News

Video Emerges as Key to Cisco's Growth

• By The Associated Press
• January 15, 2007

But a select group of companies whose products exist largely outside the public view are already profiting handsomely. Led by industry powerhouse Cisco Systems Inc., the network equipment makers are seeing their gear snapped up by service providers who must upgrade their networks to accommodate surging Internet traffic and booming broadband demand.

"Cisco would like to see video delivered to every device everywhere," said Zeus Kerravala, a network infrastructure analyst with Yankee Group. "If you're looking to something to create the next wave of network upgrades, video is front and center. It drives bandwidth like we've never seen before."

Video consumes thousands of times the network space of e-mail messages, and demand is growing so fast that it's poised to overtake peer-to-peer file sharing as the dominant form of Internet traffic.

But online video -- which is projected to grow from $1.3 billion in revenue last year to more than $7 billion by 2010, according to the market research firm Parks Associates -- isn't yet the profit machine the online community envisions. Companies are still grappling with how to generate reliable revenue from content that is largely free and often littered with copyright-infringement land mines.

That's a rich opportunity for Cisco, Alcatel-Lucent, Juniper Networks Inc. and Redback Networks Inc., companies that build the Internet's infrastructure.

Their products -- routers and switches that direct traffic over the Internet and other networks -- help the cable companies and telecoms manage the growing traffic load and intelligently direct massive amounts of data.

The end result for the consumer: faster downloads, higher video quality, and the ability to eventually upgrade to Internet Protocol Television, or IPTV -- TV delivered over a broadband connection.

Millions of broadband customers in the U.S. already get their telephone service through Voice over Internet Protocol, or VoIP, and IPTV is being hailed as the Next Big Thing in video delivery to the home.

For the service providers, IPTV is a crucial component in their fight to deliver the so-called "triple play," or the commercial bundling of data, voice and video over a single network connection.

Companies like Comcast Corp., the nation's largest cable operator, and others have already begun rolling out their own versions of the service.

Charlie Giancarlo, Cisco senior vice president and chief development officer, said the push also is forcing Cisco to change the way its products are built to deliver high-quality video, which puts more strain on the network than voice or data transmissions.

"It's a big challenge for us," Giancarlo said. "It's not just that they want more of the same thing. What they want are things that change the nature of our product in multiple ways."

Worldwide broadband proliferation is also helping fuel the demand for more sophisticated networking gear.

An estimated 210 million people have broadband subscriptions worldwide, and some 40 to 50 million new subscribers are expected to sign on each year, according to networking and telecommunications industry researcher Dell'Oro Group.

The increased traffic, coupled with video's huge bandwidth requirements, create a lucrative opportunity for the networking companies, which have profited from the booming sales of their routers and switches to service providers.

In 2006, the market for service provider routers was $5.5 billion, a 26 percent increase over the year before and continued several years of double-digit growth, according to Dell'Oro Group.

Carrier Ethernet switches had a $2.1 billion market, a 33 percent increase from the previous year.

Cisco is the far-and-away leader in both markets, commanding more than a 50 percent market share in each category.

Cisco has posted admirable profits in recent quarters -- including a 28 percent gain in the most recently reported period -- and Wall Street has cheered the company's performance.

Cisco shares are up nearly 50 percent from a year ago, which has translated into about $56 billion in additional shareholder wealth.

Financial analysts said they are optimistic the company can keep up its impressive pace. On average, they expect Cisco's annual revenue to grow 20 percent in the current fiscal year to about $34 billion.

"This is going to be a multiyear phenomenon -- right now you've got the YouTubes and the consumer applications sucking up capacity on the networks, and we haven't even had IPTV deployments in any significance yet," said Troy Jensen, senior research analyst with investment bank Piper Jaffray & Co. "But once this couple-year investment cycle winds down, it could potentially be tough times again."

Cisco's competitors have also seen strong growth in similar areas even as their overall financial health in some cases suffered.

Some industry observers said they are still puzzled how content providers plan to make money off so-called "over-the-top" Internet video like that on San Bruno-based YouTube, which was streaming more than 100 million videos a day but had not yet turned a profit in its short history when it was acquired by online search leader Google Inc.

IPTV, on the other hand, involves TV delivery over a closed network infrastructure for a fee and is viewed as a much more lucrative arena.

"The core customers, the service providers, are having a difficult time figuring out what to do with over-the-top video," said Sam Wilson, a communications equipment analyst with JMP Securities. "They'd love to not have it at all; it's competition. But the government wouldn't like that. So companies like Cisco are benefiting from the carriers having to carry it, and carry it in a responsible manner."