How Cheap Technology Ambushed Cisco

John Chambers , CEO of Cisco (NASDAQ: CSCO), may have made good decisions several years ago to enter several consumer-facing technology ventures. Now his company is suffering from the fact that most of these have been commoditized by new products  the consumer can either use for free or at rock-bottom prices.

Chambers bought set-top company Scientific Atlanta for $7 billion in 2005. The smaller company controlled the cable box  in most living rooms along with rival General Instruments which was bought by Motorola. Chambers probably assumed that because Cisco would sell the boxes in bulk to cable companies that it was protected from consumer whims. The consumer discovered, over the last two years, that services which stream video including Netflix (NASDAQ: NFLX), Apple (NASDAQ: AAPL) TV and game consoles made the set-top box less essential. The amount of competition for old-style boxes now numbers at least a dozen, and many of these have several uses within the home that cannot be matched by set-top.

Chambers bought Linksys for $500 million in 2003. The company’s Wifi was essential to internet access in many homes and offices. Cisco said at the time of the purchase the consumer network market would grow from $3.7 billion in 2002 to $7.5 billion in 2006. Chambers did not see 3G and 4G as eventual competitors. Perhaps worse, cable companies have begun to give away routers as part of the service they use to capture new customers. The least expensive Linksys product costs $59.99. That is for a wireless product that is redundant in many homes now.

Cisco purchased video conference firm WebEx in 2006 for $3.2 billion. The low-end WebEx products for small business and home use sell for $49.99. Cisco’s home umi video commerce products sells for $599.99. These products compete with free services like Skype video. WebEx and Cisco’s other home video solutions also face many free competitors. Even smartphones can be used for two-way video communication.

Chambers only realistic solution to save both his job and Cisco’s stock price is to acknowledge what most Wall St. analysts and investors already know. The veteran CEO entered sectors which were promising the day he bought them. New technologies have killed that promise. Chambers has very little to show for his diversification beyond his enterprise router, storage and switch businesses.

Stick to your knitting.

Douglas A. McIntyre