Dan McLean: Cisco’s Linksys buy has industry scratching its head

It’s certainly the most perplexing acquisition Cisco has ever made.

That would be the purchase of home network equipment maker Linksys last month, a deal that must have many industry watchers scratching their heads. On the surface, it looks like Cisco plans to spend US$500 million, give or take, to buy its way into a market that the company has not only ignored throughout its history, but has often staunchly admitted it has no interest in.

It’s the market of what is commonly referred to as “box pushing,” where high volumes of low-margin gear must be sold in order to achieve profitability. It’s tricky business, since the small office/home office (SOHO) market is highly competitive and is characterized by vast sales of products with slim margins that are continually eroded. Commodity has not been the name of the Cisco selling game.

Rather, Cisco is the force to be reckoned with in the large enterprise, where rich function and high performance count the most. In addition, the company sees its enterprise equipment as an opportunity for solution and service selling partners to add on value way beyond the price of the product that might include some degree of consulting, implementation or operational service. In fact, each year Cisco goes through a partner paring process to weed out those associates who seem solely bent on selling as much gear as possible, to the exclusion of adding that all-important service value.

So, what on earth does Cisco want with Linksys’s product suite of SOHO wireline and wireless adapters, gateway/routers, hubs and modems, as well as some small business switches and network interface cards (NICs)?

The corporate party line suggests that having Linksys gives Cisco greater overall product breadth – the old end-to-end solution story, where through the acquisition Cisco can sport the full gamut of gear, from high-end switching for carriers and large business to home routers and NICs. It’s true that the SOHO market represents the last untapped customer frontier for Cisco, but the company has had designs on this market before and has given up the ghost.

The fact is that Cisco’s business model – to offer value beyond merely the equipment itself in the form of rich services and comprehensive large business solutions – runs counter to low-margin volume selling with no presale and little, if any, after-sales support or services.

There’s also the suggestion that Cisco is interested in achieving success in a non-traditional market. Certainly the sheer number of home network users is impressive: an estimated total of approximately 55 million in the U.S. alone, according to Charlie Giancarlo, a senior vice-president at Cisco. But on the flipside, the total worldwide market value of home network equipment – reportedly US$3.7 billion in 2002 – seems a somewhat modest opportunity for a half-billion dollar investment.

If Cisco were to compete in the consumer space, there would appear to be a whole lot of work to do. Start with a recruitment of a whole new set of retail distributors and volume selling partners to sell the Linksys gear. We’re talking thousands of them in Canada alone. Expect, too, that significant dollars must also be invested by Cisco in market development and rebranding of the Linksys gear to the Cisco moniker.

Maybe in this case Cisco will look to operate Linksys as a standalone separate entity, allowing that company to continue doing what its been doing in the market, and providing resources or financial support when and where needed in order to drive further market penetration. Such a scenario runs absolutely counter to the traditional tack of assimilation into the greater Cisco “collective.”

The Linksys acquisition by Cisco purely as a market-play into the consumer space is extremely difficult to rationalize.

Is it possible that there might be another agenda?

There could be a grander vision at work. Throughout its history, Cisco has demonstrated a penchant for thinking way beyond the near term and is definitely the one network equipment maker working to drive new technology and application concepts into the market. The current existence and growth of IP telephony, for example, has a whole lot to do with the determination and effort Cisco has made to both educate users to the value and pioneer adoption.

Undoubtedly there are as yet unrevealed and announced communication solutions that Cisco may have on the drawing board. The market is certainly waiting to see the greater promise of network convergence beyond IP telephony. Something that might, for example, enable business processes and/or applications in real-time, interactive ways through a more dynamic, multimedia-based, super high-speed network. Cisco is plenty interested in concepts like content delivery, personal area networks, anytime/anywhere computing and education in general. Has the company dreamed up a “way cool” something that required a final piece – like the front-end home-user network gear that Linksys sells?

Cisco might also be looking to establish a beachhead into the consumer space and drive its brand to an even more ubiquitous level of recognition. So Cisco might be looking to continue selling Linksys gear to consumers in the near term and down the road drive down to that market much more interesting and dynamic solutions, which are being developed in the larger enterprise space. Linksys then becomes an important vehicle to establishing an inroad to the home customer.

Doesn’t it make sense that there must surely be a strategy in the Linksys acquisition beyond the obvious entry into an existing market where Cisco will battle a number of formidable heavyweights? Otherwise, the acquisition just doesn’t seem to make a whole lot of sense.