Telecom

Are Smartphones on Cisco's Wish List?


Cisco Systems? Make smartphones? The idea isn't as far-fetched as it may sound, says RBC Capital Markets analyst Mark Sue. "Considering its big push into the consumer market, we believe Cisco may be developing a smartphone of its own, slated for mid-2010," Sue wrote in a recent research note.

Sue's note isn't the only source of speculation that Cisco (CSCO), a maker of Internet routers and switches, might be mulling a foray into wireless phones. A series of recent patent filings and the company's own recent expansion into consumer electronics suggest Sue's speculation may not be off the mark.

On Mar. 31, Cisco was awarded a patent for managing time delays in relaying video wirelessly to consumer electronics devices. The same day, it received a patent for a network-connected phone able to stream video. Many of Cisco's recently filed patents mention a personal digital assistant as a device that could potentially use the innovations described.

A History of Expansion

Cisco won't comment on the smartphone talk. "There are a lot of things people thought we wouldn't do that we can do," says Ken Wirt, vice-president for consumer marketing at Cisco. "We've done some things that have been surprising to people." Former high-level Cisco executives say a move into smartphones would fit well with Cisco's strategy.

Under Chief Executive John Chambers, Cisco has a history of expanding beyond its core market of networking equipment for companies and communications providers. In 2003, Cisco acquired Linksys, which sells Wi-Fi access points that provide wireless broadband coverage in homes, cafÉs, and airports. Later, Cisco bought set-top box maker Scientific Atlanta. This January, Cisco unveiled its own wireless-enabled home stereo system, and in March, Cisco acquired Pure Digital, the manufacturer of Flip camcorders. Even before that acquisition, as of last fall, Cisco had sold a total of 168 million consumer gadgets, more than the total number of iPod music players sold. "What we are looking at doing is becoming a next-generation (consumer experience) company," Wirt says.

Cisco has a lot to bring to the smartphone table. One of the company's chief aims is to help consumer devices connect to networks and eat up such bandwidth-hungry services as online video. That, in turn, drives sales of its bread-and-butter networking gear. Current smartphones are limited in their ability to provide a range of multimedia interaction, such as two-way wireless video interaction, Wirt explains. "The camera is not in the right place" and the device has to be held in a way that makes conversations uncomfortable, says Wirt, who used to head global marketing efforts for handset maker Palm (PALM), where he helped develop Palm's first consumer PDA. Cisco's know-how could be brought to bear to improve two-way wireless video communication and other features.

Leader in "Telepresence"

Other Cisco executives with smartphone experience include former Motorola (MOT) Chief Technology Officer Padmasree Warrior, hired as Cisco's CTO in 2007. Cisco's manufacturing chief Angel Mendez is a former Palm exec. In addition to its deep knowledge of gear for wireless networks like Wi-Fi and WiMAX, Cisco became a leader in so-called telepresence, which allows for virtual video, audio, and Web meetings, through its 2007 acquisition of WebEx. Earlier this year, Cisco released its iPhone WebEx app, which not only allows several people to get together for audio calls but also to view presentations, a sign Cisco is developing mobile-phone software expertise.

U.S. wireless networks are finally getting to the point where they can better handle more technologically challenging communication. In 2010 and 2011, major U.S. wireless carriers like Verizon Wireless and AT&T (T) will have widely deployed high-speed wireless networks that allow for high-quality real-time video transmission between two people. "In five years, 50% of all telepresence use will come from consumers," says Susan Eustis, CEO of marketing consultant Wintergreen Research. The market for telepresence equipment added up to $765 million in 2008 and is expected to grow to $2.9 billion by 2013, according to Wintergreen.

A video smartphone could also appeal to companies in such industries as health care. A telemedicine company called Wound Technology uses new two-way video software from startup iVisit to monitor diabetes patients in their homes. The new software allows a technician visiting patients in their homes to get advice and guidance from physicians reached via mobiles. "People have looked at this as a consumer application, whereas we believe there's a very high [return on investment] for enterprise applications," says iVisit CEO Orang Dialameh.

Big Players Already in Smartphones

Cisco would have to contend with formidable established players, a possible deterrent to entering the smartphone market, say former Cisco executives. The company typically pursues opportunities where it can build a $1 billion-a-year business and lead in market share. But mobile-phone makers Apple (AAPL), Research In Motion (RIMM), and Nokia (NOK) would put up a tough fight. "It is crowded," says Will Stofega, an analyst with researcher IDC. "[To enter it], you need the 'wow' factor."

Yahoo (YHOO), Google (GOOG), and eBay's (EBAY) Skype enable messaging and video conversations online and are working on ways to weave them into mobile devices. On Mar. 31, Skype unveiled an iPhone application that lets multiple users talk and send instant messages.

One way for Cisco to enter the smartphone market would be with an internally developed handset. Alternatively, the company could snap up Palm, which could sell for less than $1 billion, estimates Tom Taulli, founder of business valuation service BizEquity. Other acquisition options include Motorola, which is struggling financially. The company could also buy equity in Sony Ericsson, a joint venture between Sony (SNE) and Ericsson (ERICY) that's under pressure.

No matter which way it goes, Cisco will have to prove its chops as a consumer brand. The company has been running TV ads for the past three years, ever since the start of its consumer push. And shows like 24 and The Office have used Cisco's WebEx product in their scenes. The result is promising: A February survey Cisco conducted among 1,100 U.S. Web users showed that 69% of the consumers were aware of the brand. "Chambers talks about [consumer electronics] all the time," Wirt says. "It's an area where we see a lot of potential upside."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

Olga_kharif1
Kharif is a reporter for Bloomberg News and Bloomberg Businessweek in Portland, Ore.

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