Cisco Dumps Linksys, Still Stuck In Telco Trap

Dec.17.12 | About: Cisco Systems, (CSCO)

Cisco (NASDAQ:CSCO) is expected to dump its Linksys router unit later this week, probably for less than the $500 million it paid for the company a decade ago.

The decision represents a complete turnaround for CEO John Chambers, who led Cisco into consumer markets during the last decade with things like the failed Flip video camera and the Scientific Atlanta set-top business. Under Chambers, Linksys went from being a router company renowned for quality to one renowned for stupidity. It repeatedly ran afoul of the General Public License, or GPL, using open source code without telling anyone, and when confronted it simply released some buggy code rather than commit to what open source could do.

Most bloggers covered by IT Blogwatch are expressing little regret over the decision, speculating that Belkin will be the buyer.

Investors need to ask two questions in the wake of this debacle:

  1. Does Cisco's new strategy of becoming a networking systems company, rather than just a hardware outfit, make any more sense than the Linksys play?

  2. Isn't it time for John Chambers to retire? And who will follow him? Has he, in fact, earned the right to decide that question?

The latter question may be the more important one. Chambers in many ways is Cisco, but he's now 63. The names being floated, both Cisco insiders, are exciting no one and give no impression that Chambers' hand is going to actually leave the stick anytime soon.

The biggest problem for Cisco wasn't the consumer market at all, but its forced transition from being a supplier to competitive ISPs and enterprises building their own Internets into being a telco equipment company. I've said this before, but depending on telcos for growth has always been a mug's game, as the basic telco mindset is focused on limiting expenses as much as possible while squeezing captive customers as much as possible.

Doubling the capability of networks and improving their price performance just isn't part of the telco business model. If you don't have a business model that focuses on forcing telcos to buy in order to stay in the game, you're just not going to grow. Cisco has been the latest company to prove the truth of this adage, and the question for whoever succeeds Chambers is how will he or she escape the telco trap?

Consumer products wasn't it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.