Online Video Beneficiaries: Cisco

The $1.65 billion acquisition of then newly launched YouTube by Google in October 2006 highlights the market’s bullishness about the potential of Online Video. While Google hasn’t yet succeeded in monetizing YouTube, there certainly are other players who have, Cisco being one of the most key ones. All that video traffic needs to travel through networks, and guess who powers the networks?

Furthermore, popularity of innovative devices like iPods, iPhones, X-boxes, and smartphones that can browse, download, or host video have changed forever the way people watch video. Even the most popular TV shows are posted on the Web within moments of their broadcast.

Business users have also benefited from this phenomenon with Cisco launching its TelePresence product that enables their customers to connect, communicate, and collaborate. In this post, I will analyze Cisco as an online video beneficiary.

Incorporated in December 1984, Cisco Systems, Inc.(Nasdaq: CSCO) is a worldwide leader in networking with net sales of $34.9 billion in fiscal 2007. Its business is organized into four product lines: Routers, Switches, Advanced Technologies, and Other Products.

On the financial front, Cisco reported an increase of 23% year over year in the net sales for fiscal 2007. Earnings per share were $1.17 GAAP, an increase of 31% year over year. For Q4 2007, net sales were $9.4 billion, an 18% increase year over year and earnings per share were $0.31 GAAP. During fiscal 2007, Cisco repurchased 297 million shares of common stock at an average price of $26.12 per share for an aggregate purchase price of $7.8 billion.

In February 2006, Cisco acquired Scientific-Atlanta, a provider of set-top boxes, end-to-end video distribution networks and video system integration. Arroyo Video Solutions, a provider of next-generation solutions for on-demand television, was acquired in September 2006. In 2007, it acquired Webex for $3.2 billion and BroadWare Technologies, a provider of IP-based video surveillance software.

Both Telepresence and Webex represent Cisco’s move upwards in the technology stack, and entering the application business, rather than pure infrastructure. Now, especially with high bandwidth consuming apps like Telepresence, it becomes not only a router of heavy network traffic, but also a generator. In a way, the combination of video conferencing and enterprise networking solutions is a perfect leverage of the online video trend. [I covered Polycom and 3Com recently. Perhaps, Polycom and 3Com ought to merge to pull together an alternative to Cisco’s hegemony.]

Cisco has already deployed around 110 TelePresence systems around the world. It expects to generate $1 billion in revenue from TelePresence by 2013. It competes against HP, Polycom, Teliris, Telanetix, and Digital Video Enterprises in this market. With this product, Cisco expects to further increase its visibility as a solution vendor rather than an infrastructure vendor for the enterprise.

On the consumer side, Cisco’s purchase of Scientific Atlanta represents its ambition to own the set-top box that controls home video. Also, its carrier equipment business is thriving right now, due to increased demand for bandwidth caused by online video.

Its stock is doing well and is currently trading in the range of $31 and $33. The only problem I see in the company is if some of its competitors get their act together, and present a compelling alternative to its product line that is significantly cheaper. 3Com, for one, is hoping to become successful with that strategy, although they are way behind Cisco. The company has bought H3C, its Chinese JV with Huawei, to achieve a dramatically different cost-structure than Cisco, which, as I have said before, remains a fat company.

Nonetheless, for the foreseeable future, Cisco’s unbelievable sales engine will likely continue to deliver. With global demand for bandwidth increasing due to growing adoption of online video, their routers are busy and overworked, and happily so. John Chambers, therefore, mentions “video” with every breath he takes!

This segment is a part in the series : Online Video Beneficiaries