You may not have heard about video on demand (VOD). It's all the rage in tech-savvy movie enthusiast circles, it has the studios and movie theater operators apparently fearing for their lives, and it's even cited as one reason why Netflix (Nasdaq: NFLX ) stock isn't valued any higher than it is. Networking giant Cisco Systems (Nasdaq: CSCO ) knows all about VOD, though, and it's well positioned to capitalize on the coming revolution.
The company's numbers are healthy, too. On Tuesday night, it reported adjusted earnings of $0.29 per share for its third quarter of fiscal 2006. Earnings per share on a GAAP basis came in at $0.22 on solid sales gains, and sales for the quarter weighed in at a robust $7.3 billion, up 18% year over year.
Of that revenue, $407 million came from recently acquired Scientific-Atlanta, a maker of cable modems and set-top boxes for cable TV. I'm quite happy with the Scientific-Atlanta DVR my cable company provides for me, and even though it's a few notches below the polish of the latest TiVo (Nasdaq: TIVO ) boxes, I think Cisco is making a smart play with this latest move into our living rooms.
Besides, my handy-dandy cable box already offers a few VOD channels. I find them useful and see a lot of promise, but there isn't enough content available yet to make it my preferred mode of TV watching. Ask again in a couple of years, and my answer may be very different, as cable companies and content producers work out their differences and start licensing a wider range of good stuff for VOD or online delivery.
Briefly put, VOD means having content -- movies, episodes of TV series, National Geographic specials, or even music videos -- available anytime you want it, either through downloads or at the touch of a remote button. That idea seems to be so appealing to Joe Consumer and his entire family that traditional forms of filmed entertainment must feel as if they're on their way to their funerals.
Cisco has wisely made sure it has a finger in the VOD pie way before it's fully baked. Not only that, but the in-home entertainment market fits in well with the main Cisco business of network infrastructure equipment. To support the coming tsunami of TV-related bandwidth needs, service providers and Internet backbone operators may need to scale up their own networks. And for the last 50 feet or so, Cisco also owns Linksys, a market leader in wired and wireless home networking. If the customer doesn't have cable TV, I'm sure Cisco will find a way to leverage his or her Internet connection to achieve much the same delivery results.
It all fits together. Cisco benefits three ways from the VOD revolution, whenever it comes: fatter pipes for network traffic, set-top boxes to control what and how you watch the downloaded content, and a home network to let you bounce the entertainment goodness around your house, to every screen or set of speakers that needs it.
Intel (Nasdaq: INTC ) wants its Viiv project to provide only the last two of those components, and if the chipmaker succeeds, Cisco still benefits from the increased traffic. It's a beautiful plan, if a bit long-range for Wall Street tastes. Maybe the time to buy Cisco is now, before the coming sea change.
I agree with my Foolish colleague Rich Smith when he says that Cisco can pump all the money it wants into R&D. The delivery keiretsu I just described, all in-house at Cisco, needs to be polished and stretched and fitted together just right, and that will take some time and money. Meanwhile, there's the reliable old array of network switches, routers, firewalls, and all the rest of the company's offerings, keeping a steady cash flow and solid growth going until VOD enters the mainstream and takes off. It may turn out that buying Scientific-Atlanta was the best $7 billion Cisco ever spent.
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Anders Bylundowns a little piece of Netflix but holds no position in any other company mentioned. His DVR is crammed full of Blue's Clues and Whose Line Is It, Anyway? The Motley Fool's disclosure policy never goes off the air.