Technology

Cisco Steps Up Consumer Push


CEO Chambers is readying a souped-up set-top box as part of the networking company's deepest push yet into the living room

It was less than an hour after Cisco Systems Chief Executive John Chambers released impressive third-quarter results, but the stock was slumping on disappointment with his forecast for the current period. Last quarter, sales jumped 21%, yet Chambers was calling for growth of 15% to 16% this quarter—and was unwilling to tweak his long-term growth target of 10% to 15%.

Chambers conceded during a call with analysts that with several areas of the business growing at a faster pace, it would be enticing to issue a higher long-term forecast. "But I'm going to resist the temptation," Chamber says. "I don't want expectations to get ahead of our ability to deliver." Having been through the dot-com bust early in the decade, Chambers knows all too well that healthy growth rates today can lay the groundwork for disappointments tomorrow.

"An Architectural Play"

That's why Cisco is now stepping up its attack on big new markets—including the most alluring of them all: the consumer. Cisco (CSCO), the world's largest maker of networking gear, has widened its focus in recent years to include regular folks in addition to the large corporations and telecommunications services providers that make up the bulk of its base.

Its 2003 purchase of Linksys has made Cisco the market-share king in the home wireless router business, and in late 2005, Cisco acquired set-top box powerhouse Scientific-Atlanta, just in time to ride a huge wave of new demand from its cable and telecom carrier customers.

But home routers and set-top boxes may be only the beginning. The company has already begun to announce some stand-alone products, including a line of home phones, webcams for monitoring the kids, and storage devices for creating DVD-less movie libraries. But those are only part of the plan. Cisco wants to become the epicenter of what it's calling a "Connected Home" where consumers use Cisco software to manage how all of these devices—not to mention TVs, PCs, and possibly even iPods, should Apple (AAPL) sign on—interact.

If successful, Cisco will benefit from sales not only of stand-alone consumer gear but also of the huge routers and switches cable companies and carriers need as they race to deliver more music, movies, and other digital fare to consumers' homes. "We are going to move aggressively into consumer markets—but it will be an architectural play," Chambers says.

Networking DVD Players

A key part of this push will be a souped-up set-top box that melds many existing products into one. Sources say it will include the basic TV capabilities of Scientific-Atlanta, including a TiVo-style personal video recorder, with wireless networking know-how from Linksys. Consumers could use the device to take content received over cable DSL and distribute it around the house, sources say.

The box will probably also include technology from KiSS Technology, a Danish startup purchased in 2005. Already available in Europe, these networked DVD players let owners grab content such as family photos and home movies off a PC, like Apple's new Apple TV does. But while Apple TV can only access content stored in an iTunes library on a PC, sources say this device will provide a browser, so users could access all manner of Web content—videos off of YouTube, video podcasts, and the like.

Sources expect Cisco to release the device toward the end of the year or early 2008. There would be versions sold in stores under the Linksys brand, and others that would be provided by cable companies and other carriers. Cisco Senior Vice-President Robert Lloyd declined to comment specifically as to whether such a product is in the works, but he said there's plenty of scope for further integration of recent acquisitions. "With the ability of Scientific-Atlanta to deliver this video experience, and the ability of Linksys to distribute it throughout the connected home, there are clearly synergies we want to take advantage of," Lloyd says.

Retail Resistance?

When it comes to video and getting it from the network to the living room, timing is crucial. Chambers, who told BusinessWeek.com that he will remain at Cisco for three to five more years, said during the earnings conference call that consumer traffic on the Net this year would exceed corporate traffic for the first time (see BusinessWeek.com, 5/9/07, "John Chambers Agrees to Stay at Cisco Until Next Decade"). That's largely because of the popularity of online video, which consumes far more bandwidth than do static Web sites or Internet-based phone calls. "Video-on-demand and personalized video distribution could be a massive driver of network consumption," says former Cisco Chief Information Officer Peter Solvik, now a venture capitalist with Sigma Partners. "That's a killer platform for them to grow on."

Cisco isn't the only company that sees the opportunity. Phone company Verizon Communications (VZ) and satellite service DirecTV (DTV) are both preparing to introduce multi-room digital video recorders. And big cable companies plan a slew of multi-room products and receivers that let subscribers shuttle content between set-tops, PCs, and mobile devices, says John Burke, vice-president and general manager of digital video solutions at Motorola (MOT), a Scientific-Atlanta rival that counts the largest U.S. cable companies among its customers.

And analysts wonder whether Cisco will overreach trying to execute such ambitious plans. While it certainly isn't going to back away from selling through big carriers, some analysts wonder whether it can successfully sell such complex products at retail. "The biggest obstacle has been the retailers themselves," says Mike Paxton, an analyst with In-Stat. "They're just not interested in carrying cable boxes. The profit level is low, the demand is low, and they don't want to give up shelf space for something that will gather dust." So for now, veterans at Cisco's Scientific-Atlanta unit are still focusing on selling via carriers, he says. "Most consumers are quite happy leasing the box from the cable operator and getting a new one when something goes wrong."

The Challenge: Keep It Simple

The biggest challenge, however, will be building devices so elegant and easy to use that consumers change the way they use communications and entertainment products. So far, Cisco has relied mostly on a buy rather than build philosophy; homegrown products such as the iPhone family of phones announced late last year haven't had much impact. For a company used to selling to network administrators, Cisco has a long way to go. Snipes one tech executive: "The question isn't just whether they can build a good consumer product. It's whether they'd know a good consumer product if it bit them."

To succeed, Cisco will need to master software—not just the heavy-duty product and network engineering, but the controls that show up on screen. A Linksys spokesperson says the plan is for all of Cisco's consumer products to share a layer of software that would let them work easily together, while also being personalized by consumers. "The real home run is if Cisco can be the bridge between all these devices and make navigating between them as simple as turning on your TV," says Edmond B. Lewis, general partner at RCBG, a Chicago consultancy.

To that end, Chief Development Officer Charlie Giancarlo has been aggressively building a team of design specialists. This effort is very early-stage. "They've invested in it, and started to build some teams," says an insider. "But they're light years behind Apple or Sony (SNE) in terms of having something be sexy."

"All About Video"

Sexy or no, the products will be based on open standards, enabling them to be compatible with a host of rival digital devices. Of course, Cisco intends to add its own features on top of those standards, to make its products stand out. But "the days of proprietary operating systems and products is over," Chambers says. "You'll be able to see any device and any content you want, in whatever mode you want. I might like [to use] voicemail, and you might like e-mail," he says, and Cisco's software would be smart enough to do the necessary translations.

Chambers may be reluctant to overpromise on growth and readily admits that the company has a lot to prove. But he says he's convinced Cisco has predicted market trends expertly and is well-suited to the task.

Chambers recalls the criticism heaped on the company a couple years back for spending $500 million to develop a router, the CRS-1, so powerful that it could transmit the entire Library of Congress in 4.6 seconds. "People said we'd only be able to sell seven of them," Chambers says. But now, thanks to the explosion in online video distribution, sales of the router are expected to hit $1 billion in the fiscal year that ends this summer, up from $400 million last year. "We knew it was going to be all about video," Chambers says. "The market is going exactly where we thought it would." And that's precisely the direction he plans to take Cisco.


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