Making an Investment
eWEEK: Having filled those gaps, what else is left to be done? Claflin: Were going to invest in our service, marketing, sales and supportthe customer-facing activities. We will also invest in higher value-add channels than we have typically been in.But they said that selling Cisco equipment, they dont have to fight a battle with the customer. They also said Cisco had a complete product line and you guys [3Com] dont. So were now going back to them saying, Voila, we have a full line of products, and voila, we have no intent to have account control. We tell people were going to become a tier one network provider. Some companies have a good price structure and some companies are tier one, but we dont know of any other company that is trying to do both. eWEEK: Most everyone assumes that Cisco will survive, and yet, theyve had very hard times as well. Claflin: Im not going to say that Cisco is in imminent peril. Having said that, theyre a dripping roast. Just imagine a big, fat dripping roast that you just cant wait to sink your knife in. Its like when IBM came out with the 360 and the 370 architecture. Who took a big chunk out of IBM? Gene Amdahl. He leveraged 360 and 370 software, using technology to give a better price and function point at every level. It ran standard code, and his gross margins were 20 percent less than IBM. This is where Cisco is exposed. eWEEK: This is Dells argument. Claflin: Well get back to Dell in a minute. Regarding Cisco, heres a company that had their stock at 80 a share and now its trading at about 12, so its taken a big whack. It still has a P/E ratio of 25 to 30, which means it has to have extraordinary returns to justify $12 per share. What happens if someone puts pressure on and they cant sustain those gross margins? Theyd have to gut the company: massive reductions, real estate sales. The price goes from $12 to $2. Is it likely in the near term? No, but is that a real risk for them? You bet. If a company can come along and demonstrate products as capable as if not more so than theirs, supported by world-class partners, and can price it far lowerthats where I see the dripping roast. It happened in mainframes, it happened in PCs, and its happening in storage.
Global systems integrators told us about their relationship with Cisco. They said it was love-hate. They said Cisco wants to have account control and so do they. They said they hate that they [Cisco] have 20 percent of their revenues coming from services and they try to displace our service offering. They said they hate the margin pressure; they dont like their [Ciscos] arrogance.