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Cisco investments fuel consumer electronics push

Cisco Systems develops an aggressive investment strategy to support its push into consumer electronics, home networking.

Cisco Systems, often thought of as a master of acquisitions, has developed an aggressive investment strategy that it hopes will drive the company toward success in the consumer electronics and entertainment market.

For much of its existence, the networking giant has used acquisitions as a way to enter new markets quickly and to round out its technology and product portfolios. In the past two decades, it has acquired more than 100 companies.

But as Cisco moves into the consumer market, it expects to make more strategic investments in start-ups rather than buying them outright.

"Given the margin profile in the consumer market, it sometimes makes more sense for us to look at investments to shape our strategy," said Charles Carmel, director of corporate business development for the company. "We also see investments as a complement to acquisitions."

Since 2003, when Cisco entered the consumer electronics business with the Linksys acquisition, it has invested in 14 start-ups. During this same period, the company has bought only three other companies besides Linksys to fit into its consumer electronics and home-networking business: Scientific-Atlanta, a cable set-top box maker; Sipura Technology, a maker of Net phone products; and

Cisco's home-networking vision is to offer devices that can be connected to the Internet, as well as to other entertainment gadgets in the home. And it plans to offer the networking equipment, such as wireless routers, used to shuttle IP packets of music, video or interactive games throughout the home.

But to fulfill this vision, it needs access to content and security technology to protect copyright movies or games. And the company sees partnerships as a good way to meet these goals.

"There are a number of markets where we don't want to participate directly," Carmel said. "But we want to influence how the software or silicon develops to complement the markets we are in. So we invest in companies that may supply Cisco."

For example, on Monday, the company said it participated in a $15.5 million round of funding for Akimbo Systems, a small company that delivers television programming distributed over the Internet. Akimbo offers a library of more than 10,000 movie and TV show titles that can be downloaded from the Internet.

Akimbo, which had been selling its own hardware along with its service, has shifted its business model recently so that its software and service can work on other companies' hardware. Cisco expects to offer the Akimbo service as part of a package of content services that will ship with the Kiss DVD/DVR device when it launches in the U.S. market later this year.

To keep content secure, Cisco announced in April that it had invested in a digital rights management company called Widevine Technologies, which provides security for on-demand movies and TV shows by placing digital watermarks in content at each stage of the video distribution chain. This technology is essential for content providers to feel comfortable distributing their movies, TV shows or games over the Internet.

Cisco also has made strategic investments in gaming companies such as TerraPlay, IndiaGames, Exent and Emergent. And it has invested in start-ups Broadlogic and Entropic.

As for turning any of these investments into acquisitions, Carmel said an investment in any company--whether it be for the consumer group or for Cisco's core networking groups--is not a precursor to an acquisition.

"We use investments for new market learning in areas where we don't participate," he said. "Sometimes it happens where we buy a company we've invested in, but it's not common."