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By Pat Dorsey, CFA | 02-11-2011 05:09 PM

What Cisco Must Do to Preserve Its Moat

We'll be watching Cisco very closely to see how management reacts to the firm's clear inability to compete in the consumer market.

Securities mentioned in this video
CSCO Cisco Systems Inc

Pat Dorsey: Hi, I'm Pat Dorsey, director of equity research at Morningstar.

Tech bellwether Cisco this week posted its second disappointing earnings outlook for the past two quarters, sending the stock down about 15%. The market is worried about competition in Cisco's core routing and switching markets, but we think it's actually not the bigger concern for Cisco's competitive advantage, or economic moat as we like to say at Morningstar.

With me to talk about Cisco's economic moat, and some of the things they might be able to do to fill it in or widen it, is the associate director for our technology group, Grady Burkett.

Thanks for joining me, Grady.

Grady Burkett: Thanks for having me.

Dorsey: So, we've talked for a while in our Analyst Reports about our worries with Cisco's push into the consumer market, and now we're seeing perhaps some of those chickens come home to roost. You want to give viewers some background on that?

Burkett: Over the past five or six years, Cisco has been moving into the consumer market. They bought Scientific Atlanta in 2005, and that brought them into the set-top box industry. They picked up Linksys in 2004 and that was home routers. More recently, they acquired Pure Digital, which makes flip cameras, which are just those small video cameras that you are starting to see in the consumer [market], and these are really commoditized areas for Cisco.

Dorsey: And not an area where it has much experience, right? I mean, selling into the consumer market, the distribution channel, the audience is quite different than selling a mission critical router to Procter & Gamble?

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