 million social media impressions and 56 million views, with 99.9% of the viewers watching for the entire 31 seconds. In addition, Cisco has seen interest in Webex from some large companies whose CEOs attended an exclusive McLaren-hosted and Webex-branded racing event in the U.K.

 

Frankly, after viewing these ads with the new Webex logo and branding it is hard not to see Webex as a cool, hip, fun, fast, modern collaborative product. McLaren is a global winner, and by association, Webex is inheriting this persona.

 

Besides the McLaren partnership, other branding/marketing initiatives for Cisco include the NBA, the NFL, and the English Premier League (football, or soccer, as the Americans call it).

 

The proof of how well this rebranding and marketing initiative is really working will show up in Cisco’s Application group revenues in future earnings disclosures.

 

A year ago, I noted that Cisco needed to get to a globally consistent offering. With the BroadSoft acquisition, closed in February 2018, Cisco gained 50 million cloud telephony subscriptions hosted on the BroadWorks cloud UC platform. But, it also acquired 600+ partners, each of which had its own BroadWorks servers and service wrappers, some of which are Webex competitors. The inconsistency of the two offers, Webex Calling with Webex Meetings and BroadWorks with various third-party add-ons, both owned by Cisco caused confusion in the market.

 

Since then, Cisco has developed a strategy for transitioning its BroadWorks partners to Webex Calling, at the partner’s own pace. As a first step, these partners can upgrade the software on their own servers to Webex for BroadWorks. This version of BroadWorks tightly integrates with Webex Meetings while still allowing the service provider to have its own calling service. Webex for BroadWorks allows the partners to receive the same feature upgrades Webex Calling receives at the same development cadence, but the feature set between Webex Calling and Webex for Broadworks may differ slightly as each partner rolls this out. Once Webex for BroadWorks is deployed, these partners can expand their offering by selling Webex Meetings (which is frankly far superior to the meeting capabilities available in BroadWorks alone).

 

As a second step, these partners may then transition their customers to Webex Calling, hosted by Cisco, and decommission their own/BroadWorks servers. By transitioning this base over to Webex Calling, Webex will then enjoy a consistent solution globally that will compete more effectively with Zoom, Microsoft, RingCentral, etc. These partners will remain a key element in Cisco’s go-to-market strategy for the SMB market.

 

Cisco hopes that most of its partners will move their installed bases off of BroadWorks and to Webex Calling and the full Webex Suite within the next 18 to 24 months; however, Cisco has reiterated that partners can transition at their own pace. There may be some large carrier partners that will maintain their own BroadWorks servers and calling services for a long time simply because they have invested so much into that architecture and have branded complete service wrappers around it. However, these large carriers can also sell the Webex Suite alongside their own private-label offering. Over time, customers will ultimately decide which option is best for them, but regardless, the strategy assures that Cisco will be optimally positioned to sell meetings and video into that base as well as be positioned for the transition to Webex Calling at some point in the future.

 

Another significant change Cisco has introduced over the past year makes Webex Calling available for purchase directly from the Webex.com website. A year ago, I pointed out that most of Webex’s competitors had this option, and people couldn’t even try Webex Calling without the friction of going through a partner.

 

Cisco now sells Webex Calling direct from its website for accounts with up to 100 licenses; above that number, customers must go through the partner network. However, all customers, whether they’ve procured licenses from Cisco or a partner, can handle new number provisioning via the Control Hub management portal.

 

A year ago, Cisco still had multiple communication and collaboration apps, although it had hinted about consolidation into a single app framework for several years. I had suggested that Cisco bite the bullet and consolidate meetings, calling, team workspaces, etc., into a single app — which it did earlier this year, along with retiring the Webex Teams name in favor of having everything under the single Webex brand. You can still purchase meetings and calling services separately, but Cisco now exposes those services through the single, consistent Webex app used for calling, video, meetings, team workspaces, and events, similar to competitive offerings.

 

After analyzing Webex and competitor pricing a year ago, I felt that Cisco had priced Webex too high in light of the pricing from competitors, and I suggested that it should reduce the license fees.

 

This has some implications, however, because I pointed out that Cisco requires premium pricing for its business model to work. This was one of the main considerations in my thinking last year that perhaps it was time for Cisco to sell or spin off Webex.

 

Since then, Cisco has significantly reduced Webex pricing. Last year Cisco charged approximately $33/user/month for an Enterprise Meetings plus Calling license, not including the PSTN cost. In the revised pricing, the Meetings plus a basic Calling license is $11.95/user/month, with the capability to add unlimited domestic outbound PSTN calling for $3.50/user/month. The new pricing model makes Webex extremely competitive in the market.

 

In fact, the pricing is so low that I asked Cisco if it is sustainable given that I feel the company needs premium pricing. Cisco assured me that the cloud nature of Webex provides economies of scale that it leverages, and that its profitability on Webex services will be sufficient to fund sales team growth, all the agile development required to keep ahead in the current market environment, its marketing investments, and achieve significant profitability.

 

You have to ask if all of this activity and investment around Webex will be worth it to Cisco’s customers and to Wall Street. The executives I spoke with are animated and believe this investment in product, image, marketing, and sales motion is going to move the needle with respect to Cisco Webex’s competitive positioning in the marketplace.

 

I also believe it will. Cisco did many of the things I suggested a year ago, and the steep pricing reduction surprised even me. Cisco assures me that there is plenty of revenue and margin in its Webex business, which is why the company is holding on to it. In reviewing cost models and the margin on PSTN, a significant gross margin is still attainable — and that is still a huge amount of money based on a potential $10 billion annual revenue stream Cisco will achieve if it converts even half of its installed Call Manager telephony base to Webex.

 

When I asked how an independent analyst like myself might gauge whether the strategy is working, Cisco told me that there aren’t any external measures for doing so. I’m sure Cisco will drop some hints and some numbers occasionally, like the 56 million views of the McLaren ad, or some service usage statistics like the other vendors do. We’ll be able to kind of see how these investments are paying off during the next few quarters as we look at the results in Cisco’s quarterly financial statements under the Applications category.

 

In spite of all this effort, one thing that may still be alarming to Cisco is that Zoom is estimating $3.7 billion for revenue in fiscal year 2022, ending Jan. 31, 2022, won primarily during the COVID epidemic. Zoom’s revenue is closing in on Cisco’s Applications revenue, which topped out at approximately $5.5 billion in FY 2021 that ended July 31. Applications revenue is not just Webex; it also includes the rest of the collaboration portfolio (CUCM, contact center, telephony endpoints, and telepresence hardware) as well as Cisco IoT software and AppDynamics. Although FY 2021 Applications revenue was down 1% year over year, Webex saw double-digit Y/Y growth. The changes Cisco has made should show up beginning in subsequent quarters, but I believe that in order to win big, Cisco clearly has to migrate its extensive telephony base to the Webex brand to continue the market position it has enjoyed since the beginnings of VoIP.

 

This analysis is part of the work Phil Edholm, of PKE Research, and I are doing to prepare for our two-part “Cisco, Microsoft, or Zoom? Making Sense of Their Enterprise Platforms” session taking place next month at Enterprise Connect 2021 in Orlando, Fla. I look forward to seeing you there — and if you haven’t registered yet, use the No Jitter promo code NJAL200 to save $200 off the current rate!