Economic Woes Boost Videoconferencing

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Tandberg doesn't see it that way, given its strong growth numbers so far this year. Many companies are still investing in its technology to reduce their overall cost level. Its growing roster of customers includes British banking behemoth HSBC (HBC) and Norway's Statoil (STO), which uses videoconferencing on its offshore drilling platforms so engineers on shore can diagnose a problem when something breaks down.

Riding the "Perfect Storm"

Polycom is thriving, too. It counts Doubleclick, Adobe Systems (ADBE), and financial-services company Bear Stearns among its customers. "We're doing a great business right now," says Robert Hagerty, chief executive and chairman of Pleasanton (Calif.)-based Polycom. A combination of factors is causing what Hagerty refers to as "the perfect storm."

Travel cost and time savings have always been a key driver for videoconferencing. "However, in times like these when fuel costs are sky high, travel has become more expensive, financial markets are in turmoil, and several organizations have mandated strict travel restrictions, collaborative technologies like videoconferencing get significant attention," says Roopam Jain, a principal analyst at Frost & Sullivan who specializes in conferencing and collaboration.

Videoconferencing technology, which has been around for almost 20 years, has also significantly improved. Until recently "video quality was not good, voice synchronization was a problem, and it was tough to set up the conferences unless someone knowledgeable was there," says Rich Costello, research director for enterprise communications at technology consultancy Gartner (IT). "It was not a very pleasant experience overall, so everyone got frustrated."

Videoconferences Get Second Look

Now, though, "people are willing to give this technology a second look," says Tandberg chief Halvorsen. For starters, the resolution has become far sharper and less choppy and the audio sync problem has gone away, both in boardroom systems and on desktop systems. That is because high-definition video is now becoming available on the desktop, improving quality and user experience, say analysts.

Meanwhile, the move to Internet Protocol has dramatically driven down the cost, since the calls are sent over broadband networks that charge all-you-can-eat fixed tariffs rather than by the minute. And videoconferencing is no longer confined to special rooms with huge screens that cost anywhere from $3,000 to $300,000 to install, though demand for these high-end systems is booming as well.

The market leaders for big-screen systems for executive suites and boardrooms include Tandberg, Polycom, Sony (SNE), Italy's Aethra, and a Texas company called Lifesize Communications. HP and Cisco make high-end "telepresence" systems that help people in far-flung locations feel as if they are in the same room. These systems represent only one-half of 1% of all the units sold, but about 12% of the revenues. Although their market share is insignificant, HP and Cisco have access to top-level executives and have raised awareness of the impact on visual communications on the bottom line of corporations. "They have raised the water for all the folks in this pond," says Andrew Davis, an analyst at Wainhouse Research, a market research firm based in Duxbury, Mass.

Desktop Systems Poised to Take Off

At the same time desktop systems, which have been around since the 1990s, finally look poised for real growth. "The desktop videoconferencing market has always had disappointing results," says Davis, "but I expect this to change in the next year." Desktop systems that allow people to set up calls spontaneously can now be integrated with a corporation's e-mail and instant-messaging systems so participants can share documents while holding a virtual meeting. Microsoft (MSFT), IBM (IBM), Cisco, and a dozen or so small companies are all pushing desktop collaboration systems that include video, and are planning to include devices made by the likes of Tandberg and Polycom as part of the package.

Some of the desktop systems are expected to sell for as little as $50 to $100 per desktop, depending on the volume of orders. Other systems are more expensive. Tandberg's new, sleek $1,499 desktop VoIP videophone, set to be released in October, includes a lens cap that allows people to choose when they want to be seen and when they don't. That feature addresses a psychological factor that has held back widespread use of the technology. While people working from home might like having a corporate videophone so they can get face time with management on a scheduled call, they don't want to be caught off guard and have a boss or a client catch them in their pajamas.

Working at home could prove to be a big driver of the business. In the U.S., government agencies and companies are talking about allowing a significant number of employees to work one day a week from home. Soon it won't be just big government and the TNTs of the world that see the advantages. "I think this is going to trickle down to small and medium business in less than three years," says Wainhouse Research's Davis.

Schenker is a BusinessWeek correspondent in Paris.