Cisco takes first small step to focusing on core

April 12, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

Cisco’s boss, John Chambers, acknowledged last week the company he has run for 16 years had lost its way. Now he’s putting some money where his mouth is and shutting parts of the over-reached networking group’s shrinking consumer unit. That’s sensible, but more will be needed to simplify Cisco’s sprawl and improve shareholder returns.

Cisco’s move into consumer markets always looked like mission creep. The purchase of the maker of Flip video cameras for $590 million in 2009 was emblematic of that. Cisco justified the purchase as “key to Cisco’s strategy to expand our momentum in the media-enabled home and to capture the consumer market transition to visual networking.”

But it was never clear why a company that had been enormously successful in delivering advanced, expensive networking gear for the corporate market should spend heavily to expand into cheap gadgets for consumers. Now, it’s shutting Flip as part of its effort to restructure, and expects to take a $300 million charge. That’s bitter, but medicine often is.

The company still needs more. It has spent the past decade plowing profits into low-margin businesses only loosely connected with networking and capital-destroying share buybacks. The shares have lost more than half their value since the start of 2001. This poor capital allocation has frustrated investors and made Cisco difficult to manage, as the CEO admitted last week. And it may have caused the company to take its eye off the ball in core markets like switching, where sales fell 8 percent in the last quarter.

Chambers is closing in on retirement age. If he wants to hand a sound company over to his successor — and not be chased out by investors who are tired of the past decade’s turmoil — the firm needs to be simpler still. Redoubling its efforts in networking while whittling down the more than two dozen “market adjacencies,” such as security and smartgrids, that it has been chasing would be the next logical step.

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