Tightening The Telepresence Belt

In Pictures: Your Virtual Presence Is Requested

Sitting in one of Cisco's "telepresence" rooms, it's hard to imagine how the networking giant's high-end version of teleconferencing bills itself as a technology for tight times.

Three 65-inch high-definition screens channel images of Cisco (nasdaq: CSCO - news - people ) execs from the opposite coast with no discernible latency. An array of speakers and microphones catch and project audio in stereo, convincingly mimicking the direction of voices across a conference table. Even the rooms' lighting and wood paneling is designed to eliminate shadows and make users feel as though they're separated by just a few feet.

All those details add up to prices as high as $300,000 along with an extra $10,000 or so a month in bandwidth costs, enough to make telepresence rooms seem less like a cost-cutting measure and more like a World's Fair exhibition. But frilly as it sounds, Cisco's David Hsieh argues--with a straight face--that telepresence is designed to save your company money.

In Pictures: Your Virtual Presence Is Requested

By creating a real alternative to costly business travel, Hsieh claims that the rooms will often pay for themselves in less than a year. "It's an easy one. In a tight economy, you've got to do more and spend less," says Hsieh. "When customers look at this creatively, the key advantage is that you get that in-person meeting experience along with immediate hard-dollar travel savings."

And Cisco and other vendors' push for the expensive systems as a thrifty measure may actually be working. In September, after the crash of Lehman and AIG (nyse: AIG - news - people ), Cisco announced that it had shipped its 1,000th telepresence unit.

In its August earnings report, the company announced that its telepresence business had quintupled when measured against the year before, even as other parts of the IT sector were already starting to slump. Analysts tracking the young technology agree that despite its price tag, customers are likely to continue buying telepresence systems at a healthy rate through the coming slowdown, and that economic troubles may in some cases even accelerate the technology's adoption.

An IDC report from last March projected that by 2012, the number of deployed telepresence systems like those sold by Cisco, HP, Tandberg and Polycom (nasdaq: PLCM - news - people ) would grow from around 600 to more than 8,000 worldwide, and that revenue from those systems will increase tenfold, from $170 million to around $1.7 billion.

Though IDC now believes that growth may be dampened somewhat by the downturn, the research firm says it will remain far healthier than other IT spending on telecommunications equipment, PCs or servers.

Forrester Research (nasdaq: FORR - news - people ) analyst Henry Dewing is more bullish on high-end videoconferencing. He argues that the economic crisis may actually contribute to what he calls a "perfect storm" of factors that will boost telepresence's growth: Large companies are consolidating offices across the country, travel budgets are shriveling and, significantly, Cisco is pushing a new business model aimed at improving adoption.

Earlier this year, Cisco began offering telepresence "managed services," a pay-as-you-go plan that splits revenue with AT&T (nyse: T - news - people ) and British Telecom (BT) in the United Kingdom. Under the new model, Cisco's partners own and host a telepresence room on a company's own turf. That way, smaller customers can simply rent the equipment from one of those telecom providers for a monthly fee. That drops the cost outlay for such services from a six-figure bill for a full system to a monthly fee of as little as $10,000. Particularly during times like the current credit crisis, that option means companies avoid locking up capital--or seeing favorite projects get sliced out of the budget, says Dewing.

"Initially, companies were saying 'Holy smokes, a quarter-million dollars for a single [telepresence] room?' But a monthly fee makes a huge amount of sense when you've got problems borrowing," says Dewing. "There are a lot more rooms being sold now than anyone expected."

New York-based telepresence vendor Teliris, which sells $250,000 systems without that pay-per-month plan, is also sailing through the downturn, says chief executive Mark Trachtenberg. After two months of customers "freezing up in shock," Trachtenberg says his company has returned to selling at the same brisk rate as late year.

Among Teliris' existing customers, Trachtenberg says financial services users are spending 25% more time in telepresence meetings, with an average of twice as many users in any given meeting. The deeper economic troubles become, the more companies Trachtenberg expects to adopt his technology.

"I hate to admit it, but we do better the longer this downturn lasts," he says. "Long-term cost-cutting is integral to what we're offering."

The focus on high-end systems doesn't mean cheaper video conferencing technologies aren't also in high demand. Cisco and Hewlett Packard (nyse: HPQ - news - people ) both sell smaller versions of their telepresence units for far less, and companies like Tandberg and Polycom offer simpler videophones that provide some telepresence functions for around $1,000. Hackensack, N.J.-based Vidyo sells a software version of telepresence technology that it claims can make basic hardware run as seamlessly as a Cisco setup for around $3,000.

So why would a thrifty company spend six figures on telepresence technology? To purchase a piece of equipment that will actually replace travel instead of merely cluttering the conference room, says IDC analyst Abner Germanow. Older, more complex and clunkier videoconferencing technologies rarely were good enough to stop people from traveling for an important meeting, he says.

"You still see carts with a TV and a camera slapped on top that sit in the back of the room and no one has ever touched it," says Germanow. "If people can't figure it out, they say 'Heck with this, I'm getting on a plane.'"

But the details of modern telepresence, like low latency, high resolution,and realistic audio, mean the technology is reaching a stage where it can finally replace in-person human interaction, he says.

"You can be in a telepresence meeting for three hours, and after about an hour and a half, you forget there's this extra thing there. It largely disappears," says Germanow. "You get that solid, across-the-table meeting that lets you feel like you've actually connected with a person."