Video conferencing -The video cloud research-Glowpoint

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 its
research reports. As a result, investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors should consider this report as
only a single factor in making their investment decision. PLEASE SEE DISCLOSURES BEGINNING
ON PAGE 2 AND ANALYST CERTIFICATION STATEMENT BEGINNING ON PAGE 2 .
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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

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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 or


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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.


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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 one


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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,


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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 if


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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 Better


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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.


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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.


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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.


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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.


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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 a


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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 decline


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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.


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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, and


Page 16 of 23


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 around


Page 17 of 23


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 is


Page 18 of 23


$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).


Page 19 of 23


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)


Page 20 of 23


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)

*REIT's 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%


Page 21 of 23


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 analyst's
personal views about any and all of the subject security(ies) and issuer(s), and
(b) no part of the research analyst's 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
company's shares. Short-term trading ideas are not related to a stock's 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
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*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.


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
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John R. Lawrence 901.579.4203
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