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Cisco faces challenges in consumer expansion
January 7, 2009 / 1:34 AM / 9 years ago

Cisco faces challenges in consumer expansion

<p>A sign shows the headquarters of Cisco Systems Inc. in San Jose, California May 6, 2008. REUTERS/Robert Galbraith</p>

By Ritsuko Ando - Analysis

NEW YORK (Reuters) - Cisco Systems Inc (CSCO.O) is attempting to break into the consumer entertainment market this year, taking on big brands like Apple Inc (AAPL.O), as it faces a slackening in sales of routers and other network equipment.

But analysts say the hotly competitive consumer market will be a difficult challenge for Cisco, a technology company more accustomed to selling network equipment to phone companies and large corporations.

With slower growth in routers and switches, its bread and butter, the company is determined to look for new areas of growth, even if it means fighting household names like Apple and Microsoft Corp (MSFT.O).

At the annual Consumer Electronics Show in Las Vegas this week, Cisco will unveil a wireless home audio system linked to an online media service, as well a software service called Eos that helps media companies run social networking sites.

The wireless audio system, designed to be used in various rooms at once, makes it particularly clear Cisco is ready to play with the likes of Apple and Sony Corp (6758.T).

“This is altogether a new level of competition,” said Michael Wolf, research director at ABI Research.

“I don’t think they’re necessarily going to be able to really compete at that level ... with Sony, Panasonic (Corp (6752.T))” he said, but added that Cisco may seek growth in the consumer markets in various ways, for example by licensing its technology to electronics vendors.

The new ventures are not major breakthroughs for the San Jose, California-based company, whose advanced routers helps to direct global Internet traffic, but they reflect Cisco’s strong ambition to enter more consumer-focused markets.

They also come amid a rapid slowdown in the global economy and Cisco’s sales. It has forecast revenue falling 5 to 10 percent in the fiscal second quarter ending late this month.

But to be a significant player in the consumer space, Cisco will have to learn more about consumer behavior, deal with fickle tastes and lower margins, create a new brand image and build new sales strategies, analysts said.

WILL THEY COVET?

Cisco has expanded into consumer electronics over the past few years with its acquisition of Linksys, which makes wireless routers for homes and small businesses, and Scientific-Atlanta, which makes cable set top boxes.

While the acquisitions bolstered Cisco’s revenue, they have had limited success in making Cisco a consumer brand. Scientific-Atlanta boxes, for example, are mainly sold through cable service providers, with little consumer choice involved.

For the most part, many of Cisco’s corporate customers do not even see the products. Like plumbing, routers and other networking gear are crucial but often out of view, inside walls and data centers.

Even Linksys routers are hardly the kind of products that consumers covet as they do iPhones and Sony PlayStations.

In addition to investing in product design, Cisco will need to brand and market itself more clearly to the public, analysts say. Some consumers heard of Cisco for the first time two years ago when it sued Apple over the rights to the iPhone name. The two sides have since settled.

But there are examples of technology companies that have become household names, like Intel Corp (INTC.O), and Cisco’s success in climbing to the top of the network equipment industry means its foray into consumer electronics shouldn’t be shrugged off too lightly.

Cisco’s growth over the past few years has not been just a result of growing Internet traffic, many say, but also due to the company’s ability to create virtuous cycles of demand, in which sales of one product enliven network activity and create opportunities for selling other related products.

It has gradually expanded into network services including online video software and high-definition video conferencing systems as well as routers and switches, growing its revenue to around $40 billion from a little over $1 billion in the mid-1990s.

Cisco could extend that strategy into the home. Cisco says it aims to “create an intelligent, end-to-end media-optimized network that extends from the content source to the consumer” -- although that wordy mission statement may reflect the challenges it faces in endearing itself to consumers.

“I would say it’s an innovative, peripheral move for Cisco,” said Signal Hill analyst Erik Suppiger. He has not yet seen Cisco’s plans but was asked about prospects for such wireless home entertainment products.

“I think to the extent that there is an opportunity for them to leverage content on the Internet to networking consumer devices, there’s a decent opportunity to do that. But once you start getting away from the benefits of the Internet, it’s less clear how Cisco can compete.”

Reporting by Ritsuko Ando, editing by Gerald E. McCormick

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