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What should Cisco change?

Chambers memo promises but does not detail changes to come; consumer stands out as the ugly stepchild

So what should Cisco do? CEO John Chambers said there will be changes coming at the company following two quarters that disappointed shareholders and Wall Street.

What will those changes be?

There's been a lot of talk from Wall Street types that Cisco should divest its consumer businesses - Flip videocams, umi TelePresence, Linksys... Maybe even Scientific-Atlanta cable set-top boxes and even the new Cius tablet computer for enterprises, which just started shipping last month.

Even though Cisco's switching business, which is undergoing a wrenching product transition at the moment, is getting the most attention for throwing cold water on Cisco's fiscal second quarter, the consumer business is a close second. Overall sales were down 15% in Q2. Sales of Flip, a product and $600 million acquisition that still has pundits scratching their heads over its strategic fit, was half of what Cisco expected in Q2. Cisco consumer chief Jonathan Kaplan, CEO of Flip maker Pure Digital when Cisco purchased the company, fled Cisco shortly after Q2 results were announced.

What did he see?

Sales of cable set-top boxes from the $7 billion Scientific-Atlanta acquisition a few years ago were down 29% in Q2. Consumer TelePresence, embodied in the brand new umi high def system, hit a backlash immediately after it was announced: pricing was just outta whack with consumer budgets, critics cried.

Cisco recently dropped umi pricing. Too little, too late because last Christmas, Cisco consumer sales "got crushed," to quote John Chambers.

As for Linksys, has anyone seen or heard that Linksys Wireless Home Audio and Media Hub since it's introduction at CES two years ago? Anyone? We'll see how the new 802.11n routers do...

Perhaps the nail in the coffin for Cisco's consumer business is Chambers' admission at last month's Cisco Partner Summit that the company is unable to upsell consumers into an overarching "architecture" for the home. During the Q2 conference call, Cisco executives said they were sticking with their "high value" architecture plan for the consumer market even though consumers had a "low value" budget and buying pattern. Chambers remarks during the Partner Summit suggest Cisco may now abandon that plan.

Pure Digital, Linksys, Scientific-Atlanta... $8 billion in acquisitions alone, perhaps billions more invested over the years since Linksys was acquired in 2003, in consumer (technically, Scientific-Atlanta set-top boxes are under Cisco's Service Provider business but they are sold to consumers). We're talking close to, or likely more than, $10 billion invested in consumer in less than 10 years. And for what?

You're up, Cius. Change Cisco's fortunes or you too might be a victim of the coming changes.

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