Cisco Pushes Further Into Consumer Territory

In a recession, the strong get stronger, and the small or weak get eaten. Just a day after news broke that IBM (IBM) was in active talks to buy up rival Sun Microsystems (JAVA), Cisco Systems (CSCO) announced it was snapping up Pure Digital Technologies, maker of the wildly popular Flip line of inexpensive video cameras, for $590 million in stock. Coming on the heels of Cisco's announcement that it was moving into the server business, the acquisition is another sign that Cisco is pushing aggressively into new markets at a time when many of its competitors are hobbled.

But just where might Cisco be going with Pure Digital? The Flip cameras arguably will be the first true consumer products under the Cisco umbrella, but the San Jose maker of networking gear has been sidling into consumer markets for a while now. In 2003 it bought Linksys and its extensive line of home and small business networking gear. And in 2005, Cisco acquired Scientific Atlanta, a leading maker of cable TV set-top boxes.

True Consumer Electronics

Evidence abounds that Cisco wants to expand the market from technical components such as wireless routers that no one wants to see or think about into true consumer electronics. Consider the latest additions to the Linksys line—the Media Hub and Wireless Home Audio, both marketed under the awkward and transitional "Linksys by Cisco" brand.

The Media Hub is a Linux-based home server not unlike many others on the market, but Cisco is pushing it as the heart of your digital home entertainment system rather than as a storage or backup device. And with a starting price of $300, it's a lot cheaper than Hewlett-Packard's (HPQ) $599 MediaSmart Windows Home Server.

Wireless Home Audio, from $550, is a multiroom music system designed to play either content stored on your network or music streamed from the Internet. Again, it seems intended to compete with more expensive products, in this case the Sonos Multi-Room Music System. Pretty soon, the Linksys brand will be phased out altogether—eventually, so will Scientific Atlanta—in favor of Cisco's stylized bridge logo.

Full Line-Up

Adding Pure Digital to this mix of products begins to make sense. The Flip video cameras, starting at about $150, are ridiculously easy to use, produce surprisingly good images, and offer simple uploads to services such as Google's (GOOG) YouTube and Yahoo's (YHOO) Flickr. And they move the Cisco line from just facilitating media consumption into the fast-expanding area of content creation.

Catering to homes complements Cisco's other businesses, too. Communications providers need switches and routers to handle all that network traffic generated by video uploads and shared film clips. "Pure Digital will add to Cisco's arsenal of products aimed at driving increased network bandwidth, similar to Cisco's videoconferencing products," UBS analysts write in a Mar. 19 research note. "As more consumers upload video content to the Web, it will also drive demand for Cisco's traditional products—switches and routers."

If there's a piece missing from the puzzle, it's a simple way to get the video onto a TV set instead of a computer. Cisco already makes the key set-top boxes found in millions of homes, but these Scientific Atlanta machines are built to the specifications of the cable operators who buy them and rent them to customers—not the consumers who actually use them. The Pure Digital acquisition, a tiny one for a company with a $94 billion market cap and $29 billion in cash, becomes a lot more intriguing if it is an indication that Cisco plans to turn those Scientific Atlanta boxes into consumer products rather than just cable products. That would position Cisco to become a dominant player in the networked home of the future.

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