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See the best of Reuters photography. See more | Photo caption Healthcare in Appalachia Remote Area Medical clinics bring free medical care to uninsured people in Appalachia and elsewhere. Slideshow A city destroyed Amid the ruins of the Syrian city of Homs. Slideshow Analysis: Polycom faces painful, but necessary, shift to software Tweet Share this Email Print Related News Microsoft posts quarterly loss but beats Wall Street Thu, Jul 19 2012 Microsoft revamps Office, looks to the cloud Mon, Jul 16 2012 Microsoft takes $6.2 billion charge, slows Internet hopes Tue, Jul 3 2012 Related Topics Tech » Media » By Sayantani Ghosh Thu Jul 26, 2012 11:57am EDT (Reuters) - Polycom Inc (PLCM.O) was a big beneficiary of the 2008 recession, as its videoconferencing products helped companies cut back executive travel, but the advantage has proven short-lived as cheaper rivals muscle in on its business. The company is working on new cloud-based software products but analysts warn of a rocky couple of years while it makes a transition from selling expensive hardware. Polycom is caught between Cisco Systems Inc (CSCO.O), which dominates sophisticated virtual conference rooms linking offices around the world, and free videoconference software such as Microsoft Corp's (MSFT.O) Skype and Apple Inc's APPL.O FaceTime. Earnings are already being crunched. Polycom reported Tuesday a 77 percent drop in quarterly net income, as Europe's woes hit its business. After two years when revenue growth topped 20 percent each, analysts see a 2.2 percent decline in sales this year, according to Thomson Reuters I/B/E/S. The shares hit a three-year low of $7.45 on Wednesday, taking their decline to 78 percent from an 11-year high of $34.30 last year after the appointment of a new CEO. The stock edged up in morning trade on Thursday to $8.04. "It's a tough time to be changing the company in this economy," said Ira Weinstein, an analyst at independent market research firm Wainhouse Research. "I believe they will make the transition, but it will take time. It's not going to be as fast as (CEO Andy Miller) wants it to be." The transition to a software-based model will pressure earnings over the next 12-18 months, Citi Investment Research wrote in a note on Wednesday. High turnover of sales staff at the company's key North American market has added internal pressure to the big change job. BIG CISCO Polycom faces a leaner, more competitive Cisco, whose TelePresence has become the dominant choice in the corporate sector with double Polycom's market share. "Cisco outnumbers them in every sales situation and has more brand recognition, so it's an unfair battle," said Weinstein. Polycom said in an email to Reuters that it gained market share over Cisco in the first quarter of 2012, according to market research firms including IDC, but analysts don't see a major advance on the dominant player in tough times with so many internal changes. "It's going to be very difficult to turn the company around with those headwinds hitting them all at once," Mizuho Securities USA analyst Joanna Makris said. Polycom must embrace a cloud-based model to fend off the likes of Skype, she said. "(Skype's) free. And in a bad macro, people like free," said Makris, who has a "neutral" rating on the Polycom stock. Competition is also intensifying from smaller, privately held rivals like Vidyo, which recently received funding from Juniper Networks Inc (JNPR.N). FIGHTBACK Polycom is fighting back. The company, which still gets most of its revenue from hardware-based systems, is using a software solution to target smaller businesses, including videoconferencing apps for mobile devices. It has made a slew of small purchases to boost its web presence, including ViVu, a maker of software to embed videoconferencing in websites and the videoconferencing business of Hewlett-Packard Co (HPQ.N). The software model has potential as companies can only afford a few expensive videoconferencing rooms but a software-based solution could be used to equip thousands of employees. Videoconferencing companies, used to shipping hundreds of thousands of units for thousands of dollars, will have to get used to shipping tens of millions of units for much less each, Gartner analyst Scott Morrison said. "That's not an easy transition to make for any organization and Polycom is not unique," he said. As well, Polycom, as a standalone videoconferencing firm, will always be dependent for corporate sales on partners including it in their telecommunications offerings. That introduces more risk, as Skype-owner Microsoft is a key user of Polycom products in its Lync corporate video, email and messaging product. Polycom hasn't disclosed how much it gets from Microsoft but has acknowledged in its annual report the risk that its products could be replaced by Skype. "If Microsoft integrates Skype into Lync then it is really game over for Polycom," Makris said. The Mizuho analyst said in a post-earnings note that Polycom's outlook was disappointing and reflected a product and organizational changes that would take several quarters to execute. Polycom said Tuesday it continued to restructure its North American business after appointing four new area vice presidents earlier this year. It said David Ruggiero, its president for North America, would be leaving and it would reorganize its U.S. government sector units into a new "public sector" business. 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