Cisco's new Umi: The answer to a question nobody asked

October 8, 2010: 12:13 PM ET

The company says its new video chatting device is just what people want. But a look at the competition -- and $600 price point -- doesn't seem to bode well for its chances.

There had better be an elite group of videochatters out there with cash to burn. Otherwise, Cisco Systems will be in trouble with its video-calling system, Umi. Cisco (CSCO) says it has done the market research to back up the device's release.

But if Umi fails, it will represent a larger problem for Cisco and other big tech companies that, having made fortunes developing products for enterprise, are now turning toward consumers. Namely, that they have to be in touch with consumer behavior, and devices like the Umi don't make it seem like that's the case. For videochatting to work, lots of people have to buy these devices, and though they support Google video Chat, the company clearly hopes users chat "Umi to Umi." But the price is so high that it will probably prevent widespread adoption.

The fact that there's a price at all could be a problem, let alone that it's $599. Not only does Cisco have to carve out a market for a device-dependent service that's already ubiquitous, but the company also has to convince consumers to pay for videochatting when competing products are free.

The idea is that there's a group of people out there frustrated enough with glitches in free applications like Skype and FaceTime to spend $599 on Umi. Cisco is also expecting consumers to be forgiving of the cumbersome $24.99 monthly or $274.99 annual service fee. Cisco will have to offer airtight service to compete, and chatting via Umi will still require a lot of bandwidth. If kinks develop -- say a slow Internet connection at home -- consumers are probably going to be blaming Cisco, not ISPs like Comcast (CMCSA). That's a risk Google (GOOG), with its free video chat offering, doesn't face.

Cisco also has to sell a significant number of these things for the product to snowball, since the chat quality is only significantly better when it's between two Umis, which people hook up to their HD TVs.

Enterprise offerings dictacting consumer price points?

Early reviews have said that the quality of the Umi chat experience is pretty good. That makes sense -- Cisco has had HD videochatting technology for a while. In 2006 the company released TelePresence, a slick video-calling service for corporations. It works well -- ESPN partnered with Cisco this summer to use TelePresence to broadcast the 2010 World Cup in South Africa.

Cisco's good repertoire of services for corporations might be part of the reason the company can't lower the price on Umi. If the price were low enough and the quality good enough, companies might switch from the Cisco TelePresence service that they have to cheaper Umi technology. Cisco acquired the technology for Umi when it bought Norwegian company Tandberg in April for $3.3 billion.

Now, Cisco wants to hit individual consumers all over the globe, and it's trying to do so via a couple of big marketing campaigns. For example, the company made an agreement with Oprah Winfrey that she would call guests for the show using Umi instead of Skype. Cisco is also donating its digital expertise toward the construction of a New Age South Korean city that will be full of the devices.

Despite such high-profile marketing, Cisco will have to work hard to buck the predominant model for developing video-calling services: videochatting as a free or low-cost add-on service to push pieces of hardware like computers and the Apple iPhone (AAPL) and Android phones. Cisco will have to find a way to add value to the chatting experience that, say, an iPhone can't, and improve the service faster than Apple can. Cisco also has to hope a previously untapped market for high-end videoconferencing actually exists.

HP once tried to do this too, in 2009, with a high-definition videoconferencing system called SkyRoom. SkyRoom was different from Umi in that it was made for PCs, and HP initially released it on workstations for businesses and some of their higher-end laptops. It cost $149 and was ultimately supposed to hit mainstream consumers. A year later, no one remembers it.

Finally, even if there is a demand for high-end videoconferencing, Logitech released a new product yesterday that's cheaper. The Revue box, the main device, enables Google TV on screens that can't run it now. It costs $300, with no subscription fee. Customers who want to chat in high definition have to buy a webcam for $150 and download free chat software. Still not as easy as a Skype account, but if consumers are going to buy a set-top device, why not one that does more and costs less?

A failed Umi launch won't take Cisco down—it's doing far too well with its business-oriented products. But unless Cisco knows something we don't, Umi will not help drive the company's move toward the consumer marketplace.

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Shelley DuBois
Shelley DuBois
Writer - Reporter, Fortune

Shelley DuBois writes on management issues for Fortune.com. Before joining Fortune, she was a producer for National Public Radio's Science Friday and worked for Wired. Shelley has a graduate degree in science, health and environmental reporting from New York University. She lives in Brooklyn.

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