Cisco's video revival

December 12, 2007: 8:30 AM ET
Cisco CEO John Chambers
Cisco Systems CEO John Chambers gives a presentation in July. Image: Cisco

To understand why Cisco CEO John Chambers is still bullish on the company's growth prospects in an uncertain economy, consider the change underway at the BBC.

The European public service broadcaster is in the throes of a major digital transformation. Its online operation, bbc.co.uk, moves a staggering 1.3 petabytes of data every month to its audience – the equivalent of transmitting all the print holdings of the Library of Congress twice, every day.

But an even bigger wave is coming on Christmas day. That's when the BBC plans to widely launch iPlayer, video software that allows people to download programs to their computers. By the broadcaster's internal estimates, traffic will quadruple in a year – so the BBC is now in the market for lots of the gear Cisco sells.

The trends behind the BBC's plans were just one of the potential growth drivers Chambers highlighted Tuesday at C-Scape, Cisco's (CSCO) global analyst conference held at San Jose's Fairmont Hotel. The day's presentations were part technology forecast and part big-tent revival, as Chambers and his lieutenants made the case that the two hottest trends in Web 2.0 – digital video and online collaboration – will power Cisco's sales and fatten its profit margins well into the foreseeable future.

Cisco 3-month chart
Investors got spooked last month when Cisco said large U.S. businesses were curbing their spending, but Chambers remains optimistic about Cisco's growth.

Not everyone is a true believer. In fact, it was uncertainty about Cisco's prospects that triggered a broad selloff in the tech sector last month, when analysts interpreted comments from Chambers as a sign that weakness in U.S. corporate spending could soon slow Cisco's momentum. The company has since labored to allay investor fears, but the stock still trades at post-selloff levels, even as bellwethers such as Google (GOOG), Hewlett-Packard (HPQ) and Apple (AAPL) have recovered.

Maybe that's why Chambers paced the aisles of the hotel ballroom with all the fervor of a country preacher, sometimes walking right up to analysts and making eye contact over their laptop screens. Cisco has no lack of growth opportunities, he emphasized more than once. At one point, Chambers predicted that in five years or less, we will enter a new era of interactive television where sports fans will have greater control over the action on their own screens even as they communicate with others who are watching.

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"You will not only be able to run your own replays, you'll watch the game from multiple angles," Chambers said. "You'll be able to collaborate in ways you've only been able to dream of – and it will chew up bandwidth and sell a ton of routers."

It's hard to argue with the trends underlying Chambers's optimism. Just last week, a report from Horowitz Associates said video downloading is on the rise among consumers with fast Internet connections. The number of people who go online weekly to watch full-length TV shows doubled over last year, and 86 percent of high-speed Internet users download video at least once a month. As those numbers creep upward, and as wireless providers embrace video too, there will be more demand for Cisco's gear that manages the data traffic.

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But Chambers could be miscalculating how quickly the video revolution will arrive. Sure, consumers love video. But are they willing to pay enough for it to make Hollywood perk up? Unlike the BBC, which is funded by taxpayers in the United Kingdom, other major content owners have to worry about how to make back whatever money they spend to fuel the digital video phenomenon.

And as the possibility of a recession looms, content owners can't assume an endless supply of advertising dollars will be available to fund even a popular service. (All this is assuming the writer's strike ends, and the content owners have any shows at all.)

Finally, don't forget Apple's cautionary tale. Even as the darling of digital media scores with its iPod and iPhone, video has proven a tougher sell. Though the iTunes Store has an audience of millions that's willing to pay – Pay! – for digital video, some TV executives don't like Apple's terms (see NBC Universal). And movies? Apple CEO Steve Jobs predicted a year ago that the major Hollywood studios would gradually embrace his download store, but instead many seem to be making a point of staying away from the Apple empire, at least for now.

All those potential delays are bad for Cisco's video vision. Cisco will make the most money when top content owners feel comfortable putting their digital archives online for the world. And while that seems sure to happen eventually, there's no guarantee it will happen as quickly as Chambers would like.

Cisco's display of strength

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