Cisco's Consumer Dreams

Walk down a consumer electronics aisle in any major retail outlet today and you’ll see some familiar brands: Sony, Sharp, Sanyo. In a few months, though, you’ll likely see a new entrant: Cisco.

According to a report in the Financial Times this week, the San Jose, CA-based networking equipment maker plans to launch a series of products with a distinct consumer feel: mainstream phones, radios, and home theater equipment. While specific details on the products are not yet available, it’s likely that Cisco Systems will build networking capabilities into each device; for example, a Cisco radio might play streaming Internet music as well as terrestrial-based signals.

Cisco’s chief development officer, Charles Giancarlo, told the Times: “Consumer electronics companies have been able to compete on a stand-alone device, but the dynamics of the market are changing. The Internet and new networking requirements are enough of a disruptor for us to enter a new market.”

Elizabeth McNichols, a Cisco spokeswoman contacted for this story, wouldn’t comment on unannounced products, but said, “It makes sense for Cisco to be involved in convergence. It’s a market we have looked at for awhile, and we’ve always signaled our intention to expand our offering.”

For a brief period in early 2000, Cisco, which makes network infrastructure hardware, such as switchers and routers, had the highest market capitalization of any company in the world. But now, as the market for infrastructure hardware matures, it languishes. Cisco’s stock price has been on a slow, mostly steady decline for the last four years and currently hovers around $19, down from an all-time high near $100 in 2000. So a wide-scale consumer product launch, such as the one the Financial Times hinted at, would be a bold but potentially critical move for the company.

Cisco has dabbled in the consumer market in the past. In March 2003, it bought home-networking powerhouse Linksys, and in November 2005 the company announced its intention to buy Scientific Atlanta – a leading manufacturer of cable set-top boxes. That acquisition is expected to close in April 2006, barring any regulatory hurdles or surprise bids from other companies. Cisco also currently sells DVD and DVR players in Europe through its purchase of KiSS, a European electronics firm.

Still, what makes Cisco think it can succeed in more mainstream areas of consumer electronics? In part, its move has to do with the shifting nature of consumer electronics. The line between standalone items, such as a stereos, and the kinds of networked products that Cisco has excelled at, is blurring. Stand-alone voice-over-Internet phones are becoming more common – and Cisco already offers such a device for businesses. With digital cable reducing television to nothing more than a data stream, Cisco has a natural affinity with cable-box companies like Scientific Atlanta.

What’s more, it’s clear from rising phenomena such as home wireless networking, massive sales of songs, movies, and TV shows on Apple’s iTunes, and technology that allows viewers to program their TiVos over the Internet that consumers are becoming more accustomed to incorporating the Internet into their home-entertainment habits.

In fact, success for Cisco in networked consumer electronics goods could ultimately mean success for its core product line as well. If more consumers accept the idea that radios, phones, and stereos can access the Internet, and enough compelling applications push consumers to actually use these Internet-friendly components, Cisco will likely sell more of its infrastructure router and switching hardware as overall Internet usage increases.

Its move into consumer electronics carries significant risks as well, though. Consumers are familiar with brands such as Sony and Apple, and not so much with Cisco – at least not on the shelves of Best Buy. Aware of this, Cisco has followed its tried-and-true strategy of entering new markets via acquisitions and maintaining brand names when it makes sense. Its decisions to buy Linksys and KiSS, and to continue selling products under those names, are prime examples.

But there’s a big difference between selling Linksys modems and routers and hawking radios and home-theater equipment.

If Cisco’s current push is successful, it will likely mean two changes for consumers: more choices and cheaper prices. When new products appear on shelves, the companies making existing products often drop their prices to maintain market share. So Cisco will have keen competition. Still, by the holiday season of 2006, it might not be uncommon for gadget-heads to wake up with a little Cisco under the tree.