How Will Cisco Keep Set-Top Boxes Profitable?

Cisco (NASDAQ:CSCO) won’t drop its business of making video streaming equipment, including the thin-margin set-top box. Instead, the company wants to expand its purview to get into the quickly expanding internet-streaming market.

Cisco has “a huge commitment to video,” Cisco chief executive John Chambers told the Atlanta Journal-Constitution. “This isn’t [about] set-top boxes. It’s how you bring video into the home, into wherever. This is right now our sweet spot for where we want to go,” Chambers said.

Cisco’s $6.5 billion net income for its last fiscal year was down 16 percent from 2010 and an analyst said the traditional set-top box business was dragging earnings down.

However, Chambers said video-related traffic was growing and would make up 91 percent of Internet data flow within three years. Cisco wanted to grow its business of developing software and hardware for cable, telephone, and wireless networks. The company had recently bought NDS Group, a video software maker, for $5 billion.

One of Cisco’s set-top box updates lets users to connect their devices to the Internet devices that connect to the Internet, allowing them to pause and resume shows and switch from one television to another, or from a television to a tablet computer or another smart device. The update also allows the viewer to use multiple gadgets at the same time to watch a show.

“It’s the ultimate product placement,” Cisco’s video group marketing manager Daren Mallard said. “We’re trying to help our [cable] customers transition to … cool features … on hardware that was never designed to support this.”

Other companies are beginning to see the hybrid set-top box advantage, with the Arris Group (NASDAQ:ARRS), Samsung, and TiVo (NASDAQ:TIVO) also getting into the mix.

“It’s a business that Cisco wants to be in,” Avondale Partners analyst Blair King said.

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