January 8, 2007 6:01 PM PST

Cisco looks for friends in consumer electronics

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Cisco Systems CEO John Chambers will have one simple message when he takes the stage at the Consumer Electronics Show in Las Vegas on Tuesday morning: "We come in peace."

Some people might be scratching their heads at the idea of the leader of Cisco--a company that has catered mostly to Fortune 1000 companies for the past 20 years--delivering a keynote address at a consumer gadget trade show. But given how consumer technology and entertainment are changing from isolated, discrete products to ones that are connected to each other and to the Internet, Chambers' presence makes sense.

That said, however, Cisco executives say they're aware that traditional companies catering to the consumer market might not know what to make of the Internet networking giant intruding on their turf.

"I think historically there has been some tension between some of the networking/IT companies and the consumer electronic industry," said Dan Scheinman, senior vice president of Cisco Media Solutions Group. "Some of the vendors and media companies aren't sure if we are a friend or a foe. But we are here to tell them that we come in peace. And we think that through partnerships with them we can really grow the market into something that wouldn't be possible if we each worked alone."

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For over a year, Cisco has been preparing for a push into the consumer market. Last year it closed the $6.9 billion deal to buy cable set-top box maker Scientific Atlanta. It also unveiled a new logo and marketing campaign to help make it a household name. And the company has created a new business unit headed by Scheinman that will work with content creators to help build products that cater to the entertainment industry. And Cisco has also continued to develop its retail presence with new products for its line of home networking equipment from Linksys.

Some industry observers have wondered if Cisco will use its coveted keynote address spot and debut at CES to make a big announcement about a set of new products specifically designed for the consumer electronics market--products the company has been promising for nearly a year.

But Scheinman said that when John Chambers takes the stage on Tuesday, he won't be introducing specific new products. Instead, he will be delivering a message to the industry about Cisco's long-term commitment to the market. And specifically, he will be trying to convince the service providers, consumer electronics vendors and content owners that Cisco can help them innovate and create demand for more products and services in the home.

Change is already on the way as consumers seek out more sophisticated products and services, Scheinman explained.

The market for TVs is a perfect example. For the first time since 1996, TV sales in 2006 outpaced PC sales, according to the Consumer Electronics Association. TV revenues generated $20 billion in sales, whereas PC revenue generated $19 billion in 2006. The main reason for this shift is the emergence of HDTV.

As more cable operators, satellite TV providers and phone companies roll out new high-definition programming, people are compelled to upgrade their TVs to more expensive, high-definition TVs.

TV sales are just the beginning of this trend, Scheinman said. Digital video recorders have already begun teaching people to watch TV when they want instead of when their cable operator and the network television networks dictate they watch them. Devices in the home are also becoming Internet enabled, which means that a PC can communicate with a TV, which can communicate with a stereo to allow consumers to share digital content throughout the home.

Scheinman likened the trend to one that emerged in the late 1980s and 1990s when Cisco was just a scrappy Silicon Valley start-up. Back then, printers and PCs in offices and corporate campuses were becoming connected using a technology called Ethernet. Cisco was born out of a need to easily shuttle data between these devices, and later it helped connect offices to a new-fangled thing called the World Wide Web. Along the way, Cisco formed partnerships with traditional large suppliers already serving corporate end users.

"We've been through this before," Scheinman said. "But instead of Sony and Disney, back then it was IBM and Hewlett-Packard. We know from our previous experience in the enterprise market that we created value for other companies within that ecosystem."

In the end, Scheinman said, the enterprise IT market grew stronger because Cisco helped these companies reach more end users or create new services that they wouldn't have been able to offer if they could not connect their applications to multiple users. And the benefits to consumers were also just as important. E-mail, networked storage, and unified communications are all applications that would not exist if Cisco hadn't developed the underlying network to deliver them.

"We think that phenomenon will repeat itself in the consumer market," he said. "A big market transition is under way as content is digitized and IP-enabled. And we want to partner with media companies, service providers and consumer electronics companies to help them prosper just as we've helped do it for the IBMs and HPs of the enterprise industry."

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