Cisco Looking to Muscle Up with New TechnologBy Ben Klayman
CHICAGO (Reuters) - Twenty years ago, Cisco Systems Inc. (Nasdaq:CSCO - news) got in on the ground floor of computer networking.
Now the world's largest maker of equipment that directs Internet traffic is contemplating a smorgasbord of cutting-edge technologies, trying to decide which ones will fuel its next wave of growth.
The company, founded by a small group of Stanford University computer scientists to create a way for computers on disparate networks to talk with each other, is already in six growth businesses. However, it said last week it wants to add six more, possibly in the wireless and video markets, by the end of 2005.
"We have a lot of opportunities in front of us," Cisco Chief Executive John Chambers said last week. "We're doing a better job of figuring out where probably three of those additional six might come from."
Analysts and investors said the ultimate goal is to drive sales of Cisco's bread-and-butter switches and routers, as well as push further into the telephone and cable television markets.
Switches and routers are machines that direct the flow of data on a network. The market for such gear is still growing, albeit at a slower pace than in the 1990s, so Cisco's dominance leaves it less room for growth unless the company can boost overall demand.
"Most of what Cisco does in the way of these new technologies is all about trying to grow the traffic so they can sell more routers and switches," Legg Mason analyst Timm Bechter said. "As big as Cisco is, they need the whole pie to grow."
The San Jose, California-based company has said it will combine acquisitions with partnerships and internal growth to achieve its goals, but analysts believe it will mainly be on the prowl to buy other companies.
"About once a week, I hear Cisco's buying 'insert name X here,"' CIBC World Markets analyst Steve Kamman said.
Cisco is looking to recapture its late 1990s magic. During the Internet tech boom, some thought Cisco would pass General Electric Co. (NYSE:GE - news) and Microsoft Corp. (Nasdaq:MSFT - news) as the world's most valuable company, becoming the first with a trillion-dollar market capitalization. Cisco is now valued at $149 billion.
LIKELY TARGETS
The company has not identified specific markets it will tackle next, but tagged Internet-based software applications, video, and such emerging wireless technologies as radio frequency identification and Wimax as areas of interest.
Besides Internet voice transmission and home networking, Cisco includes optical networking, network security, storage networking and wireless local area networks in its Advanced Technologies group, which accounted for 16 percent of sales in the most recent quarter. Cisco's goal is to hit annual sales of at least $1 billion in each new market.
One target may be software applications in the area of XML, one of the Internet programing languages that Cisco can use to customize programs for its networking gear. Analysts said it could bulk up its software offerings to serve the wireless and cable TV segments, and pointed to such companies at privately held DataPower Technology as possible targets.
Thanks to the backing of Wal-Mart Stores Inc. (NYSE:WMT - news), the RFID merchandise-tracking technology appears set to take off in retailing as a way to speed up distribution, cut costs and stock shelves better.
Making gear to read, route and process that traffic could boost sales in a market where the RFID tags themselves will probably be commodity items, analysts said.
WiMax, technically known as 802.16, has been called Wi-Fi on steroids. The service can reach 30 miles from a base station, as opposed to the 300 feet typical of Wi-Fi hot spots, at speeds that rival cable modems or DSL, good enough for video, data and voice transmission. It could be used to serve homes in rural areas, and equipment is expected next year.
The explosion in wireless data transmission is driving Cisco's interest, analysts said. Such gear as wireless data modems would be a natural.
Video is another area heating up. Cisco officials are looking at such technologies as video-on-demand, video conferencing or access technologies like fiber to the home.
Some analysts see Cisco buying a company like SeaChange International Inc. (Nasdaq:SEAC - news), Concurrent Computer Corp. (Nasdaq:CCUR - news) and nCube Corp., which make servers for the video-on-demand market,
Others note the telecom industry's growing interest in fiber-optic cable to the home. Analysts said that could draw Cisco to such companies as Alloptic Inc. and World Wide Packets. It already invested in Optical Solutions Inc. last fall.
Cisco probably will not dominate any of its new markets the way it does switches and routers, analysts warned.
"They're entering into a lot places where there's very strong, embedded competition." said telecom strategy consultant Frank Dzubeck, president of Washington-based Communications Networks Architects.
But the networking giant needs to find those markets before it can worry about rivals.
"Cisco is facing what we're all facing," CIBC's Kamman said, "which is: Business is stabilizing, things are good, but there's not a tremendous amount of phenomenally, exciting, headline-grabbing tech advancements."