Cisco Steps Up Consumer Push

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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.

Burrows is a senior writer for BusinessWeek, based in Silicon Valley.