The worlds largest network equipment maker, Cisco Systems, Inc., has been bloodied by the industry downturn over the past three years. Now the company has regrouped, recently resuming its practice of acquiring companies, including Linksys Group, Inc. and SignalWorks, Inc., which it acquired last month.
Attempting to engineer Ciscos rebound is John Chambers, president and CEO of the company since 1995. He led the company in 2000 to attain the highest market capitalization of any company in the world. In a recent interview at Ciscos corporate offices in San Jose, Calif., with eWEEKs Executive Editor Stan Gibson, Labs Director John Taschek and Editor in Chief Eric Lundquist, Chambers explained his vision of how Cisco will regain its glory, keying on 9 new initiatives, each of which could be worth $1 billion annually. Those include storage, IP telephony, security, wireless, metropolitan networks, converged packet networks, voice, virtual private networks and cable networks.
eWEEK: Why did Cisco acquire Linksys?
Chambers: Weve built out the network highways pretty well, but where were lacking is getting you out of your garage onto the network. The loads coming from the home for personal and business reasons can be pretty dramatic. In the future, every device—the Internet car and the Internet appliance—will be connected to the network. Were designing routers for cars and, in ten years, almost every car will have a router.
If you believe a network of networks will evolve—and I do—then you will have companies that want to take their networking all the way to the homes of their employees.
For example, I will pay for all of our employees home networks at Cisco. All it takes is one hour a month to break even.
eWEEK: It also gives you household name recognition without buying a Super Bowl ad, doesnt it?
Chambers: Yes. When we launched our major marketing campaign, it was a brand awareness campaign that would expand to the low end of the commercial market as well as the home. Linksys had been on our radar for quite some time.
eWEEK: Is Cisco going to resume the pace of acquisitions it had in the mid-90s?
Chambers: You wont see as many acquisitions as we once did at the height of Internet activity. Then, it was all about speed—how fast could you enter a market. Now, its much more about integration and staying power and a slower growth level. But we will absolutely be aggressive in the market about moving into new areas. When we move in, we often use acquisitions as the first step.
eWEEK: Many of your competitors say your profit margins are too high. They think youre vulnerable. What is your response?
Chambers: When a company acquires technology, its for productivity. Very few of our large customers view IT as an expense. At our recent CEO Forum, executives said that IT enables the implementation of their strategy.
If the market is moving to an end-to-end architecture, its pretty hard to compete with us on that. None of our peers have done that. If you believe its going to be a network of networks and you need to compete in the enterprise, the service provider and the home, then that puts a lot of people [competitors] in tough situations.
If you believe its about the flexibility of your hardware for the future, when you will need to integrate voice, data and video and add security, its tough to come at us from that angle.
All that leaves is price.
Most of our peers are not making any money. If youre competing with us on price and youre not making any money, customers kind of understand that.
I like our position. Well continue to come down the price-performance curve ahead of Moores Law at 20 to 50 percent a year—not stair-steps, but in big jumps.
What we did with the 6000 pricing [recently] is we priced our gigabit capability at the 10/100 [Ethernet] capability. Thats a tenfold increase in price-performance in one year.
Two years ago, we were leaders in a race that was going 200 miles an hour. Were now leaders in a race thats going 100 miles an hour. And our lead is actually larger than before.
Weve refocused our whole company on profit contribution. We used to do 10 different router families. Were now going to do one throughout, with common ASICs and common software. Youll see many more efficiencies. We did the same things in switching. We had major price performance improvements or price reductions in all ten of our major product lines last year.
We will compete on price, but price is the number three, four or five customer decision criterion.
eWEEK: It sounds like a compelling message, but is Wall Street convinced? Youre buying back stock, for example.
Chambers: If the company executes well, the stock will take care of itself. Wall Street has voted the value of Ciscos future is that of our 11 closest competitors times three plus. Its quite an honor. During the height of the bubble, the market cap of those competitors was $937 billion. Today its $32 billion. [Editors note: a Cisco spokesman said these competitors are: Nortel Networks, Ltd., Lucent Technologies, 3Com Corp., Foundry Networks, Inc., Redback Networks, Inc., Extreme Networks, Inc., Juniper Networks, Inc., Enterasys Networks, Inc., Riverstone Networks, Inc., Sycamore Networks, Inc. and CIENA Corp.]
Wall Street has pretty high expectations of Cisco. The issue for the street is whats our growth rate.
eWEEK: What should be the growth rate for a company of Ciscos size and maturity?
Chambers: You tell me the growth rate of the industry and the GDP and I can be pretty accurate. But nobody knows what the GDP growth rate is. It depends on GDP growth because capital spending it tied to GDP growth.
eWEEK: Has the 100-year flood of the past couple of years subsided? What lessons did you learn from it?
Chambers: If you talk to companies outside of IT, they will tell you how to handle peaks and valleys in their industries. Slowdowns will surprise you. The first thing you ask is did you do it yourself or did the industry do it to you. Thats important. We did some soul-searching.
eWEEK: Was it a combination of both?
Chambers: Somewhat, but I think it was primarily an industry phenomenon.
Could we have done it better? Of course. The second thing is to determine how long it will last and how deep it will be. That dictates your strategy. You adjust appropriately. You try to do it once, but there are no guarantees.
We said it was going to be a 100-year flood and we had our changes implemented in 51 days. Then we focused on getting ready for the upturn.
eWEEK: Which hasnt quite happened yet, has it?
Chambers: Oh, absolutely not, it has not happened yet. But were positioned extremely well for the upturn. Our profitability has returned to where it was before as a percentage of income. We are a more agile company now and a company that learned an awful lot and was humbled pretty good.
eWEEK: Arent there some laws that come into play when a company gets very large and has many products, as you experienced at IBM. Is it in fact manageable after a certain point?
Chambers: Lets break that question into three pieces. The answers are yes, yes, and it depends.
If youre asking about individual products, it gets very difficult to manage all of them at the same time. 3M could do it, but they were the exception.
Then the question is how you tie your products together. Our products tie very well together, and our customers want them to tie even tighter. Thats the end-to-end architecture.
The third is a management philosophy. If all the decisions have to be made at the top and not just the strategic ones, then there is a critical mass that, regardless of how effective your senior management team is, will stifle your growth and cause your company to get into trouble.
We empower remarkably deep within the company. We set the strategy at the top, but then we empower it.
I do not see it being a limitation at this time. Might it be in the future? I sure hope so, but well see. Because that means well be broader and deeper. Im very comfortable scaling where we are today, but I hope we enter enough new markets that its an issue we have to confront.
eWEEK: IP telephony may be the hottest market out there. What is your vision for it?
Chambers: IP telephony in combined voice, data and video is the long-term hottest market. In the short term, storage and security and broadband to the home are higher in terms of the opportunity.
In IP telephony, its integration of data, voice and video. Its one connection to the home, your car or your office. Were agnostic on what combination of wired or wireless that is.
We know that a majority of our enterprise customers will move to a single voice data and video network over the next five years.
The commercial and the home market will move at different paces, but its what were focusing on at this time. Its one of our 12 [new] markets, nine of which have been identified. We are investing 40 percent of our growth in these markets.
Were investing for the future. Were probably the most aggressive weve ever been in our history, in the number of fronts were moving on.
eWEEK: In storage, you acquired Andiamo last summer and rolled out new products based on their technology. How fast do you see Cisco growing there? Will you be the dominant vendor?
Chambers: Were very honored that the people who have taken a look at the product view it as a very hot product. It would be naïve to say well be the leader before theres broad customer acceptance. Do I think we have the potential to be the leader? Absolutely. But the customers get 100 percent of the vote here. Well have a good idea by the Fall on that.
Weve already acquired partners in IBM, HP and Hitachi, and well see about EMC. Who would have said Cisco could have even been a player in storage two years ago, much less saying well be the leader?
Were off to a good start, and its now about execution. But it would not be constructive or good behavior for me to call it now. Do I like where we are positioned? Oh yeah!
eWEEK: One of your competitors, 3Com, has been working with the Chinese company HuaWei, a company that you are suing. Could you comment on that suit and how you see China as a market and a place to do manufacturing?
Chambers: First, Ive been doing business in China for 18 years, always very profitably and with good relations with Chinese customers and the government. I was the only non-Chinese to be in charge of that market for Dr. An Wang at Wang Laboratories, and I did one of the first joint ventures there.
The Chinese market will be the fastest growing economy for the next two decades and may become the number one economy. They are turning out more engineers than we are here in the U.S.
In terms of manufacturing support and engineering, we moved a large part of our manufacturing there a long time ago. We have strong relationships with customers there.
In terms of the suit against HuaWei, weve never sued a company before. There have been lots of companies that have crossed the line, and weve been able to work it out with them. We dont use litigation as a way of slowing down a competitor but only as a last resort after all else has failed. All we want is a level playing field. That is not intellectual property misuse. And competition or creativity is not copying.
HuaWei, in its comments has said that it probably crossed the line here and theyre going to fix it.
3Com is a good company, I would be surprised and disappointed if they ever got involved in a situation that was not very upfront in terms of intellectual property and copyright protection issues.
eWEEK: You mentioned An Wang. Is there a leader you emulate?
Chambers: I think you learn from everybody you touch in life. I learn from every customer, from many different people, and I admire Dr. An Wang tremendously. Hes the smartest man Ive ever met in my life, bar none, and one of the kindest and most gentle people.
My dad is someone Id like to emulate. I have pride in what he was able to accomplish, and he is my best friend.
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