Does Cisco get consumers?

Business down 15% from last year, chief departs as Cisco overshoots "lower value" market with premium architectural pitch

The consumer market doesn't seem too hard to figure out: give us cool gadgets that can do useful, practical things - that's things with an 's' - at a reasonable price and we'll buy it. Some of those things include data (e-mail and text), voice and video. Maybe a flashlight and a currency converter too, or a tip calculator for lunch and dinner.

In fact, data, voice and video should be standard features of any consumer handheld gadget on the market. Base features, the foundation. Smartphone makers and their subsidizers already know this. One trick ponies will not fly.

Perhaps it is this realization that drove Jonathan Kaplan, Cisco's senior vice president and general manager of Consumer Products, out of the company last week. That, and the cold hard data associated with Cisco's consumer business in its fiscal Q2: revenue down 15% from last year, products overshooting a market seeking, in Cisco's words, "lower value" devices vs. the company's fattened and pricey supersized stuff.

Cisco's Consumer line of business includes the Flip videocam - obtained from the $590 million acquisition of Kaplan's company, Pure Digital, in 2009 - and Linksys routers. Cisco bases its consumer product selling strategy on convincing customers to embrace an overall home networking architecture filled out with higher end "value add" Cisco products. But by CEO John Chambers own admission, value add higher end products "got crushed" at Christmastime. Indeed, consumers were not buying what Cisco was selling over the past six months.  Flip was up 15% year-over-year, but Cisco was banking on 30% growth. Linksys too was selling as a low-end, point product home router rather than as a piece of an overall home architecture.

Flip is cool as a videocam. It's handy and very easy to use. But that's all it does. Video. No data. No voice. Smartphones do all three. For about $200 to $300, and beyond. Cisco said it's not keen on making a smartphone. Flip is off target and consumer is down 15%. OK.

Cisco's seeing the same customer reluctance in its set-top box business even though that's sold out of its Service Provider line of business. Orders in Q2 decreased 15% from last year, and cable set-top box revenue plummeted 29%. Remember, this is Scientific-Atlanta stuff, a veritable household name in residential cable TV. Cisco paid $7 billion for this company in 2005.

IP set-top boxes, on the other hand, grew 47% but the combination still saw overall set-top box revenue decrease 9% from last year.

Cisco's staying this course though. In its Q2 conference call with analysts - a transcript of which can be read here on Seeking Alpha - Cisco is confident its Videoscape architecture (there's that word again) for service providers will be a winner. And despite the market's appetite for low-end, commodity-type products in Cisco's Q2, the company still believes its opportunity in consumer is to "create premium experiences and premium products" sold through retailers and service providers.  

And Cisco plans to tie these architectures into its Smart Grid utility infrastructure strategy to make the home networks play consistently and efficiently with the power grid. The architectural strategy seems to make sense for utilities. But again, for the home?

Cisco should think back to Q2 of fiscal 2011 when revisiting that plan. The Christmastime "crush." The disappointing growth of the one trick pony Flip.

And consumer appetites for "lower value" data, voice and video-capable smartphones.

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