Cisco Sees a Living Room in Its Future
Cisco Systems Inc. staked a $6.9-billion claim Friday on the world’s living rooms.
The San Jose-based maker of Internet routing gear is betting that its agreement to purchase Scientific-Atlanta Inc. will bolster its bid to control how music, movies and other data move around the house.
Georgia-based Scientific-Atlanta builds set-top boxes for cable television companies. Cisco’s all-cash purchase follows its 2003 acquisition of Linksys, which makes home-networking equipment, and represents the tech titan’s biggest push into the consumer market.
Dozens of companies -- from Microsoft Corp. to TiVo Inc. -- are eyeing the living room as the next technological frontier. They envision the day that people will be able to call up any movie, TV program or song on the Internet and have it delivered to their stereos or televisions.
“A lot of guys are trying to come up with the home device which combines your MP3s [digital music], your home videos, your TV and maybe your cellphone,” J.P. Morgan analyst Ehud Gelblum said.
Gelblum said the set-top box was a strong candidate to win in that race. It will stand a much better chance, he said, when such boxes aren’t just provided by the cable companies and competition intensifies.
“A couple of years down the road and you’ll be able to buy it at Best Buy,” Gelblum said. “That’s when the size of the market explodes.”
A highflier during the dot-com boom, Cisco built its fortune and reputation on the equipment that directs Internet traffic. But its growth slowed and its stock price slumped as Internet start-ups failed and demand for new gear cooled.
Nonetheless, Cisco had more than $13 billion in cash on hand at the end of its first fiscal quarter, which ended Oct. 29. That cash has enabled it to weather the downturn and make acquisitions.
Analysts said Cisco’s purchase gave it the opportunity to build the same sort of infrastructure it built for the Internet -- only smaller.
“The television set-top box is positioned to become the nerve system of the home network,” SunTrust analyst Chris Rowen said. “This gives them better capability.”
Current versions of Scientific-Atlanta boxes don’t connect with Cisco’s Linksys gear, but analysts said future versions could be set up to transmit information that came in through cable lines.
Although more studios are releasing video-on-demand services over the Internet, there hasn’t been a simple way to watch that material from the couch, said analyst Stewart Wolpin of Points North Group, a research firm whose clients including Comcast Corp. and Walt Disney Co.
“By putting [an Internet] connection inside the cable box,” Wolpin said, “it starts the process of making all of that content available on home televisions.”
The deal is Cisco’s biggest purchase since 1999. The $43 per share price represents a 4% premium over Lawrenceville, Ga.-based Scientific-Atlanta’s Thursday closing price of $41.45. The company’s rival in cable boxes, Motorola Inc., rose 31 cents to $23.86 on Friday. Investors sent Cisco shares down 35 cents to $17.02.
Analysts noted that the purchase came after Cisco Chief Executive John Chambers, in dismissing a rumored interest in acquiring cellphone giant Nokia, stressed that his company preferred small and fast-growing companies.
But Cisco might have felt pressed to act because growth in its core business continues to slow. Net income in the company’s most recent quarter dropped to $1.26 billion from $1.4 billion as Cisco was forced to begin treating grants of stock option as an expense.
“This mostly reflects Cisco’s difficulties,” Merrill Lynch & Co. analyst Tal Liani wrote in a report to investors.
