Cisco tries to break out
Once an oligopoly has mastered its industry segment, life can get troubling. If the industry is mature or nearly so, the explosive growth that fueled an oligopoly's rise is shut off. For the most dominant players, acquisitions in the area of expertise are generally small in nature. The biggest rivals are usually unavailable, due to antitrust regulations.
Shareholders, whatever the success of the company in its field, start to get impatient. The company cannot deliver the kind of growth that attracted investor sin the first place. So then comes the temptation to break out of the category, to find another (hopefully related) area, one that still has growth potential, one that the company can hope to dominate or at least provide ongoing growth.
This is always a moment of danger. Getting into businesses that are complementary to the main one is a strategy that is easy to talk about but it is hard to pull off. For example, it seems obvious that banking, stock brokering, and insurance are complementary businesses that could only help feed on each other.
But as Citigroup and many others have found the fit is not necessarily there. In similar fashion, McDonalds found that expertise in selling burgers did not translate into an advantage in selling pizza. German utility RWE discovered that running water utilities is not the same as running gas and electric utilities. And we needn't point out investments further afield, like Vivendi-Universal and AOL-Time-Warner.
Cisco is dealing with the same problem of dominance. They are the leader in network routers and similar hardware, though they do have some rivals threatening their dominance (Juniper and Huawei). That business segment area (including network security) is still growing, as at a far slower rate than before. While Cisco will keep growing and innovating (through the purchase of smaller rivals), it will never be a hot growth stock again.
So it's no surprise that Cisco has stepped away from its core business. It announced it will make a big investment in Scientific Atlanta, a maker of set-top television boxes. The deal is for $6.9 billion. With this move, Cisco goes in a big way from the corporate to the consumer market, competing head-to-head with #1 Motorola, in what is effectively a duopoly in the US. (Though Cisco-owned Linksys is a significant player in the home network area.)
Set-top boxes are the devices that sit between incoming cables and televisions, and that translate incoming data onto the screen. It looks likely to be n area that heads up, as the delivery of video on demand, high-definition TV, digital video recording, phone services, and interactivity finally become reality. That's a convergence that lost of companies want to reap a profit from.
Cisco clearly sees the value it can offer is to allow for networking, especially wireless networking, within the home, so that in addition to TVs, audio equipment, PCs, and other devices can be used to set up an entertainment network in the home. Some are calling this the beginning of a new revolution in home entertainment.
There's no questions that the move has promise, but it has big risks. In the end, Cisco has to please the top four or five major US cable systems and convince them that it should act as a partner, not just a supplier of boxes. In the end, it will be the Comcasts and Time-Warners who will be deciding what services get offered and how they will be billed out. In there is still an open question about how much consumers want to see TV on their PCs or run programs on their TVs. Most important, will Cisco just end up another supplier in this field, or will the cable companies be willing to partner in a way that can lead to significant long-term growth?
Cisco feels it can't afford to ignore the upcoming big convergence going on in the cable/phone/computer world. But there are lots of companies positioning themselves to grow in that new environment, such as content providers like the big movie studios, software giants like Google and Microsoft, and the ones who own the wires -- the cable and phone companies. Will there be a significant slice of the pie left for Cisco?
