Cisco's Chambers Sees Opportunity in Web TV Effort

By Ari Levy and Brian Sullivan

April 6 (Bloomberg) -- Cisco Systems Inc. Chief Executive Officer John Chambers, whose company dominates the market for corporate computer-networking equipment, is taking aim at Internet-based television services. Chambers says analysts' projections may be conservative when they estimate the market will grow to at least $4.5 billion a year by 2010, from a "couple hundred million'' now. Web TV service is a system that will deliver customized programs, such as letting people in different towns watch a movie together. "The market's going to move with tremendous speed,'' Chambers said yesterday in an interview at the company's headquarters in San Jose, California. "If there is such a thing as a killer app, video is it.''

Chambers, fresh from completing his $6.9 billion purchase of set-top box maker Scientific-Atlanta Inc. in February, is finally winning over analysts. He has touted the benefits of Internet Protocol Television, or IPTV, for more than five years and bought Scientific-Atlanta to tap new markets as growth in his main business slows. Cisco shares rallied 27 percent this year to their highest since June 2004. CIBC World Markets analyst Stephen Kamman now expects 95 percent of U.S. households to have high-speed Internet by 2020. Equipment providers are the "clear beneficiaries in this race,'' Lehman Brothers Inc.'s Jiong Shao said. "You've got IPTV, video on demand, iPods, downloadable video clips,''Piper Jaffray & Co.'s Troy Jensen in Minneapolis said. Chambers "is right on. He was ahead of his time.'' Shares of Cisco fell 6 cents to $21.63 at 9:42 a.m. in Nasdaq Stock Market composite trading.

Alcatel-Lucent
Competition is heating up after Alcatel SA agreed this week to buy Lucent Technologies Inc. for $13.4 billion, combining the world's largest provider of Internet broadband gear with the top U.S. maker of telephone equipment. The two companies had combined sales of $25 billion last year, comparable to Cisco's. "This raises the competitive stake,'' said Rob Keil, founder of Hammerhead Systems Inc. in Mountain View, California, and a former manager in Cisco's switching unit from 1996 to 1999. "Every product weakness that Cisco has in the carrier lineup is going to get a lot more scrutiny.'' Chambers, 56, who has made 107 acquisitions since taking the helm at Cisco in 1995, isn't deterred. Takeovers among equipment providers are healthy, he says. "I would argue that Cisco was a key driving force of that combination in terms of our success,'' said Chambers, who earned $1.65 million last year. "It's a logical consolidation within the industry.''

Most Opportunity
Chambers describes the opportunity this way: Watching a movie in high-definition creates the same amount of traffic on the Web as 300,000 e-mails. For Cisco, that's big business. "You begin to really load networks up,'' Chambers said. Some customers expect the size of their networks to triple on demand for combined video, voice and data services, he said. "The consumer has the most opportunity for growth.'' Only 5 percent of Cisco's sales came from consumers last quarter, compared with 45 percent from large businesses. Twenty-five percent came from small and medium-sized companies, with the rest from cable and phone providers. Shao estimates Cisco, with customers including Philadelphia-based Comcast Corp., Reston, Virginia-based Sprint Nextel Corp., and London's BT Group Plc, will report a 16 percent increase in second-quarter revenue next month to $7.19 billion. That follows growth of 9 percent last quarter, the slowest in two years.

Going Further
Scientific-Atlanta will boost Cisco's sales by $875 million in the second half of fiscal 2006, according to JPMorgan Chase & Co. analyst Ehud Gelblum. He raised the shares to "overweight'' in December, saying the acquisition helps Cisco enter the video and home entertainment markets. Cisco competitors are participating in this year's rally. Two of the top gainers in the Standard & Poor's 500 Index are San Jose, California-based JDS Uniphase Corp. and Linthicum, Maryland-based Ciena Corp., up 67 percent and 63 percent respectively. Both equipment makers have expanded their broadband offerings and won contracts from top service providers. Cisco's first foray into the consumer market was in 2003 when it paid $500 million for Linksys Group Inc., a maker of home routers. Cisco also spent $61 million last year on Kiss Technology, setting up a battle with Alviso, California-based TiVo Inc. in the market for digital recorders. "I would've never done the Linksys acquisition if I didn't intend to move onto video and move further into the home,'' Chambers said. Investors responded to Chambers's strategy by lifting Cisco shares to the biggest quarterly gain in three years last period. That follows losses in five of the previous six years. "I'm more encouraged,'' said Brian Freyvogel, an analyst at Pittsburgh-based Mellon Private Wealth Management, a unit of Cisco's eighth-biggest stakeholder. "They're pulling that data whether through Linksys routers or SFA set-top boxes and making sure it goes through their gear.''