A really big deal

Cisco’s surprise acquisition of Linksys last Thursday changes everything in the home network market – probably for the better.  For details on the deal, which should be finalized in the May-June timeframe, see the editorial link below.

Both Cisco and Linksys have a lot to gain.

* Cisco becomes the leading SOHO/home network vendor overnight.

* Linksys gets $500 million in stock and will operate as an independent and intact division. “We’re still hiring and expect to expand our staff 15% to 20% this year,” Linksys CEO Victor Tsao says.

* Cisco gets to use Linksys to further propel the home network/home entertainment market, which in turn will spur demand for bandwidth, which means service providers will turn to Cisco for more high-end equipment.

* Linksys benefits from the Cisco brand; Cisco benefits from the Linksys brand.

“We’re really excited about this,” Tsao says. “Cisco is like the Mercedes of networking – great but high-priced. And Linksys is like the Honda – a good car, but affordable.” 

Pricing – and product quality – are the big questions that remain. Cisco’s products yield 70% margins; Linksys’ yield about 30%. While Cisco says it will not assimilate Linksys – like it did the previous 80 companies it acquired -what level of margins will it accept before interfering? Will we be seeing higher prices for Cisco/Linksys products?

As interesting is the quality issue. Cisco’s products are well engineered. Linksys’ products have plenty of room for improvement. One reader summed it up best: “Cisco quality with Linksys prices would be nice. Linksys quality with Cisco prices would be awful.”

But will consumers and small business people tolerate higher prices for better quality products? For gear that autoconfigures and doesn’t require a half-dozen firmware upgrades and as many calls to tech support, I sure would.

On the flip side, too hands-off an attitude from Cisco could tarnish its reputation. Cisco doesn’t want anyone to associate its products with a half-dozen calls to tech support and as many firmware upgrades. Interestingly, Cisco says it doesn’t plan to interfere with Linksys’ product lines, even though Linksys is selling draft 802.11g wireless products – that could have interoperability problems with products using the final specification – and Cisco said it would not. For more on Linksys and 802.11g: http://www.nwfusion.com/news/2003/11g.html

Tsao acknowledges that Linksys plans to use Cisco’s technology “selectively” in its products to improve ease of use, especially in wireless networks. “The lines between the home and the office network are blurring,” he says. “I want to connect to my office wireless network, and I want to connect to my home wireless network without worrying about changing channels or SSID numbers. Cisco can help us get there.”

 The other big question is how the competition will respond. No. 2 SOHO vendor Netgear turned down an interview request; Microsoft, which has made several market plays, hasn’t yet returned my calls. Analysts were caught off guard and didn’t have much to say at first blush.

Microsoft’s managed to garner 8.1% of market revenue in the retail networking category in January 2003, according to NPD Techworld, which isn’t bad since it entered the market last fall, but a far cry from Linksys’ 40%. It might not mind trailing Linksys, but I wonder how long it will tolerate trailing Cisco.