Cisco has long operated behind the scenes, building the Net. Now its working to build the next generation living room.
Like every Silicon Valley chieftain, John Chambers is eager to share his grand vision of the Home in
the 21st Century. Not surprisingly, it’s a world perfectly suited for talking smack during heated sporting events. In the digital domicile of the future, according to Chambers, television, telephone and Web services will flow into living rooms over the same fat Internet pipe. Consumers will exert as much control over their TVs as they now have over their Web browsers, ordering from a limitless menu of programming. With a few clicks of the remote control, viewers will be able not only to watch old movie classics, but to open video and audio connections to far-flung family members, so they can view shows (say, Duke basketball) and talk to each other as though they were all sitting in the same room. Most telling about Chambers’s vision, though, is, he believes Cisco itself is in position to deliver all this technology directly to the home. It’s one thing to be the behind-the-scenes hardware Goliath that laid out all the infrastructure for the Net—quite another to be a company every consumer recognizes.
Microsoft, of course. Apple, sure. But Cisco Systems? In the race to bring the next generation of high-tech goodies to the home, Cisco is probably the least
likely company in Silicon Valley to lead the pack. Founded in 1984, it sells the big, burly machines that direct "data packets" around the global network—that’s geek-speak for being the master of all information on the Internet. Cisco’s powerful computers, called routers and switches, sit in the back rooms of cable firms, telcos and regular companies, where they essentially serve as the Web’s central nervous system. Cisco executives, perhaps locked in those temperature-controlled data centers for too long, don’t really speak English. They slap their techie products with names like XR12000 and Catalyst 29000, and are so devoted to efficiency and technology standards that the 41 buildings on Cisco’s San Jose, Calif., campus all appear identical—right down to the beige fabric on the cubicles.
The utilitarian infrastructure business was a sweet one for Cisco. During the dot-com boom of the late ’90s, it was the most valuable company on the planet for a brief time (chart, page E16). Its market capitalization passed half a trillion dollars, surpassing even such high-tech legends as Microsoft and Intel, and pleasing countless investors and fund managers. Netscape and Yahoo were media darlings; Cisco merely dominated its own market. You might not have been able to explain at a cocktail party what Cisco actually made—except that it made you rich. But the boom went bust and the stock took a miserable dive—today, the company is worth less than a quarter of what it was at the peak.
Still, it remains the highest-valued in Silicon Valley, bigger than Google and Intel. And now Chambers, its hard-driving 56-year-old leader, wants to usher in a new wave of consumer technology to boost the company’s fortunes. Despite a healthy $25 billion in sales in 2005 and nearly 40,000 employees, Cisco has shown it can move quickly. In 2003, it bought the Irvine, Calif.-based Linksys, which makes wireless routers that can spread blankets of high-speed Wi-Fi over a home. Last month Cisco completed an even more ambitious deal: the $7 billion acquisition of 55-year-old Scientific Atlanta, one of the two companies (along with Motorola) that sell the TV set-top boxes that cable companies place in consumers’ homes. Behind the deals are a big ambition: Chambers doesn’t simply want to join the race for the digital home of the 21st century, he wants to own the racetrack—all the ways in which data flow into, out of and around the home. With its recent acquisitions, most analysts think Cisco is well positioned. "They are the only company that can come in on top of technology like cable boxes and routers that is already inside homes," says high-tech analyst Rob Enderle. "Everyone else has to build from scratch."
Cisco has knocked on the doors of consumers before, with less than stellar results. During the 1990s, when nearly every high-tech company was recklessly over-extending itself, Cisco decided to move beyond its hyperprofitable business of selling networking gear. It started a consumer group with 300 employees, whose products are cringe-worthy today. They included an Internet-connected fridge, designed with Whirlpool, and a videoconferencing telephone that was well ahead of its time. "We were into all sorts of craziness," Cisco’s M&A chief, Dan Scheinman, says. When the dot-com bust flattened Cisco’s stock price—it fell 77 percent between March 2000 and March 2001—Chambers discontinued the entire consumer line and laid off 8,000 Cisco employees. Sadly, the fridge never hit the market.
Despite "lots of scars" from those early efforts, as Scheinman describes it, Cisco had no choice but to try again. Sales of corporate-networking gear fell into a canyon after the bust and never returned to the same growth levels, while consumers revived the Internet economy from their home PCs. They flocked onto their new high-speed DSL and cable connections, checking out booming online services such as Google and iTunes.
This time Cisco took a different approach to the consumer market. As any —marketer knows, it’s easier to capitalize on existing behavior than to try to invent new trends. By 2003, sales of wireless routers, which allow Internet users to take their laptops and lattes away from their desks while remaining online, were beginning to take off. So Cisco jumped into an already promising market, buying Linksys for $500 million. By now Chambers understood that Cisco didn’t quite have the linguistic legerdemain to talk to consumers. Though Valleyites sometimes call Cisco "the Borg" for its practice of swallowing the firms it acquires, Chambers let Linksys remain independent. Even today, some employees refer to the merger as "the Nancy Reagan integration," because they were instructed to "just say no" when presented with any opportunity to bring the two companies closer together.
The nonmerger merger worked well. Linksys sells a majority of wireless routers around the world, and is on track to add a billon dollars to Cisco’s revenues this year. Linksys also sells adapters that wirelessly transmit media from the PC to the TV, and phones that work with voice-over-IP services such as Skype, instead of over the traditional telephone network. But for Chambers, that’s not quite enough. For the past two years, employees say, he’s been obsessed with adding another capability to Cisco’s product portfolio: video. "Every staff meeting I can think of, he’s bugging the heck out of the IT guys to get videoconferencing going," says Mike Volpi, a senior vice president. "It’s, like, every week was too late."
Chambers thinks Internet video will flow not just into the home, but into the workplace as well. So he’s pushing video initiatives for both markets. Last month, in a conference room dubbed "Big" inside Cisco’s headquarters, enterprise got a glimpse of an as-yet-unannounced product for companies called TelePresence (there’s another great product name). Inside the room, three massive 65-inch high-definition screens surround a conference table that, incongruously, appears sliced in half. Cameras are mounted atop each screen and, unseen, Cisco routers crunch video and sound, then pipe the data over a broadband Internet connection. To demonstrate the service, two Cisco managers use the same setup, with another half conference-room table, in another room. Images of their faces appear on the individual screens and, weirdly, the table now looks complete. There’s no lag or static—they could be halfway across the world, but the final effect is one meeting happening in real time.
That’s precisely what Chambers wants to see one day in the home, too, and how he plans to watch Duke basketball with relatives. But building video networks for consumers is a more complicated task, since giant firms like cable and satellite companies control that market. So over the summer, Cisco decided to jump in by buying Scientific Atlanta. The cable-equipment company, based across the country in suburban Atlanta, has 7,500 employees and is actually 30 years older than Cisco. Though Scientific Atlanta’s largest customers are cable firms Time Warner Cable and Cablevision, new opportunities are opening up in the digital world. As cable companies roll out Internet telephone service, telephone firms, such as Verizon and AT&T, are preparing to counterattack by offering thousand-channel, Internet-based television services called Internet Protocol TV (or IPTV). They need lots of infrastructure equipment and set-top boxes to make those systems work, and Scientific Atlanta has already locked up several big deals.
Chambers now thinks he has two of the major pieces he needs to create his ballyhooed digital home of the future, and he’s adding smaller components to complete the picture. Last July, Cisco bought a Danish technology firm called KiSS, which puts hard drives into consumer-electronics devices like DVD players, and allows them to connect to the Internet. KiSS technology could create yet another path for digital entertainment to flow into the living room. Last month Cisco also joined with Disney and Intel in unveiling MovieBeam, a video-on-demand company that will charge consumers a few dollars to watch any of 100 recently released movies, many in high definition. The MovieBeam service works through a $199 set-top box, made by Linksys (and sold in Best Buy and Sears).
Of course, Cisco faces a few obstacles in its mission to rule the den. Though the telephone companies will start deploying IPTV this summer, the service will take years to roll out completely. There’s also fierce competition in the IPTV equipment market, particularly from France’s Alcatel. Then there are all the firms trying to decide if this newcomer is friend or foe. Giants like Microsoft, Sony and Intel all have their own plans for bringing digital entertainment into the home.
Though Cisco executives claim they’ll act like Switzerland—working neutrally with anyone who wants to send data to the home over Internet-based networks—there are conceivably big philosophical differences. For example, Microsoft views its Xbox gaming console and MediaCenter PC as the center of the digital home—rather than the cable box—and it, too, wants to sell to the telcos rolling out IPTV. It’s unclear whether Cisco can play nicely with the consumer clique. "It’s in that awkward high-school situation where they have outgrown their old friends, but their new friends aren’t quite sure about them yet," says Stephen Kamman of investment bank CIBC.
Finally, there’s Cisco’s biggest, and toughest, challenge: talking to consumers in a language they can understand. Venture capitalist and author Geoffrey Moore, whose new book, "Dealing With Darwin," uses Cisco as a case study, says "speaking to the consumer is not in their genes, and I don’t know where that DNA will come from." Inadvertently, Chambers himself demonstrates this PR challenge. Asked how consumers will understand the new gear flooding into their living rooms, the trash-talking CEO brings enterprise to his office computer, where he shows off the company’s "sales dashboard" system. Every order, from every part of the world, flashes on his screen, all tracked with exact precision and updated in real time. "This is where I start off every day and end every evening," he says proudly. But the point he’s trying to make is nearly unfathomable. How does this relate to the consumer? Chambers seems to be saying that technology in the home will one day be just as seamless as the stuff on his screen. The comparison is a stretch. But so is a company like Cisco invading our homes, and by all indications, it’s there to stay.