Video conferencing is growth area

Milwaukee Journal Sentinel (MCT) - Airline capacity has shrunk, fares have risen and it's difficult to maneuver through airport security.

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There's a solution for corporate travelers that not only solves these problems, it also reduces their carbon footprint.

Video conferencing has come of age, says Ryan Davies, a senior analyst at Cortina Asset Management Inc. in Milwaukee.

For the $15,000 that a handful of cross-country business trips might cost, a company can buy a high-definition video conferencing system, Davies said.

Unlike the systems of even just five years ago, state-of-the-art video systems have good all-around quality and are much easier to set up, he said.

Participating in a video conference may be uncomfortable at first.

"But once you've done it a few times, you get used to it and it's no big deal," said Davies, whose firm rents conferencing time periodically.

Because the costs have come down, the technology has improved, and businesses are increasingly concerned about their carbon footprint, more companies are turning to video conferencing, Davies said. Some European countries even require companies to document how they're reducing their carbon footprint, which is calculated by determining the amount of greenhouse gases produced by an activity like a plane ride.

Although video conferencing has just 5 percent penetration, industry experts at Frost & Sullivan say it should grow by 20 percent annually for the next five years to be a more than $2 billion industry.

Every 12 to 18 months, Cisco Systems identifies a trend it thinks will be huge. The technology giant last year decided to put some of its might behind video conferencing, Davies said.

Cisco's TelePresence video conferencing system costs as much as $600,000 and is marketed to top-level executives. For that price, they get a room designed specifically for video conferencing that includes the furniture and gives the impression the people on the other end are sitting across the table. This high-end product has just a slice of the video conferencing market, though, Davies said.

The biggest players in this space _ Polycom Inc. and Tandberg ASA _ each have about a 40 percent share of the market, Davies said.

Tandberg only trades in Norway, so Davies looked to Polycom, the only video conferencing company that trades publicly in the U.S.

Polycom Inc. of Pleasanton, Calif., makes video, voice data and Web conferencing systems.

Its stock has traded as high as $32.41 and as low as $19.47 in the last 52 weeks. It has fallen from a peak of $35.53 in March 2007 because of the weak economy and some investors' concerns that Tandberg picked up share from Polycom in a niche area, Davies said.

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But with two-thirds of its business in video conferencing, an area that could grow as much as 20 percent a year, Davies says this company has good opportunities ahead. Concerns about carbon emissions could help propel growth too, and the company is anticipating that _ for instance, by giving customers the ability to calculate the amount of fuel they would use on a plane trip they're replacing with a video conference, Davies said.

Sure, Cisco is trying to get into the business.

"But Polycom has more than 20 million lines of code in its products. Even though Cisco may say 'We can do this,' it doesn't happen overnight," Davies said. Also through its marketing of video conferencing, Cisco is offsetting some of Polycom's potential cost of "evangelizing" the technology, he said.

Polycom has revenue of about $1.2 billion, and doesn't pay a dividend but is aggressively buying back its stock, he said.

Because Polycom also sells conference room equipment, wireless phone systems used primarily by hospitals and retailers, and traditional phones, it has a well-developed distribution network. Several big companies like Lucent, IBM and Nortel also help distribute Polycom products. The company doesn't have a strong presence in emerging markets like Romania, but management is "slowly but surely" working to get subsidiaries in those geographies, Davies said.

Generally, technology prices drop by about 10 percent to 15 percent a year, but in the last two months, Polycom has been increasing the price on its video conferencing systems.

"What that tells you is the benefit they're providing to customers must be significant because they have confidence to charge more for what they're doing," Davies said.

In recent weeks, there has been a lot of discussion about mergers and acquisitions in the communications industry, particularly in the voice and video space, he said.

A private equity firm has approached Tandberg about going private, a development that could help Polycom because Tandberg would likely have to cut costs to deal with the debt that would be incurred, Davies said.

The biggest risk associated with these shares is the possibility that further economic woes would dent Polycom's business more, he said.

Davies says he began buying these shares in February and is still buying them for new accounts. They could go as high as $40 in the next two years, he said.

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© 2008, Milwaukee Journal Sentinel.