While Cisco is a newcomer to the consumer electronics business, the company says that after years of promises by the industry, consumer electronics is only now taking advantage of broadband Internet connections and home networks.
“This holiday the vast majority of consumer electronics purchases will be connected,” said Ned Hooper, a Cisco senior vice president, in an interview before Christmas. Mr. Hooper was put in charge of the consumer electronics push a year ago. Many music players, digital cameras, game consoles, Blu-ray players and a variety of set-top boxes connect to the Internet directly or by way of a computer.
Although they are digital, most of the high-definition televisions sold so far do not have Internet connections. But Mr. Hooper argues that televisions soon will also be connected to home networks and the Internet.
“We are all making this investment in high-definition television, but all we are doing with them is watching TV the same way,” Mr. Hooper said. “They can actually provide all sorts of experiences, whether it is viewing family photos or connecting to the Internet to watch video.”
Cisco can draw on much of its existing business line to help build its home electronics products. It is the leading maker of routers and switches, the devices that act as the traffic lights of the Internet in connecting one computer to another. In 2005, it bought Scientific Atlanta, one of the leading makers of equipment for cable TV systems. And Linksys, which it bought in 2003, is the top seller of devices used to set up wireless and wired networks in homes and small businesses.
Sales directly to consumers represented only 2 percent of Cisco’s $40 billion in sales in its most recent fiscal year. But the company is counting on home entertainment, along with Scientific Atlanta and some other new initiatives the company calls “advanced technology,” to provide much of its growth.
Despite Cisco’s dominance of the corporate market and its $27 billion in cash, it faces a number of challenges as it tries to find a place in the home. The Cisco brand is not associated with consumer electronics. The company runs fast-paced commercials with the slogan, “Welcome to the human network,” but it is not particularly clear what Cisco is offering to consumers.
“I don’t think that when they hear the name Cisco they think of great products in consumer electronics,” said John MacFarlane, the chief executive of Sonos, which already makes systems that send music around the house wirelessly.
With the exception of Apple , other computer companies have not had much success in consumer electronics. Dell and Gateway have been in and out of the television and music player business. Hewlett-Packard is still trying to sell computers, servers and set-top boxes designed to move video around the home, but it, too, has dropped out of the television business. Intel, the computer chip maker, abandoned its Viiv brand of processors for media center computers after consumers gave the cold shoulder to the devices, which had been promoted as the key to moving content around their houses.
Mr. Hooper says Cisco has no interest in selling televisions. It will continue to make set-top boxes that bring in programs from cable and the Internet, but it assumes that eventually all televisions will simply connect directly to home networks.
Consumers, however, have not been all that interested in set-top boxes, despite many offerings from companies including TiVo, Vudu and Roku. The most successful has been the Apple TV, which can be used to watch downloaded movies and television programs, but it is still what Steven P. Jobs, Apple’s chief executive, called a “hobby” rather than a business like the iPod or the iPhone.
It is not so clear to consumers why they would need to get online video on their TVs when they have hundreds of channels and increasingly thousands of video-on-demand choices from their cable systems. “Consumers are reluctant to pay for another service and find a home for another box in their living rooms to duplicate much of the content they already get from cable,” said Ross Rubin, a consumer electronics analyst with the NPD Group.
While Cisco is building out its line of consumer electronics products to sell directly to consumers, it has other ways to profit from the growth of home networks. Its Scientific Atlanta unit sells set-top boxes through pay-TV companies, such as a video recorder offered as part of AT&T’s Uverse television service. It is splitting ad revenue with the media companies for which it runs Web sites. And it wants to develop technology with which Internet providers and media companies can sell new Internet-based services for a monthly fee. One example would let people store music and video on the Internet, rather than on discs or their own hard drives, so they could get access to it anywhere.
“Today your content is very tightly tied to a device,” Mr. Hooper said. “Your music is tied to your iPod. Your games are tied to your PlayStation.” Cisco is pressing media companies to change their business models to sell more flexible digital rights to their content. “If I forgot to sync my iPod before I left home, I can connect in my hotel room,” said Mr. Hooper.
Ultimately, Mr. Hooper said, the company expects to make the most money by offering home video conferencing. Today, Cisco is making a major effort to sell Telepresence rooms to corporations for $40,000 to $300,000 each. These have big high definition TV and a fancy audio system on each end, connected by a high-speed Internet connection, meant to simulate face-to-face meetings.
Cisco envisions bringing a cheaper version to consumers in the next year or two. Consumers would place a small camera next to a television to chat with friends and relatives from their family room couches. Cisco is trying to develop standards that would make placing a video call as easy as dialing a phone number and that would allow the recipients to see notices of incoming calls on their televisions.
Mr. Hooper said this technology would be so much better than the current Webcam-on-a-PC video chat systems that users would be willing to pay their cable companies a monthly fee for it. “Once you can go to full HD quality, with simple setup and high-quality experience, it tips the balance,” Mr. Hooper said.
For Cisco, however, the biggest profit still may not be in the gadgets, but in the plumbing. Video is by far the biggest user of bandwidth and as more people use the Web to watch programs, networks will be forced to buy more routers, switches and equipment.