All good things come to an end, so they say. Is this the end for Cisco
Back in the '90s, Cisco Systems was known as the company that "built the Internet backbone" (even if we weren't quite sure what an "Internet backbone" was at the time). More recently, the company's ventured into consumer electronics in an effort to spur ever greater Internet traffic. First it bought Scientific-Atlanta, going head-to-head with Motorola in the market for television digital video recorders. In later years, it expanded its video ambitions with the purchase of "Flip" maker Pure Digital, the development of the Umi home video-conferencing system, and the Cius tablet computer. Why, along the way, Cisco even built itself a home stereo system(!).
The logic behind Cisco's move into CE: The more consumer products out there, the greater consumer demand for bandwidth -- and the more routers and switches Cisco can sell.
And the problem: Not everyone is buying this new strategy.
Last week, Reuters reported on a new analysis of Cisco from equity analyzer Morningstar, which opined that despite Cisco management's infatuation with CE, "what investors would like is to see them more focused on their core market, like routers, switches and data centers, and de-emphasize or even exit some of these consumer businesses."
Competitors like Juniper
Raise your hand if you think the one has nothing to do with the other. As for Morningstar, at least, they're pretty sure the lack of traction in CE is having an effect on overall profitability, and it's high time to put an end to that. Cisco needs to cut bait on bad bets, and spin off its losing businesses. In short, Cisco needs to break itself up.
Break-en up and fly right?
And maybe Morningstar is right. Lord knows, it's hard extracting synergies from high-priced acquisitions such as the ones Cisco has been involving itself in lately. If Cisco has fallen victim to the perils of "diworsification," it won't be the first company to do so.
After all, there's a big difference between hawking thousands-of-dollar routers to corporate IT execs, and trying to interest the Fickle American Consumer to shell out a couple of Benjamins on the next new thing. You can see this difference pretty clearly in Cisco's self-delusion on the Umi product. Somehow, the company managed to convince itself that even years after Skype made home-based video conferencing a "free" service, customers would queue up to pay $599 up front, plus an additional $25 a month, for the chance to play Chat Roullette in hi-def.
So here, in a nutshell, is Cisco's problem: The company built its reputation on selling high-price routers and switches that "last forever." Which is great. But who even wants a Palm Pilot that lasts forever, when you know that an iPad 2 is waiting for you just a few years down the road? It's entirely possible that Cisco just isn't cut out for this kind of work. (Indeed, the numbers kind of prove that it isn't.)
Give me the ball, Coach!
But that's OK. Even if Cisco can't push Internet bandwidth demand itself, there are plenty of companies out there that can. Companies that are pretty darn good at it, in fact. Apple
Call me a crazy optimist, but I suspect that if Cisco exits the CE game through a series of spinoffs, as Morningstar suggests -- or even if it closes up the CE shop, and stops making Flips, DVRs, and Internet stereos entirely -- the Internet would keep on growing. When you consider this likelihood, Morningstar's advice actually makes a whole lot of sense. Why lose money trying to do something you're no good at, in hopes of getting a chance to make more money at something you do do well ... when someone else is volunteering to take the money-losing, hard work off your hands for you?
My advice? Diworsification is for fools, Cisco. And for all your good intentions, you're no fool.
Actually, the contrary is closer to the truth. Motley Fool Alpha owns shares of Cisco Systems, and the Fool has created a bull call spread position on Cisco Systems. Also, Juniper Networks is a Motley Fool Big Short short-sale choice. Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. The Fool has written puts on Apple, Motley Fool Alpha has opened a short position on Juniper Networks, and the Fool owns shares of Apple.
As for Fool contributor Rich Smith, he does not own shares of, nor is he short, any company named above. Check out his latest stock recommendations on Motley Fool CAPS. The Motley Fool has a disclosure policy.
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