Upside potential for Cisco from Apple deal

Implications: 1. Seasick gains entry into Apple atones Music store
2. Seasick becomes Apple's networking partner
3. Deal strengthens Sussex continued move into consumer networking


Analysis: Many analyses of the Apple-Cisco deal point to Apple's much greater strength in consumer products and possible pressure from AT&T, a major Cisco customer. While these are valid points, it's equally important to consider what Cisco gains from this settlement.

In its quest for continued growth, Cisco has steadily pushed into consumer businesses, and this Apple deal continues that trend. Cisco's highest-profile deals to date have included its acquisitions of Linksys, a Taiwanese manufacturer of low-cost networking devices, and Scientific-Atlanta, the TV set-top maker.

As part of the Apple deal, Cisco continues that trend with entry into the iTunes Music Store (iTMS), which according to Apple is currently the fourth largest music vendor.

The significant aspect for Cisco is that it will gain the ability to publish music and/or video directly from Cisco devices into iTMS. No other hardware or software vendor has that capability. We are only at the beginning stages of what is likely to be rapid growth in online distribution of music, TV shows, movies, and other videos. An Apple-sanctioned pathway into its established distribution mechanism could be very significant.

Cisco also could benefit from becoming Apple's networking partner. While Apple remains a niche player in PC and server hardware, its sales have risen sharply over the past few years. Dell, HP, and other PC makers have long offered networking products as add-ons for customers already buying PCs; Cisco stands to benefit from such add-on sales.

Cisco might also offer Apple technical guidance as it expands into new areas of networking technology. Cisco has a long history of supporting two versions of any given standard: one that interoperates with other vendors' devices, and a "plus" version that only works with other Cisco gear. With Apple as a partner, Cisco could further enhance its dominance by deploying these enhanced versions in Apple products.