Cisco attempts to buy its way into home

$500 million Linksys purchase marks re-entry into consumer market.

SAN JOSE – Cisco’s $500 million stock agreement last week to buy privately held Linksys marks at least the third time Cisco has knocked on the doors of home/consumer network customers. This time, Cisco officials says they will be let in.

Linksys is a leading provider of wired and wireless network products for consumers and small office/home office users (SOHO). Cisco says the acquisition represents its entry into the high-growth consumer/SOHO market, which is expected to grow from $3.7 billion in 2002 to $7.5 billion in 2006 worldwide, the company says, citing data from Dell’Oro Group and Synergy Research.

Cisco’s attempts to crack this market date back to 1995, with the ill-fated CiscoPro effort, which was tailored to home professionals, among others. Since then, Cisco has formed and disbanded a consumer line of business internally; demonstrated its products in “Internet home” applications and at the annual Consumer Electronics Show; and has and continues to develop and offer a broad line of SOHO routers.

“What we learned through that entire process was that it was not a question of products, but one of business model,” says Charlie Giancarlo, Cisco senior vice president and general manager of product development, who used to direct the company’s consumer line of business. “These [products] could not be sustained in Cisco’s traditional business model. The high R&D, high support cost, high sales cost, which works great in an enterprise and service provider environment, is not the right one for a consumer model. This new business model will allow us to compete very successfully in that market.”

Linksys’ business will run as an autonomous division of Cisco, and its products will continue to be sold under the Linksys brand through its existing retail, distributor and e-commerce channels.

“This is our 81st acquisition, and for the first time the acquired company will be a stand-alone, separate division with its own sales, marketing, engineering and other functions,” says Tushar Kothari, Cisco vice president of new business ventures. “We expect Linksys to operate with the current business model they have.”

Linksys was founded in 1988 and has 308 employees. The Linksys business will report to Giancarlo.

Separately, Cisco last week brought more clarity to its voice-over-IP product line – literally – with the acquisition of SignalWorks, a maker of software for improving the sound quality of IP phone conversations. Cisco will exchange $13.5 million in stock for all outstanding shares of SignalWorks.

Cisco is ahead of last year’s acquisition pace, when it bought five companies. Cisco has announced three deals this year, with the other being security company Okena.