Cisco Charts Route Out of Router Rut

In March, Scientific won a $195 million deal to provide video distribution systems for two super hubs that feed 41 regional hubs for SBC(SBC). And in August, SBC awarded Scientific and Motorola a deal for set-top boxes.

Scientific chief Jim McDonald, who has committed to staying with Cisco for two years, says there are more orders in the pipeline, including a big supply deal now in the works.

With all the networking fun to be had in IPTV, Cisco clearly wanted a bigger part of the action, say analysts.

Notably, Cisco lost out earlier this week to Alcatel (ALA) in a $2.5 billion deal to build Australia's Telstra (TLS) next-generation network.

Cisco is "definitely" desperate, says the hedge fund manager. "Losing the Telstra deal was probably seen as a nail in the coffin."

Desperation would obviously explain Cisco's willingness to break its pattern of small acquisitions and reach well outside its core area of tech expertise.

And while Scientific's boxes aren't sold at Best Buy (BBY) or other retail outlets, they are a relatively low-margin consumer electronics device. Scientific's gross margins are between 37% and 40%, which could be seen as a threat that could narrow Cisco's ample 68% margin.

The Scientific deal doesn't come as a complete surprise. Some analysts say Cisco has been heading this direction for a few years now, ever since the acquisition of home wireless router maker Linksys.

Cisco has been doing more and more to get further into the home," says one Wall Street analyst. "This is just another way to diversify its product base and reach into new areas."

But not all of Cisco's new paths have led to success.

Early efforts to convert phone systems like Sprint and countless telco upstarts or CLECs to run on Internet protocol sputtered and in many cases failed. Similarly, Cisco was hired to replace Merrill Lynch's old-line office phone system with Internet protocol gear.

IP is still the future of networks, but getting there directly without major snags has been difficult. That's why investors have more than a few doubts about the already dodgy progress of IPTV and Cisco's complete conversion to the movement.

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