IPTV emerges as key Cisco strategy

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Cisco Systems, the largest maker of networking equipment, reported “solid” second quarter sales and profits that met Wall Street expectations.

Cisco said sales increased 9.3 per cent year-on-year to $6.6bn, in line with analysts’ expectations, while profit was a penny ahead of Wall Street at 26 cents a share, compared to 22 cents a year earlier.

Cisco shares rose 2 per cent in after-hours trading to $18.46.

“We’re pleased with the solid revenue and earnings per share results Cisco delivered during its second quarter, but also especially pleased with our strong order momentum,” said John Chambers, chief executive.

“This proves our strategy is working in terms of the convergence of voice, video and data.”

Television over internet protocol, or IPTV, has emerged at the centre of Cisco’s consumer strategy. Cisco, whose switches and routers help send packets of data across broadband networks, stands to benefit from the drive to pipe high-definition television signals into the home over internet connections.

Its recent acquisitions of Scientific Atlanta, the US set-top box maker, and KiSS, a European set-top box maker, should help Cisco capture additional revenues as consumers look for ways to beam those high-bandwidth signals to devices around the home.

“There is a lot of interest and opportunity in IPTV,” Mike Volpi, the Cisco executive who will oversee the Scientific Atlanta business, told the FT.

Because of its huge bandwidth requirements, IPTV has long been considered the ‘killer app’ of the networked home. Electronics companies and computer makers are racing to be the first to market with a blockbuster product that incorporates voice, video and data into a single device.

Mr Volpi said that Cisco hopes to capitalise on Scientific Atlanta’s strong market share among telecom providers to get them to embrace IPTV as a distribution model. “For many of the telecom operators, video is not part of their core business,” he said.

“Our belief is that if you get the telecoms to go to IPTV quickly, the cable operators will go along. They can’t just sit there if IPTV is a better offering for the consumer.”

Mr Volpi brushed aside concerns that cable groups might be slow to adopt IPTV because it threatens their core cable TV business.

“Everybody thinks that cable guys are not going to like IPTV. I would disagree. Cable guys know the Internet means people are not watching as much TV.”

However, Mr Volpi cautioned that technical hurdles mean that widespread adoption of IPTV is still several years away. “I think that everybody that tells you it will happen within the next twelve months is not being realistic,” he told the FT.

“Over the next two years, there is not going to be a very high penetration rate.”

Mr Volpi said three to five years would be a more reasonable timeframe as cable and telecoms groups upgrade the connections between their data backbones and users’ homes to handle IPTV’s bandwidth requirements.

Meanwhile, content providers must wrestle with how to license their content for use on IP networks. Mr Volpi said that content providers such as television and movie studios were likely to try a variety of approaches as they try to strike a balance between widespread distribution on the one hand and control over how their content is viewed, on the other.

“Exactly how things are going to shift is not clear,” he said, noting that Cisco stood to gain no matter which model prevailed. “We are a network company, which means that we benefit the most when bits move.”

Investors will be keeping a close eye on Cisco as it sets about integrating Atlanta-based Scientific Atlanta business. Mr Volpi said one side effect of the takeover could be lower margins. “Margins might go down because we have to provide set-top boxes, and they are not as high margin,” he said, adding that any decrease would be offset by higher revenues.

Mr Volpi said the company planned eventually to combine Scientific Atlanta with KiSS, a European set-top box maker Cisco bought last year. “At some point we want to bring these two together,” he said, although he declined to provide a timeframe.

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