January 18, 2006 4:00 AM PST

Cisco readies consumer electronics strategy

Cisco Systems, a company best known for supplying Internet equipment to Fortune 1000 businesses and Internet service providers, is gearing up for a major move into the consumer electronics market with new products and a new division geared toward home entertainment.

In early February, Linksys, the home networking and consumer division of Cisco, will formally announce a new business unit geared toward home entertainment, said Chris Stevens, vice president and general manager of the yet-to-be-announced network-entertainment business unit for Linksys. Also in early February, the company plans to announce new products for the North American market that have been developed from the acquisition of Kiss, a small Danish company that Cisco bought last summer.

The fruits of this acquisition were shown earlier this month at the Consumer Electronics Show in Las Vegas where Linksys introduced the Kiss DP-600, a networked DVD player. This new device was developed to wirelessly connect to the Internet through the home network to deliver 3,000 Web radio stations, online weather forecasts, stock updates and online games into the living room. Currently the DP-600 is only available in Europe. Stevens said a similar product is on its way for the North American market. And although he wouldn't talk about specifics, he also said Linksys will eventually introduce other networked consumer electronics devices.

"What we announced at CES was really an extension of Kiss' strategy in Europe," he said. "It's not something that fully represents what we plan to do in the U.S. market or the rest of the world. We're not far enough along to go into specifics about products, but we definitely plan to develop other networked entertainment products that will be built around existing consumer electronics. The idea is to connect these devices together over a home network."

Stevens explained that the Linksys strategy is to develop products in two main areas. First, it will continue building home networking products, like its wireless routers that connect PCs using 802.11 Wi-Fi signals to the Internet. It also plans to develop some consumer electronics products that will sit on the home network to enable a variety of entertainment options, such as Internet-based TV, music or photo sharing. The products from the Kiss acquisition will be the first to hit the market, but other products will be developed using technology from other acquisitions, such as the $7 billion purchase of cable set-top box maker Scientific Atlanta.

Cisco's move into the consumer electronics market could pit it against companies such as Sony or Samsung. But Stevens said that Cisco will also make products that compliment existing products from these companies. For example, the Wireless-G Music Bridge, also announced at CES, allows people to wirelessly stream music from their computers and the Internet to their stereo systems.

Cisco also sees the consumer electronics market as a way to drive demand for its traditional home networking gear. In 2004, only about 8.8 percent of homes that had broadband were networked, according to Forrester Research. That figure isn't expected to break 20 percent for 2005. And by 2010, only 40 percent of broadband homes will be networked, according to Forrester's projections.

"We need to move the home networking market beyond the computer geeks," he said. "When people buy networked entertainment equipment, it will drive demand for the network itself."

When viewed from this perspective, the Linksys strategy is very similar to Cisco's traditional enterprise and service-provider businesses. The company has developed demand for faster IP networks by building new markets that drive demand for network equipment. For example, Cisco is the No. 1 supplier in the world for IP handsets to large corporate customers. By creating a voice-over-IP market, Cisco has ensured that its customers will have to upgrade their networks. And since Cisco is already the dominant player in the Ethernet switching and IP routing markets, it's likely these customers will come back to Cisco to buy more networking equipment.

 

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