Cisco's online video gamble

October 27, 2010: 3:00 AM ET

As its traditional networking business slows, Cisco Systems believes it has found a new way to grow.

By Jon Fortt, contributor

While the rest of Silicon Valley buzzes about Facebook, Twitter, and tablet computers, networking-gear maker Cisco (CSCO) is betting big on Internet video. Cisco shook up the corporate teleconferencing market a few years ago with its TelePresence technology an Internet-based, high-def videoconferencing service and in October announced a "lite" version of the service for consumers. CEO John Chambers predicts that the Internet's primary payload will increasingly be video not the mundane corporate traffic that makes up a big chunk of Cisco's business today.

It's easy to see why Chambers is bullish on video: Today's smartphones can record, transmit, and play high-quality video. All four major broadcast networks and many cable channels now stream primetime shows the same week they air. Corporations use more video too: During the downturn, business embraced videoconferencing to save on travel costs.

Moving all that video traffic won't be easy: A three-minute HD clip can be about 50 times the size of a three-minute song, so Cisco is retooling itself to be the construction crew for a videocentric Internet. It has acquired a videocamera maker (the ubiquitous Flip) and more teleconferencing capability, but the heart of its strategy is its Medianet architecture, designed to infuse video smarts into Cisco's entire product line, from data-crunching routers at the network's core to cameras and computers at the edge.

Medianet takes much of the guesswork out of transmitting video to a variety of devices. A smartphone could tell a Medianet-outfitted network its screen size and connection speed and request a video stream tailored to its needs. If all works as Cisco hopes, gear using Medianet would save customers money by easing network traffic. It would also offer a fresh reason for telecom carriers and enterprises, Cisco's two largest customer groups, to buy the whole family of Medianet-friendly gear.

That would make it harder for competitors to take business from Cisco. Cisco's "real motivation is to sell more routers and switches on the enterprise side," complains former Polycom (PLCM) CEO Robert Hagerty.

Indeed, Procter & Gamble (PG) has expanded its videoconferencing capacity in recent years and has been testing the technology with focus groups. Partly as a result, P&G has doubled its network capacity in the past 12 months in anticipation of more video traffic. (That means P&G has had to buy more of Cisco's traditional networking equipment to help manage its systems.) If Cisco can woo more companies like P&G, video may not kill the router star; it may in fact make it stronger.

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