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What does CISCO know that the rest of us don't?

Editorial Staff

When business-orientated CISCO bought out its consumer-orientated competitor Linksys in 2003, there were a lot of questions. Now, a decade later, the unit is being sold to Belkin. More questions.

For CISCO, the purchase of Linksys made sense only if one considered that it's faster and cheaper to buy a market leader than to become one. For Linksys was already showing signs of becoming the dominant force in the consumer modem market where the main innovators were Linksys and US Robotics. Although there were dozens of other brands, and OEM manufacturers, those two were carving up the market worldwide.

CISCO sold expensive stuff to wealthy companies. But in the post dot com crash, there was a lot of stuff still sitting, unopened in its boxes. The price of new and nearly new product was far below the cost of buying direct. Meanwhile, the home market, becoming used to broadband, was poised to see explosive growth.

And it did. And around the world, it continues to do so.

But in key markets, while far from saturated, demand is bound to slow. The Linksys division has moved with the times, from dial-up on cable, through broadband on wifi and onto digital cable. Homes are now equipped with routers (correctly pronounced "rooters" not "rowters" because they "route" data) - a piece of equipment that 20 years ago was viewed as arcane, complicated and needing specialist networking expertise to operate.

Belkin is a name that has steadily grown over a period of more than a decade. From a secondary position in technology supermarkets, selling power distribution panels with spike protection, Belkin has moved into the mainstream of technology companies. But its products were still very much in a supporting role. Until it has also moved into wireless networking

And there's the hint as to why it has done a deal to buy Linksys from CISCO. Because it's faster and cheaper to buy a market leader than to become one.

But Linksys is not without competition: ZTE has a massive market share, especially amongst telcos delivering product to their users. Huawei, the company America loves to hate, is coming up on the outside. That market is where it seems logical to expect the growth to come as broadband is rolled out and Telcos/ ISPs deliver the tech they specify. The home market is, surely, bound to diminish.

And so, Belkin, which is 30 years old this year and has seen increasing profit in the past 25 years, is making the biggest purchase of its corporate life - and taking its biggest gamble. It will need to make those big corporate sales. And while it is faster and cheaper to buy a market leader than to become one, Belkin is going to have to capitalise on its new brand very, very fast because it's not so cheap: Belkin is paying USD500 million for the Linksys brand and product line.

CISCO, ironically, has been doing that. And CISCO has the advantage that it was able to cross-sell its consumer units to its big tech customers.

It is difficult to see a long-term upside in the deal for Belkin. Then again, we would have said the same about the CISCO deal a decade ago and that worked out pretty well.

But at least CISCO kept the brand: as late as 2007, CISCO, which had added its name to the Linksys boxes recognised a basic truth: in the consumer market the Linksys brand had recognition that far outweighed that of CISCO itself. Its shelf presence in its black-and-blue boxes was recognised and trusted.

And that is something that Belkin already has but for much more prosaic products. History shows that were a brand is seen as getting above its station, it loses trust: it's hard to move upmarket.

Therefore, for Belkin, folding its own nascent router / hub business into Linksys makes a lot of sense. it just takes a while to work out why.