Friday, December 2, 2005

Cisco Pursues Evolving Digital Home Market
Richard V. Ducey, EVP of BIAfn's Strategic Advisory Group

The digital home is a key battleground where companies from several distinct industry segments are betting their converged network futures. The market to provide integrated service packages of voice, video, data and wireless has forged a number of new alliances, mergers, acquisitions and joint exploration in recent years. The interplay among semiconductor and digital signal processing devices, consumer electronics components, networking (including core, local and home) along with advances in ever more capable software applications and new business models for content owners and distributors has evolved into a new Media Ecosystem. This Media Ecosystem shares properties of the telecommunications, Internet and media industries but also features emergent properties whose dimension and implications we are just beginning to see and understand.

Traditional Internet and telecom companies have repositioned themselves in short order over the past couple of years in recognition that companies must change if they want to survive in the new media order. Cisco has joined the ranks of the many other companies looking to redefine themselves in order to pursue new growth strategies premised on an understanding and capitalization of the rapidly evolving Media Ecosystem. Consider how Cisco, the Internet routing infrastructure company, is targeting the digital home by pursuing a new strategy of acquiring companies serving the consumer space. Its search for revenue growth and new markets inevitably led it to look at next generation networking into the homes. Two key business opportunities for Cisco's desire to leverage its Internet routing core competence were getting Internet data into the home and then throughout the home. Cisco's strategy has been to pursue both of these opportunities and this will influence competitive evolution across several industries.

The major information highways into the digital home remain satellite, cable, telephone and broadcast. While the transition to digital transmission in both the broadcast television and broadcast radio industries shows promise, to-date, neither of these industry segments has proven to be much of a factor in redefining the Media Ecosystem. Rather, it has been the cable, telco and satellite industries that have been the drivers.

So, how does Cisco fit into the mix? Cisco's acquisition history has been to target smaller technology companies with an edge they were looking for to drive growth opportunities. Their focus on the digital home began with its 2003 purchase of Linksys Group which featured consumer grade wireless routers to support WiFi networking in the home. Earlier this year, Cisco moved on to purchase KiSS Technology, a company which provided solutions for networked DVD players. Finally, in this month's purchase of Scientific Atlanta, Cisco has realized its strategy of developing a compelling networking offer both into and throughout the home.

As for getting into the home - the Scientific Atlanta acquisition brings a 50% market share of the existing cable set top market and positions Cisco well for the continued digital transition in that industry. Scientific Atlanta also provides headend gear for cable operators, a market space Cisco knows well from the Internet and telco customers it already serves. And, Scientific Atlanta demonstrated its own ability to understand and serve the converged network market with its sale earlier this year of IPTV set top boxes to SBC for its Project Lightspeed venture.

The Linksys and KiSS acquisitions fit when taking into account that Cisco also has a strategy for developing a beach head in the digital home for storing and moving information inside the premises. Scientific Atlanta's MediaCenter DVR product has sold 3.7 million units and features DVR recording along with DVD player/burner capabilities. The average DVR-equipped household has only one DVR but about two and a half television sets. By enabling networked DVRs and other devices (e.g., KiSS and Linksys) in the digital home, Cisco can create a substantial value proposition for its cable and telco customers in one package.