With ownership of the SMB market, is Citrix Online a threat to Cisco?

Caine's Citrix owns unified communications - for now. Photo: Citrix.

Hoopla around Google Wave service, launched publicly in September, has brought resurgence to the idea of unified communications — a single platform that integrates voice, email, fax (really!), chat, and web conferencing. Long a dream of the telecommunications industry, unified communications is gaining some buzz among corporate tech teams as a possible tool for enhancing employee productivity.

As tech executives ponder their options, vendors of communications services are racing to grab share in the nascent market. But so far, it's not online voice purveyor Skype or event Google (GOOG) that is making real waves in unified services — so far. Instead, the leader is a relatively unknown company: Citrix.

Citrix Online is the dark horse — some would say underdog — of the web conferencing space. (Citrix Systems was founded in 1989, acquired Expertcity in ’03 and renamed it Citrix Online, which oversees the company’s remote collaboration tools.) As Cisco (CSCO), Microsoft (MSFT), and IBM (IBM) fought for big Fortune 500 enterprise clients during the 2000s, Citrix focused on small to medium-sized businesses. From 2006 to 2007, Citrix’s revenue increased 50% and jumped more than 100% the following year to 101.4 million, according to Gartner data. And analysts expect the same growth this year.

The company delivered a product that had the right amount of features at the right price, says Roopam Jain, Frost and Sullivan’s principal analyst for collaboration.

“Citrix has been very aggressive around the SMB market,” Jain says. “Citrix has seen the fastest growth in this space; it’s brought meaningful market prices and hit what everyone wants — the sweet spot.”

Serving the small business sweet spot

Citrix is now hot on the heels of IBM and Microsoft — and if it continues to grow at the same rapid speed, it would be a surprise to no one if Citrix surpassed both these tech giants in market share. But compare Citrix's 2008 101.4 million revenue to Cisco’s $551 million revenue figure, and Citrix still has a long way to go.

Timing is everything. For years, small-to-medium businesses were notorious for their reluctance to invest in new technology. But as the recession kicked in, so did Citrix’s business. As enterprise clients decided to wait on investing in more technology, small-to-medium businesses were pressured to cut back, says David Smith, Gartner’s collaboration analyst.

And so small-to-medium businesses looked toward the best technology solution to replace travel expenses and unnecessary overhead — at an affordable price.

“The SMB market was very much underserved in 2004 and 2005,” says Brett Caine, president of Citrix Online. “At the time, the existing options required a lot of training and the prices were unpredictable. That’s when we stepped in and saw our opportunity.”

Citrix’s lucrative success in the SMB market has garnered the attention of many of its competitors, which has also expanded its reach and focused on this segment. Specifically, IBM and Microsoft have made big pushes for SMB in the past few years, Gartner analyst Smith says.

For Cisco, more competition has driven the company to work harder than ever to maintain its market share dominance, says June Bower, vice president of Cisco Collaboration Software Group. After acquiring WebEx in 2007 for $3.2 billion, Cisco recognized the need to expand its client base in the market and is now fully armed to not only serve its existing enterprise clients but all the small-to-medium business clients as well.

As the tech giants look to expand their reach and try to appeal to both enterprise and SMB clients, Citrix will continue to focus on small-to-medium businesses, with the hopes of gaining more and more customers (this year the focus is abroad), and effectively, more and more market share. Ironically, despite not targeting enterprise clients, those companies are actually approaching Citrix, Caine says.

But will Citrix be a lasting success? Caine says that Citrix Online has no intent on moving toward a unified communications platform, unlike the rest of the industry. His argument is that his clients don’t want that.

Web conferencing is the leading web collaboration tool that both enterprise and SMB clients want after email, but actual implementation is slow, according to Forrester research. But right after web collaboration, companies also want video conferencing. So would it not make more sense to invest in a service that could provide a unified communications solution?

We’ll see. The market is still too young to tell. But Caine says Citrix is ready to adapt to whatever changes or demands his clients want. And if the company adapts its tools as quickly as it has grown, well, then this dark horse could win the race.

Vineet Nayar, CEO of information technology company HCL talks about managing growth and taking on the big boys of tech.

Cisco CEO John Chambers and strategy chief Ned Hooper address analysts. Photo: Jon Fortt.

Cisco has its swagger back.

When the networking provider hosted Wall Street analysts at its San Jose headquarters Tuesday for its annual update on the state of the business, the most striking thing was the full-scale return of confidence. After a year in which most of tech has struggled to regain its footing in a global financial crisis, CEO John Chambers and his lieutenants told the financial community that they’re poised to grow sales faster than big companies typically can.

To be specific, Chambers says that in normal economic times Cisco (CSCO) can deliver annual sales growth of 12-17%. Off of his current revenue base of $36 billion, that translates into a promise to find more than $4.3 billion in new revenue this year alone.

Chambers believes he can do it because a fresh set of Internet technologies is changing the way we communicate – and giving Cisco a chance to grab a greater share of the spoils. Chambers has outlined three opportunities he believes will reap big rewards: video, collaboration and virtualization.

In the simplest terms, Cisco is betting that video will continue to grow its share of overall Internet traffic as carriers use the Internet video to deliver movies and TV, businesses use it to help employees share ideas and close sales more quickly, and consumers use it to express themselves on the go.

All of that new video traffic should create demand for Cisco’s highly profitable networking gear. It should also create new openings for someone to sell communication systems, back-end servers and management software to run it – and Chambers is positioning Cisco to make that sale.

Skeptics point out that Cisco has stronger competition than ever. Hewlett-Packard (HPQ) and IBM (IBM) sell their own packages of virtualization technology. Microsoft (MSFT) and IBM have their own collaboration suites. Each has resources to rival Cisco’s – and it would be foolish to count any of them out.

So can Chambers deliver? More than a few analysts think he can. They point to Cisco’s cash hoard that’s approaching $40 billion, its track record for successful acquisitions, and its knack for spotting trends early enough to get a jump on rivals. He’ll probably need to use all those tools – and some new ones – to meet his own lofty growth targets.

Tech's top vendors see small companies as a big opportunity.

Software giant Microsoft (MSFT) tops a new ranking of technology companies effectively serving small businesses online by providing a rich, educational web experience for small companies.

Compass Intelligence, a Scottsdale, Ariz.-based consulting firm, analyzes the websites of dozens of tech companies – and interviews small business owners and executives – to come up with its rankings, which it publishes twice each year.

Microsoft leaped to the No. 1 ranking from No. 6 in the first quarter of 2009, essentially switching places with computer maker Dell (DELL) which slipped to No. 6 from the top spot in the first quarter. (Remember, the Compass rankings look at just one part of the tech company's small-business strategy: online reach. All these companies also work through resellers, local affiliates and even have direct sales folks marketing to and servicing small entities.)

That said, the top ten, in order, are:

1. Microsoft
2. AT&T
3. Cisco
4. HP
5. IBM
6. Dell
7. Verizon
8. Sprint Nextel
9. Nortel
10. Symantec

"All these companies are commited and focused on the [small-to-medium sized business market](in different ways)," Kneko Burney, chief strategist for Compass, writes in an e-mail. " They all 'get' small business."

And that may prove to be smart business. Compass estimates that U.S. small businesses – companies with 20 to 100 employees – will spend more than $230 billion on technology in 2009. And a separate new report suggests smaller companies are loosening their purse strings on tech spending even as large enterprises remain cautious.

The Global Technology Distribution Council, a consortium of technology distributors such as Arrow Electronics (ARW) and Avnet (AVT), last week said its members' U.S. sales in the third quarter rose 10.7% over the second quarter.

Large companies "have cut back tech spending, and they're still hunkered down," observes consortium CEO Tim Curran. "SMB (small to medium business) in this instance seems to be a leading indicator of companies starting to invest."

Curran said his members, which serve value-added resellers and other "channels" that, in turn, directly sell to smaller firms, have been seeing particular interest in investing in security solutions and cloud computing services that deliver business software and other applications over the Internet.

Even tech executives who deal primarily with the very largest global companies are talking about their companies' ability to serve small-business clients.

"We have a porfolio that fully meets what small businesses need," says Ann Livermore, executive vice president of HP (HP) Enterprise, a $54 billion-a-year unit that includes consulting, hardware and software sales to businewsses of all sizes. Adds Livermore: "You'll see us being very focused" on the segment.

Entrepreneurs also rely heavily on mobile technology to run their companies. Today there are hundreds of mobile applications that enabling small biz executives to operate while on the go (everything from an application for sending and tracking FedEx (FDX) packages to an app that turns an Apple (AAPL)  iPhone into a voice recorder).

No wonder a Yankee Group study released in September found 28% of small businesses said "smartphone implementation" — the deployment and upgrade of Internet-enabled mobile devices – was their top tech priority in the next 12 months.

Small businesses reliance on mobile means wireless operators have an opportunity to expand their relationship with small businesses, perhaps acting as a distributor for other tech companies' hardware and software or even offering integration and other services in competition with companies such as HP and Dell.

In many ways, the telcos are already seizing the small-business opportunity. AT&T (T) is the No. 2 company on the Compass Intelligence report. "What I love about AT&T is that they are very aggressive in rolling out new "cloud" services tailored just for this market," Burney writes.  "They are focused on providing a suite of services to enable these customers using the power of the network. That's definitely the future."

It’s official. Silicon Valley has a new mega-rivalry: Hewlett-Packard vs. Cisco.

Until this week, the two juggernauts had competed at the edges of their product portfolios. Now the gloves are off. That’s the subtext to HP’s (HPQ) announcement Wednesday that it will buy networking equipment maker 3Com (COMS) for $2.7 billion in cash.

With 3Com in his arsenal, HP CEO Mark Hurd will be able to more effectively attack one of Cisco’s (CSCO) most profitable businesses: supplying companies with gear that manages and secures data traffic. Maybe this aggressive move from HP was inevitable after Cisco decided to get into the server business. Maybe HP actually started this a long time ago with its ProCurve product. Either way, it’s war now.

“This creates the largest competitor to Cisco in quite some time,” says Alan Weckel, director of Ethernet switch research at Dell’Oro Group. “This expands the products HP can present to the market. It also gets 3Com back into the United States, something it’s had a hard time doing.”

For 3Com, the transaction would be a sort of homecoming. The company was founded in Silicon Valley 30 years ago and was a networking powerhouse until Cisco overpowered it in the ‘90s. Since then 3Com has struggled to reemerge. It moved from California to Massachusetts, off-shored its entire engineering operation to China, and recently began to gather momentum from customer wins in Asia.

There’s more to this deal than hardware. Dave Donatelli, executive vice president of H-P's servers and networking business, tells Fortune software was a big part of the reason HP liked 3Com. “They manage all of their network products with one software product ,” he says. “That makes them incredibly efficient.”

How much does HP/3Com really change the networking landscape? In the near-term, not much. Even after the deal goes through (assuming it does), Cisco will tower over HP in enterprise switching. Last quarter Cisco had 69% of revenue in the $3.7 billion market according to Dell’Oro, compared to about 11% for HP and 3Com combined.

But current size isn’t the point. Last week, 3Com was a talented but undersized rival whose new products hadn’t gained much traction outside of China. This week it’s engaged to HP, home of one of the biggest sales forces in technology.

Cisco has been looking to expand its influence into other people’s turf: areas like servers, storage, communications and enterprise software. This deal is a reminder that Cisco’s turf is fair game, too.

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How social networking can transform the CIO into a superhero

By Alan S. Cohen, vice president enterprise, Cisco

Workers unite! Cohen says social networks can empower employees. Photo: Cisco

I recently spent a few days with 100 of Cisco’s (CSCO)  top customers, Chief Information Officers (CIOs), representing a range of industries – private and public and geographies. These folks are often the unsung heroes of  their organizations, enabling employees to perform great technological feats while helping management wring huge cost savings from their budgets.

During our time together, the conversations focused on how work has changed: from local to global, from centralized to decentralized, and increasingly, from live to asynchronous or even virtual.

In the past 20 to 30 years, our customers’ organizations have invested tens of billions of dollars in transaction systems – from ERP to email – to reduce latency and inefficiency in value chains. This considerable investment underpins the heart of the “Six Sigma,” process-driven revolution that became the ultimate strategy for operational excellence. However, today we’ve reached the zenith of transactional gains.

So, from where is the next wave of innovation and productivity emerging? Allow me to posit a simple answer: from people.

For most companies, people represent an untapped asset – a resource that becomes especially important for companies that must grow their business without adding personnel.

This means that corporations must design a cognitive stimulus plan based on employee contributions, and business must embrace some admittedly unusual notions about how, where and when work occurs, and how employees collaborate. Some of these notions recently arrived from the Web 2.0, social networking realm.

There is definitely something going on at Facebook: you do not add a subscriber base the size of the United States in a few years unless there are benefits to the community (Facebook added over 50 thousand new users in the time it took me to write this blog).

The sea of changing perspective on social networking struck me during our CIO conclave. Some call it social computing. We at Cisco simply call it collaboration.  Our customers recognize the critical nature of social networking as a component of collaborative business processes.

But collaboration in the workplace also requires careful integration and regulation to enable success.

No one advocates that employees post personal pictures of weekend activities in lieu of working. It is time, though, to recognize that community is at the heart of teaming and teaming is at the heart of workplace collaboration.  And collaboration is where we find innovation and operational excellence, by tapping into knowledge at the source: from one functional group to another; from one business unit to another; and from one company to another – as partners in a distributed valued chain.

We need variety, a notion at odds with the predictability advocated by Six Sigma.  Actually, in his speech on “consistency,” Mark Twain effectively made this case:

“I am persuaded that the word has been tricked into adopting some false and most pernicious notions about consistency – and to such a degree that the average man has turned the rights and wrongs of things entirely around and is proud to be “consistent,” unchanging, immovable, fossilized, where is should be his humiliation.”

To be sure, for social networks to become the next great tool in the CIO’s daring arsenal, they need to evolve. They need to be secure. They need to integrate into corporate information systems. They need to support work processes that deliver business results.

Collaborative social networking would benefit from rich voice and video systems, something that current consumer offerings lack. Often, a text message does not contain enough context.

Finally, management needs to view collaborative social networking differently.  As Morten T. Hansen notes, in his excellent new book, Collaboration, they must oversee the adoption process and change culture to achieve positive results.

To some degree, every aspect of information technology is in transition: cloud, virtualization, collaboration, and consumerization. CEOs want more and CFOs want to spend less. I could go on and on with challenges for the CIO. But what about the people who actually use all this technology, day after day, to get their jobs done?  What are they telling us about how they want to work?

The millennials, the largest presence in the workforce, are already “black belts” in virtual communications and collaboration.

Is the new CIO super power enterprise social networking? Or is social networking the kryptonite? I see a cape in the sky. (A bird? A plane? A CIO!)

Cohen is vice president, enterprise, at Cisco Systems, the San Jose, Calif.-based maker of networking equipment.

Cisco’s growing again, and CEO John Chambers has called the beginning of a tech recovery. But don't assume this is the proverbial rising tide that's going to lift all boats.

First the good news: Cisco (CSCO) turned in a bang-up quarter. For the three months that ended on October 29, the seller of networking gear managed $9 billion in sales and 35 cents per share in profit, both of which outpaced even the most optimistic analyst expectations. Even better, Chambers said the current quarter will also shape up nicely – a promise that sent Cisco stock up a healthy 3% after hours.

But even in Cisco’s celebration, there were hints of caution. Though he signaled good results for this quarter, Chambers wasn’t willing to set sales and earnings targets for the rest of fiscal 2010, saying it’s too soon to assume that this recovery has legs. He asked analysts to maintain their ho-hum expectations for Cisco's financial performance, despite his apparent optimism – basically requesting that they keep the bar low, even though he feels more confident that he can clear it.

That’s the most important takeaway for anyone who might be tempted to read a full-blown tech recovery into Cisco’s good numbers. Yes, Cisco is doing well. For the entire tech sector to have a strong 2010 – and for Cisco to sustain its winning streak – we’ll need to see a convincing turnaround in fundamentals like U.S. unemployment and consumer spending. The jury’s still out on those, and will be until well after the receipts are in from the holiday shopping season.

Even Cisco's blowout quarterly results revealed signs that things are still rough out there. Not every customer group is bouncing back; governments awash with stimulus cash and enterprises that had postponed purchases proved to be big spenders during the quarter, but plenty of other key groups still looked weak.

For example, the phone and cable companies who buy Cisco routers spent nearly 10% less than a year ago. Retailers and other businesses also spent less. In Asia, non-government accounts remained soft. And orders in developing economies were down nearly 30% from last year.

In an interview after the earnings call, Cisco Chief Financial Officer Frank Calderoni told Fortune he feels very confident in Cisco’s ability to meet its financial targets, and said he was particularly encouraged by the rebound in enterprise spending; since it was among the first categories to suffer in the downturn, he's hopeful that its return signals a full recovery. But he's not letting himself get too worked up about it just yet. “Many outside of Cisco are seeing some challenges, talking about a mixed environment,” he said. “Because everybody’s not seeing improvement, we just want to focus on the current quarter where we have visibility.”

Translation: it’s still foggy, so Cisco is treading cautiously. Investors would be wise to do the same.

A storied financier of startups expands — but its new businesses have yet to take root.

A year ago, when venture capital firm Sequoia Capital ordered its portfolio companies to slash costs in the face of a sick economy, even healthy businesses, such as LinkedIn and Zappos.com, complied.

As word of the edict spread, many non-Sequoia startups also trimmed their budgets — a testament to the venture firm's influence in Silicon Valley and beyond. In its 35 years in business Sequoia had nurtured the likes of Atari, Apple (AAPL), Cisco (CSCO), Yahoo (YHOO), and Google (GOOG). If it was bracing for the worst, the situation must be serious.

But just as Sequoia was commanding its upstarts to contract, the firm was plotting an ambitious expansion of its own. Throughout 2008 and into this year Sequoia tried entering entirely new businesses, hiring professional investors to build a hedge fund, as well as an asset-management group that would mimic the wealth-preservation approach popularized by major university endowments.

Sequoia has said little publicly about these new initiatives. Its preeminent partner, Michael Moritz, wouldn't comment. He has good reason to remain mum: Both the hedge fund and endowment-like offering are off to exceedingly slow starts. The new initiatives have failed to attract a sufficient number of outside investors or even retain their initial high-profile employees.

More ominously, a nagging question lurks behind Sequoia's entrepreneurial aspirations: What does it say about Sequoia's commitment to the venture capital industry it helped invent if its partners are busy plotting entry into two corners of the financial services world in which Sequoia hasn't the slightest bit of experience? In short, do Sequoia's imperial ambitions confirm the venture world's worst fears, that its best days are behind it?

Sequoia is hardly the only VC firm that is straying from its roots. Kleiner Perkins, which successfully seeded the public-private investment firm Integral Capital Partners nearly 20 years ago, has been busily focusing on "growth" and alternative-energy funds. New Enterprise Associates, a firm based in California and Baltimore, manages so many billions of dollars that it can't possibly be considered merely a VC operation anymore. Sequoia itself had already broadened its offerings geographically with funds in Israel, India, and China.

What's unique about Sequoia's latest foray is the aggressiveness with which it has been expanding beyond the strategy that made it great. Sequoia began business in 1972 as a spinoff of Capital Group, the legendary fund management group in Los Angeles.

And for almost three decades Sequoia stuck mainly with venture investments. Even as its renown grew, Sequoia remained relatively small and focused. It put money into small, risky tech companies, and the size of its venture funds remained in the $400 million range, far below what competing firms raised. But this approach limited the fees Sequoia partners could earn — and the firm's profit potential.

A few years ago, according to people in the know, Sequoia's partners — chiefly Moritz and the other most senior active partner, Doug Leone — became convinced Sequoia needed to do more if it was to survive well into the future. Venture had passed through a golden age of relatively easy "exits" in the form of ubiquitous public offerings or sales to major tech companies. What's more, the partners had accumulated immense wealth and weren't satisfied with the various professionals offering to manage their money.

In 2008 Sequoia made its move. It hired Michael Beckwith, a seasoned hedge fund manager from Maverick Capital, a Dallas-based money management firm, and Eric Upin, the chief investment officer of Stanford's endowment.

The plan was to raise two new pools of capital from Sequoia's network — endowment investors in Sequoia's venture funds, entrepreneurs whom Sequoia had helped become rich, and Sequoia's partners themselves.

Its pitch? Sequoia's existing funds would benefit from increased exposure to public-securities investments and the new clients recruited by the asset-management product, dubbed the Heritage Fund.

Sequoia's timing couldn't have been worse. Its expansion coincided with the worldwide financial meltdown — not a great time for a VC-turned-money-management-firm to raise funds. Without funds to manage, Beckwith and Upin left, the former back to his old firm and the latter to Makena Capital, an existing multibillion-dollar fund pursuing precisely the wealth-preservation strategy Sequoia coveted.

Sequoia hasn't given up on its dreams, say people close to the firm. But it has scaled back its ambitions. Earlier in the year the firm abandoned swank office space in downtown San Francisco that was intended to house the Heritage staff, subletting the offices to a law firm.

The performance of Sequoia's core business is a mixed bag. It has had some nice exits: Battery maker A123 Systems (AONE) went public in September and is now worth more than $2 billion. Earlier this year Zappos.com agreed to sell to Amazon.com (AMZN), and Cisco last year bought videocamera maker Pure Digital for $590 million. A potential home run is LinkedIn, whose investors have assigned it a billion-dollar valuation.

Yet in its most recent venture fund there isn't one investment with the trademark Sequoia buzz. Some look promising, like mobile ad firm AdMob and Sugar Publishing, a producer of web content for women.

Others are duds, including online media companies Imeem and Joost. Sequoia notably isn't invested in the hottest Internet companies of the moment, Facebook and Twitter, both of which seem, for now, to be gushers for their early venture backers.

True to form, Sequoia isn't panicking. In September it gathered a group of friendly entrepreneurs and investing partners to update them on the firm's progress. Moritz told the group that Sequoia remains committed to financing small, risky technology companies, with nary a mention of the new funds. Who would have thought Sequoia's chanciest venture would have been its own?

Shaw is the latest non-technologist to ascend at Intel. Photo: Intel.

Who rules techland? Increasingly, it isn't the inmates.

In May, when Craig Barrett retired as chairman of Intel (INTC), the choice of his replacement marked a momentous occasion for the granddaddy of the semiconductor industry.

That Jane Shaw became nonexecutive chairman of Intel is a big deal, but not because she is Intel's first outsider to chair the board or because she is the first woman.

What makes her role noteworthy is that she is the first non-technologist in that seat. Yes, she has a science background, with a doctorate in physiology and a career in the pharmaceutical industry. But she's not a technologist in the Silicon Valley sense.

Considering that Intel's CEO, Paul Otellini, is the first non-technologist to run the company (see my 2005 profile of him) and that his most likely successor, Sean Maloney, isn't a silicon guy either, it's a remarkable turnabout.

Revenge of the anti-nerds

Now, this isn't a piece about Intel, though it could be.  Shaw is perfectly well qualified to be Intel's chairman, having served on the board — loaded with academics, retired government officials and three corporate types, not one of whom has a commercial semiconductor background — for 16 years. (She shows up in Brent Schlender's 2004 take on how Andy Grove was trying to re-make Intel's board and himself.)

The point is that Intel's experience represents one of the quietest yet fiercest battles going on across the Valley: the technologists versus the business people.

Time after time I come across people in the Valley who want to talk about this, most of whom are technologists bemoaning their loss of power. Hewlett-Packard (HPQ) hasn't had a gearhead at the helm for years. Yahoo (YHOO) ditched its engineer/founder/CEO who missed key turns in the Internet industry. Google (GOOG), firmly run by engineers, struggles to retain its top business talent because they know they can't move up.

Most careful Apple (AAPL) and Oracle (ORCL) watchers dread the day when their tech-savvy CEOs no longer are around to work their innovative magic.

Growing up, or selling out?

The company that seems to be biggest exception is Cisco, (CSCO) where salesman-in-chief John Chambers has skillfully guided the company for years.

Cisco, however, isn't lauded for its innovation. It is known for superior execution, deft acquisitions and a clear understanding of market opportunities — not the sorts of things that makes the hearts of engineers go pitter-patter.

The charitable explanation for all this is that Silicon Valley is becoming mature. It has grown up into  a real industry, not a frontier collection of maverick companies, and its leaders approach their tasks in an industrial fashion.

The less cheerful interpretation is that the glory days are gone, that Silicon Valley is little more than a bunch of careerists and, worse, venture capitalists.

The truth probably lies somewhere in the middle: Yes, Silicon Valley has become a destination for new MBAs who see the tech biz as a money-making opportunity rather than a passion to pursue. But the Valley will continue to produce interesting new companies – founded by whip-smart engineers and technologists.

If those founders want their companies to evolve into the next Intel, they're probably going to need a few of those spreadsheet jockies to help them get there.

On the face of it, Cisco’s bid to purchase Norwegian videoconferencing rival Tandberg for $2.98 billion looks like a crushing victory for Cisco. After all, CEO John Chambers has been a tireless advocate for Cisco’s version of the technology, using it to slash his travel budget and pitch a new way to work – and he’s nabbing Tandberg for a mere 11% premium over Wednesday closing stock price. (Tandberg trades on the Oslo Stock Exchange.)

Surely Tandberg must have seen the growing threat from Cisco (CSCO), and wilted under pressure?

Not exactly. Read the fine print, and this looks like a good deal for Tandberg for three reasons.

First, Tandberg turned down a private equity takeover bid a year ago, and its stock price has nearly doubled since then – so this 11% premium is actually a nice chunk of change.

Second, Cisco typically likes to buy 100-person Silicon Valley startups for about $100 million. When the notoriously frugal Chambers is willing to dish out nearly $3 billion for Tandberg’s 1,500 people – his first time buying a public company based outside the U.S. – it means he decided this deal was worth working outside Cisco’s well-worn acquisition playbook.

Third, Tandberg CEO Fredrik Halvorsen will take over Cisco’s videoconferencing efforts, reporting to Marthin de Beer, senior vice president of the Emerging Technologies Group. That shows Cisco respects Halvorsen’s track record of double-digit annual revenue growth, and suggests the networking giant could move toward Tandberg’s embrace of open standards for videoconferencing.

Make no mistake – this is a good deal for Cisco, too. The Tandberg acquisition transforms the company from a niche player in six-figure telepresence rooms into the number-one player in videoconferencing, with a product for every budget. It also creates new headaches for competitors like Hewlett-Packard (HPQ), Microsoft (MSFT) and Polycom (PLCM), who will now face a bigger foe with deep pockets.