Cisco's (CSCO) Tandberg Gamble That Video Quality Pays

Cisco (NASDAQ:CSCO) has decided to gamble that it can get reluctant Tandberg shareholders to support a buyout of their company by raising its offer to $3.4 billion. That is a 10% improvement over Cisco’s previous offer. A number of Tandberg investors lined up against the first deal, saying it valued the company at too low a price.

Cisco says it will walk away from its attempt to buy the company if Tandberg shareholders do not approve a purchase at the new figure. The offer by Cisco is a huge gamble on video conferencing, an over-crowded field.

Cisco is planning to expand its two-way video business, a business that is already a significant part of its revenue and a hedge against any drop-off in its core router operations. Cisco is making the bet at a time when less expensive options are flooding the field. These include video-conferencing products from firms including Google (NASDAQ:GOOG) and Skype. These applications, some of which are free, do not deliver the same quality of audio and video fidelity that Tandberg products do. That will change as the world’s IP infrastructure advances and video and audio compression software improves.

Cisco is taking the chance that video quality means enough to many potential customers that they will pay a significant premium over less advanced products to have it.

In many ways, Cisco has started to look at the enterprise world the same way that Microsoft (NASDAQ:MSFT) does. Redmond continues to charge a premium for its OS and business products even though applications that do similar functions offered by Google and IBM (NYSE:IBM). Microsoft believes that the breadth of a product’s features will allow it to keep its tremendous market share advantage over almost all of its competitors.

Cisco may wake up one day soon and find that Google’s “Talk” product has improved enough that companies will turn to it for video communications. That will make the amount of money it plans to pay for Tandberg look foolishly expensive.

Douglas A. McIntyre