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This syndicated post originally appeared at No Jitter - Recent posts by Zeus Kerravala.

BroadSoft’s good for Cisco, and Cisco’s good for BroadSoft —
which means the deal is likely good for customers.

As mentioned elsewhere on No Jitter this morning, BroadSoft’s annual Connections event started off with a bang when it was announced that Cisco was acquiring the company for about $1.9 billion, making it one of Cisco’s biggest acquisitions to date, alongside its Sourcefire acquisition in 2013 and AppDynamics acquisition earlier this year. I talked with a number of financial analysts about this deal and one point many agree on is that the price seemed relatively low given BroadSoft’s current revenue ($380 million in 2017, $431 million in 2018), growth expectations (12%), and profitability (76% gross margin; 15% operating margin).

The most immediate benefit to Cisco is the fact it’s adding about $100 million a quarter in revenue to a collaboration group that has seen a recent slowdown in growth. In fact, last quarter Cisco Collaboration revenue declined, although recurring revenue did grow, showing the transition the business is undergoing. Once the BroadSoft deal is closed, the business unit should return to growth, something for which investors have been looking.

If that’s all there was, this would still be a good deal for Cisco, but as they say on TV infomercials, “wait, there’s more…”. As UC analyst Dave Michels pointed out in his earlier No Jitter post, BroadSoft fast-tracks Cisco’s journey to having a robust, scalable, multi-tenant UCaaS platform. It’s possible the company could have gotten there by investing more and more money into the home-grown Spark platform, but that would have taken some time. Given UCaaS growth is expected to be about six to 10 times the rate of on-premises market growth (depending on whose numbers you use), it makes sense Cisco would want to get there sooner rather than later.

I expect Cisco to be able expand the market reach of BroadSoft significantly and accelerate the revenue growth from low teens to high teens and possibly low 20s. Expect to see Cisco create synergies with products like Spark and WebEx where those products will be the lead and the back end will be built on BroadSoft’s high quality platform. It’s well known that BroadSoft has been trying to push its BroadWorks customers to migrate to BroadCloud but has seen some resistance. Cisco is masterful at creating high quality experiences through integrated solutions and could create a more compelling reason to move to BroadCloud. Cisco’s brand is much stronger than BroadSoft’s and can create a pull-through effect for the service providers that BroadSoft could not.

For example, when I talked with BroadSoft about its “Powered by” marketing program announced last year (see “The Big Reveal: Powered by BroadSoft“), it was clear they had some good ideas on how to run the program but there were still a lot of things that had yet to be thought out. Conversely, the “Cisco Powered” program is the best co-marketing product in the industry and is so impactful, I’ve seen businesses specifically request Cisco Powered services in RFPs. Cisco maintains tight control over how its solutions are built, deployed, and consumed; and that translates into faster sales motion and increased user adoption. Because of this, Cisco will be able to create direct end user demand, something BroadSoft would have been challenged to do on its own.

Another growth opportunity is selling BroadSoft services through the Cisco midmarket channel. Despite all the hype around UC, most of the adoption has been small business, which is a huge market but the UCaaS players have been trying to move upmarket. The problem that most have is they don’t have a good route into this group of companies — but Cisco does. Prior to BroadSoft, Cisco didn’t really have a viable alternative for this market. HCS is complex and geared towards large enterprises and Spark isn’t mature enough yet. Cisco channel plus BroadSoft product could dominate the midmarket.

Long term, I would expect to see Cisco bring other cloud offerings into the fold. For example, a Meraki + BroadSoft offering could deliver a holistic “office in a box” delivered from the cloud — communications, networking, Wi-Fi, SD-WAN all rolled into one SaaS offering. Thinking further ahead there’s no reason Cisco couldn’t throw its cloud security solution, Umbrella, into the mix. Anything Cisco sells as a cloud service could be used to deliver a broader, turnkey solution delivered by service providers or channel partners. This is akin to what Cisco did in the early 2000s with its infrastructure solutions.

BroadSoft also provides a quick fix to Cisco’s lack of a cloud contact center solution. I understand it has HCS contact center but that’s not a broad solution that can be sold down market. I thought they might bite the bullet and acquire someone like Five9 or TalkDesk, but BroadSoft gives it a solution to which to migrate its premises-based customers. Having BroadSoft’s open platform paves the way for Cisco to look at other vendors that are adjacent to contact center for additional growth. Companies like Zendesk and ServiceNow would make sense.

Over the past few years, Cisco has been focused on improving the quality of experience through simplification of its solutions. Expect Cisco to use BroadSoft to simplify what it’s doing with cloud calling and UC. BroadSoft can be that single platform to deliver WebEx, Spark, and other collaboration experiences to customers of all sizes. BroadSoft is good for Cisco, and Cisco good for BroadSoft — which means it’s likely good for customers.

One final point: BroadSoft being owned by Cisco is likely to be bad for the many BroadSoft endpoint partners such as Yealink, Logitech, and Polycom. In fact, right now I believe about 75% of the BroadSoft lines sold have a Polycom phone attached to it. Cisco would obviously prefer these to be their own phones so this deal could hurt the third-party SIP phone vendors. Also, expect to see increased pressure on the over-the-top UCaaS vendors such as RingCentral, 8×8, and Zoom. I’d like to see some consolidation in this industry creating fewer strong vendors by bringing together vendors like Zoom and RingCentral.

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Zeus Kerravala

Zeus Kerravala is the founder and principal analyst with ZK Research. Kerravala provides a mix of tactical advice to help his clients in the current business climate and long term strategic advice.
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