Meet Cisco, the Consumer Company

With its recent acquisitions, it's positioning itself to be a big player in home entertainment
Illustration By Peter Arkle

Over the past few years, an assortment of technology and consumer electronics companies, from Microsoft (MSFT) to Sony (SNE) to Hewlett-Packard (HPQ) to Apple (AAPL), have made stabs at becoming the dominant player in "convergence." The term refers to the merging of computers, entertainment, and the Internet—and all the contenders have found it a tough nut to crack. Now Cisco Systems (CSCO), which made its reputation and fortune building industrial-strength networking gear, is stepping up its efforts to dominate the connected home of the future.

Cisco brings some unique advantages but faces an array of obstacles. The company has built a growing corporate business around telepresence—high-definition videoconferencing—that it believes consumers will find alluring. And Cisco has an important beachhead in the home. In 2003 the company acquired Linksys Group, a manufacturer of home and small-business networking gear, and it has rebranded the products "Linksys by Cisco" to boost consumer awareness. It bought Scientific-Atlanta, a leading supplier of set-top cable boxes, in 2005, giving the company access to big-screen TVs in millions of homes. And in March, Cisco acquired Pure Digital Technologies, maker of the inexpensive and wildly popular Flip cameras used mainly to create online videos.

The opportunities and challenges that await Cisco are both on display in the company's new Linksys Wireless Home Audio line. It's a multiroom sound system, starting at about $450, designed to play music from any computer or storage system on your home network as well as from Internet sources.

Hard to Set Up

Cisco's offering is clearly intended to compete with Sonos' music system, which offers similar features at comparable prices. But there is one huge difference. Getting Sonos up and running is a simple matter of plugging in the device, hooking up the speakers, and making a one-time connection to your network. You're ready to go within minutes of unboxing the gear. Linksys Wireless Home Audio comes with a setup only a router engineer could love; it uses the badly named Linksys Easy Link Adviser software (Windows only) that is both unnecessarily complex and buggy. In the end the system feels more like a complicated computer peripheral than a simple consumer product. If Cisco wants to be a major player in home entertainment, it needs to develop much more of a consumer electronics mentality.

It might start by paying attention to the extreme simplicity of its Flip video cameras. Although the $590 million acquisition was small change for Cisco, the company sees it as a major strategic opening, once its cameras are integrated with both computers and video systems in the home. "The network is becoming a base to deliver new capabilities to consumers, focused around video," says Ned Hooper, Cisco's senior vice-president for corporate development and consumer business.

Those Scientific-Atlanta boxes could be the key to making this happen. The first, obvious step would be to combine a Flip camera with the set-top box, the cable connection, and the big-screen TV to create a videophone service so simple and compelling that families actually would yearn to use it. At a minimum, gathering around the TV to talk to grandma is more appealing than scrunching around the family laptop.

Serving Two Masters

The second logical step could prove more difficult. Cisco's customers will want to use their cable boxes to bring video stored on a home server or streamed from the Internet to their TVs. In the U.S., at least, nearly all of those boxes from Scientific-Atlanta and its only significant rival, Motorola (MOT), are owned and controlled by cable or phone companies, which aren't eager to expose their video services to Internet competition. Hooper says Cisco plans to add new features only in close cooperation with the cable operators that buy its boxes.

I think the company will run into problems trying to serve two masters, consumers and the cable providers. Their interests are diverging. And to the extent that Cisco tries to keep the Time Warner Cables (TWC) and AT&Ts (T) happy, it could jeopardize the advantage it derives from those set-top boxes. All of this presents an opening for Microsoft or for consumer electronics makers, such as Samsung, LG, and others, that are bundling some Internet and movie services with their new televisions.

Cisco may be in a better position than anyone else to cash in on the home networking trend, but it must find a way to make its ties to the cable business a blessing, not a curse.

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE