By almost any measure, Cisco Systems Inc. is the biggest fish in the networking pond. Thanks to more than 130 acquisitions, a brisk pace of internal development and a much-discussed new organizational structure that the company is using to attack a slew of new markets, Cisco’s reach extends from the consumer to the enterprise and deep into service provider networks. The company offers everything from personal video cameras to high-end telepresence systems, set-top video boxes to, lately, servers for the data centrer, in addition to more traditional network gear like routers and switches. But Cisco’s real ambition, as articulated by its high-energy CEO, John Chambers, is to become the most important IT company of all.
Chambers spoke with IDGE Chief Content Officer John Gallant, Computerworld Editor-in-Chief Scot Finnie, and InfoWorld.com Editor-in-Chief Eric Knorr about the market transitions fueling Cisco’s bold strategy, what it means for enterprise customers and how the company will compete head-to-head against the industry’s biggest players.
Everyone knows Cisco as the leading network company, but your remarks at Cisco’s recent Financial Analyst Conference made clear that your goal is for Cisco to be the number one IT company. That’s pretty ambitious. What’s it going to take for Cisco to become the number one IT company? And, what will it take to convince customers?
CHAMBERS: I always start from a customer perspective when I look at this. It is when your customers suddenly are encouraging you to go well beyond what your current scope is. That is the most important indicator the opportunity exists. The second; when you make movements into new market areas or have dramatically different relationships with customers, you’ve got to catch market transitions. And the third is you’ve got to have an engine that does innovation, not just internal, but partnering and acquisitions.
If you think of them in sequence, it can be as simple as smart [power] grids. I wish I could tell you it was brilliance from the top. It was not. It was basically the utility companies in Europe saying: “Cisco, pay attention. This is an instant replay of the Internet — 360 protocols and no security. You have a lot of the pieces. Put it together.” Once we got it, we then used the effectiveness of our organization structures around councils, boards, working groups. The concepts of social networking, if you will, brought together with process and discipline, and interdependencies among the groups.
I’m not after servers – I’m after virtualization
What a lot of people don’t realize is that all of these 30 new [market adjacency] areas that we’re working on will be at first appear to be independent. But they will actually be very loosely and then tightly coupled together.
We have the number one position in most every product [area] we’ve gone into. We’ve also gotten very good about doing acquisitions — 137 of them. Usually, 90 per cent of acquisitions fail. My definition of fail: Did you keep the management team? Did you keep the key engineers? Did you get the next-generation product out? Did you gain market share? Seventy per cent of ours have hit or exceeded what we told our board of directors we’d do.
So, with innovation, Cisco is pretty good at doing internal [innovation], internal start-ups, acquisitions and strategic partnering. Not perfect in any of them, but very good versus our peers.
So, the first thing is [that this is] customer driven. Second, is [our] innovation, and the third element is catching market transitions. What’s the transition here? It’s the role of the network. The network’s going to be the platform for all forms of IT and communications, if we’re right. The network is not just dumb pipes. We’re actually aligned very closely to service providers on this. I’ll make money on plumbing and there will be a lot of plumbing to be done.
But with intelligence throughout the network — starting in the data center with virtualization — you don’t [have to] know which servers are used, where the data is stored, where the application resides. That will start first in the data center, but go all the way to the home, where you won’t know if your movie is on your TV set, on your Microsoft device, set-top box, at Disney or the point of presence of the service provider — that’s what virtualization is about. That’s Cisco’s core competency there.
One of the other market transitions is that video’s role will be huge. It won’t be just the primary way we communicate; it will be the way I deliver my sales, my support, my partner interface, my service, etc., to customers.
Then [there is] collaboration. Collaboration, I think, will drive productivity at two to three per cent per year in the U.S. and Western Europe. Most economists would say that is unlikely, because you can’t grow productivity by more than about one-and- a-half per cent sustainably. But, yet, the first generation Internet did. We’re going to see an instant replay of that in my opinion around collaboration.
At that same analyst conference, you said that all the exciting new developments in IT were tied to the network. What does that mean for IT?
CHAMBERS: You’re starting to see an increase in IT spending because people have delayed some spending but, secondly, they’re realizing they’ve cut costs as tight as they can. Without process change, they’re [going to have to] cut costs more. They’re all looking at new revenue streams and they’re all looking at productivity. Process change will continue cost cutting. [For example,] telepresence reduced $750 million a year in Cisco travel to $250 million. Every CEO gets it isn’t just about travel. It’s about the process change behind it. But travel pays that first expenditure.
The second area in terms of productivity is collaboration. Using Cisco as an example, our productivity grew 17 per cent in two quarters, measured by revenue per employee. Part of it is just because our business ramped up. But, I would say at least of half of it was because of these new business models, the vision strategy, execution and organization structure, because my productivity was actually a lot higher than that. We moved a billion dollars of resources into new models that produced no revenue or no material revenue. So, at the same time, we were driving our traditional models, we are going into a whole bunch of areas like sports and entertainment. You know it’s a rounding error how much [business] we’ll do in the stadiums around the country. But the play is bringing that into the home over service provider networks, changing the advertising models, etc.
Some IT executives may look at the things Cisco does in consumer and ask why? How does that benefit the enterprise buyer? Case in point, how does the acquisition of the company that makes the Flip video camera benefit me as an enterprise buyer?
CHAMBERS: Our ability to get market transitions right is pretty good. CIOs will probably give us very high credibility for that. If you look at the charts we did in ’97, 2001, 2006 and 2009, almost everything we said that looked pretty visionary [at the time] actually worked.
So, from the CIO perspective, three thoughts. The first generation of the Internet was driven by business to the consumer, in terms of Internet productivity. Business got it first, with ordering online, doing customer support. The next generation of productivity is the consumer [technology] driving into business. We predicted this in 2000. It was on the charts. That’s how it’s occurring — what our kids did in social networking, Web 2.0, You Tube, Facebook, etc.
The first generation of competitors we took on were very good companies: SynOptics, Wellfleet, 3Com, Cabletron. Only none of those now exist. And, the same thing could happen to Cisco if we don’t get market transitions right.
This is occurring much quicker than [anyone] thought. You ask the top leadership at Procter & Gamble what they use Flip for. They use it to submit ideas to the CEO. You ask what I use Flip for? My team pushed me, saying ‘John, you’ve got to think about blogging.’ I said no way. I can talk 200 hundred words a minute. Why would I ever want to blog? Today, I will do probably four Flips to the whole company or to a specific audience.
We’ve led the video architecture in the home with our set top box architecture and we’ll tie it to the Flip. We’ll tie telepresence in the home off of the same high-definition TV.
All of a sudden what looks so remote to the consumer actually will change productivity models in the enterprise, will change virtualization models in the enterprise. You’re going to use the same devices at work that you use at home. In fact, you’ll be working a large percentage of your time based upon your own personal preference at whatever physical location you are. So, you combine those. And the CIO says, ‘I get it.’ Even though they might not have agreed with me three or four years ago.
What do you see as the timeframe on the adoption of such consumer technologies in the enterprise?
You face a lot of competition in enterprise networking right now. What are you doing to stay ahead of these companies?
We don’t focus on the competition. We focus purely on market transitions. Did you get them right or wrong? Now, you can argue whether that’s right or wrong? My view is that if you focus on competition, you’re looking out the rearview mirror. I’m a West Virginian. You look out the rearview mirror too long, you’re off the road. So, philosophically we focus on market transitions.
Second, if you haven’t got really good competitors, you’re in the wrong market. The good news is we’ve got a lot of really good competitors. But the fascinating part is who are my competitors versus Flip? Apple, Sony. Who are my competitors in security? Symantec. Who are my competitors in routing? Alcatel-Lucent, Huawei, Juniper. Who are our competitors in switching? A different set of competitors. Who are our competitors in data center virtualization? Another set of competitors. Who are our competitors in wireless? Ericsson, Siemens. Who are our competitors in terms of set-top TV boxes? Motorola.
Now, you know where I’m headed. We do them all. And we believe they are architecturally tied together across consumer, enterprise and service provider. If we’re right on that strategy, it’s hard [for the others] to move with the speed needed. If we’re also right on our business model strategy [we can].
What are the advantages of the councils and boards? On the face of it, that structure seems overly bureaucratic.
Any good CIO would tell you that if all you do is automate what you’ve already got, you get very little productivity. The hardest part is not the technology, it’s the process change and it’s the cultural change to really get productivity. We moved into councils and boards out of necessity. In 2001, we learned our lessons. I went into [the downturn] a two product company — routers and switches, some good services. Our new advanced technologies were four to five years out, we didn’t go into it with as much cash, didn’t go into it with as much flexibility. This time we went into the slowdown with $28 billion dollars and are coming out of it with $40 billion dollars [in cash]. We went into it with 30 market adjacencies, a different organization structure, different business models. We cleared our decks very quickly at the front end of it, then turned the aircraft carrier into the wind and launched. We’ve never been more aggressive in our history.
So this organizational structure enables you to launch products more quickly?
CHAMBERS: It’s a way to launch more products, but [it’s more about] movements in new markets because, remember, I’m not a product company. I don’t sell standalone products. We sell an architecture that ties routers and switches and security and wireless. I don’t go into markets where you don’t tie back to the vision.
CHAMBERS:[We’re] one of the top architectural players, as well as the top communications company, which you could argue we’re in pretty good shape on. We’ll play architecturally on both technology and on business.
We’ve had a track record in whatever markets we’ve entered, becoming the number one player. Even our toughest critics would probably give us credit for that. The first generation of competitors we took on were very good companies: SynOptics, Wellfleet, 3Com, Cabletron. Only none of those now exist. And, the same thing could happen to Cisco if we don’t get market transitions right.
Secondly, we have a healthy paranoia. We know we could be left behind too. Make no mistake about it. While we have no fear, we have a lot of healthy paranoia about what can go wrong.
Third; when we started in the service provider market, people said we didn’t understand service providers. It’s a different set of competitors, Nortel, Lucent, Alcatel, Siemens, Ericsson. To think you could even play here is probably a stretch. To think you can become the number one player, forget it. And yet, we did. Those were tough competitors. But we got our market transition right. We moved in a way they did not. We did it on architecture.
If you were at the Mobile World Congress, you ask any service provider who is your most likely business partner? And who’s your most likely technology architecture partner? We’ll get the answer the majority of the time. Now, that was something you would have said five or six years ago was not possible.
In the data center, I did not want to compete against IBM and HP. I tried to partner with both of them. I would have preferred that. But we knew going in — and the decision was made five years ago — once we started down the path with virtualization, that if they would partner we’d prefer to do that, and would have actually given them a large part of our technology. But if not, it was too important strategically to us, because it wasn’t a question about moving into new markets. I’m not after servers. I’m after virtualization, where you don’t know where your processors are, your information’s stored, the application resides. You don’t care. If done another way, the network becomes dumb pipes, commodity like. So we had to move into this in terms of where the market was going. We focused on market transition, not competitors. And I think you’d have to argue, we’re off to a good start, both in mind share and vision and strategy. But it comes down to how well we do on our first pilots.
What is it about the data center that Cisco gets that you think these other big companies don’t get?
CHAMBERS: It isn’t a question of ‘gets.’ It’s all about virtualization in the cloud and the role the network plays in it. We think the network is the central piece. It’s not the data center or the end user device. It’s any device to any content wherever it is in the world over any combination of networks wired or wireless to the home, to an Apple device, to a Microsoft device, to an IBM device, HP. Doesn’t matter to us.
Secondly, it is not going to be about voice or data. It’s going to be about video. Now, you can say that’s a big stretch. But, remember again, we said before it would be all-in-one data, voice, video. [We] made that decision a decade-and a half ago and we began building them to architecturally work together.
So, is it a stretch? Perhaps. But we’ve done this multiple times before. We do it through innovation. We can acquire companies. How good are the large companies at acquiring companies? How many times have they acquired a company, kept the top leaders, kept the top engineers, brought out the next generation product and gained market share? The answer is: not very often. We’ve done 137 acquisitions. The vast majority of them have exceeded what we told our board we would do. This is innovation. This is our game. It’s about market transformation. It’s about being customer driven. And, I learned that the hard way at IBM and Wang. I don’t fall in love with technology. Most every move we make, including this virtualization focus, was driven by customers. It was the customers’ grasping what we needed to do. Then, it’s usually internal innovation or an acquisition that kick starts you into it. Much like buying three switch companies kick started us into switching, which is now 40 per cent plus of our revenue.
You said you would have preferred to partner on this data center initiative, but isn’t one natural consequence of wanting to be the number one IT company that you have to burn some bridges? There certainly is the perception that that is happening now. Is there a risk of Cisco becoming isolated?
CHAMBERS: I think to look at the models that have tried to go it alone, that’s a fair question. But Cisco is a partnering culture — we’ve been rated number one in terms of resellers and partners for almost a decade. Doesn’t mean we’re perfect, but we’re pretty good. And secondly, you partner with the players that you have to [have] to win the long term architecture. So, service providers align very tightly across the board. And it isn’t just about selling routers and switches to them. Or doing technology. If you talk to Randall Stephenson [CEO] at AT&T, I’d be surprised if he didn’t say we were his best business partner too. Who would have thought?
We didn’t burn bridges. Instead we formed new partnerships. I never burned the bridge. Is the bridge still there at IBM? Absolutely.
You probably wouldn’t have thought that our key services partners would be Accenture, Wipro [Technologies], Infosys, Tata Consulting. Yet if you watch who the new movers and shakers are in this industry, it’s them. If you’re going to compete on services, I don’t want to be a body shop and have to compete against all those players. I’d much rather do the project management and use our partners to implement, because I couldn’t staff it even if I could afford it.
You burned one recently with HP.
CHAMBERS: Question of who burned the bridge. Very simply, there’s a point in time where you’ve got to be realistic about what’s going on in the market. Your customers see it. Your partners see it.
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So that was less about you and more about their increasing aggressiveness in your market — in your core market?
CHAMBERS: Well, I think it had to do with the way that we would partner, sharing information was not constructive, in terms of giving them product plans and directions. And, for our existing customers and partners, it made no sense to be doing that.
How do you respond to the three most common things that competitors say about Cisco? Cisco products are proprietary. They come at a premium. When you can’t get win with IT, you go around them to the business side and create a stir.
CHAMBERS: First, let’s deal very much with proprietary. We are an open standard company, period. The Internet is open, any device to any content. When we moved into telepresence, we got huge market share on the high end. Sixty-four per cent. Yet, we made it an open standard. We made it an industry standard available to others, not just for a Tandberg-type of interface, but anybody who wanted it. All of our base is off an open, standard net — the Internet. We don’t have a proprietary operating system that only operates in our products. The Internet, any device can interface to it. And we want it to. First, it allows us to move in markets faster. Secondly, customers are protected. They don’t lock in to a device operating system, a device or in the data center.
The second part of your question about whether we sell the technology to the business side at the same time? Of course. If you’re really going to be a successful company, it isn’t about how you just work the technology side. You’ve got to be able to develop the confidence to the business leaders, the CEO’s and the IT organization at one time. IT is no longer about managing this complex data center and making it run. IT is about enabling the business strategy of a company, using it to differentiate yourself versus your peers, drive productivity. I would argue [it’s about] even embedding IT into your core capability, whether it’s how you do services, product development, sales. In fact, at some point you won’t be able to tell the difference between what’s my business strategy and my IT strategy, they’ll be so deeply intertwined. Anybody who’s going to be successful here must learn to develop the trust, both of the IT organization, the CIO, the CEO, the business leads. In fact, if you only develop the trust of the CIO organization, you can’t help the IT organization as they begin to move rapidly in key project areas.
What about the middle point about the Cisco price premium? They call it the Cisco tax, that people pay a big Cisco tax.
CHAMBERS: Well, that’s a little bit unfair. Do we come down Moore’s Law at tremendous speed? The answer is yes. As long as you do that, customers don’t have a problem with you making a premium, because if you don’t make a premium, you don’t develop new products. You don’t protect their investment. They’ve all been through that.
Do I believe there’s a rapid industry consolidation taking place? Absolutely. Do I believe that part of the decision for who’s going to win is based upon your innovation, based upon your ability to catch market transitions, based upon making your products play architecturally together, protecting the customers’ investments, and an open architecture? Yes. Will customers pay a premium for that? Absolutely. But, I would argue it’s not a premium. I’d say [it’s about} your total cost of ownership versus your productivity. It costs a lot less. Wal-Mart considers us at the very top of their partnerships. You would think that unlikely because they are one of the toughest in the world on cost. Yet, if you talk to the CEO or the CIO, they would say we’re at the very top of the list. If I had told you two or three years ago BT would say we’re their strategic business partner, not just technology partner, you’d have said unlikely. Yet, we are. If I were to have said the same thing about a G.E.
How do you see both private and public cloud rolling out from an enterprise perspective? What do you see as the ultimate intersection of these?
CHAMBERS: We think the ultimate intersection will be a confederation, where it is completely transparent to the end user, the CIO and up. Completely transparent to the end user what combination of physical, virtual, public clouds and private clouds. That is perfect for us, because that’s what networking’s about.
The first thing I asked Padmasree [Warrior, CTO] when she came to Cisco was to outline our cloud strategy. She went and got the best engineers, worked with them, came up with the approach. Now we’re driving it with tremendous speed and efficiency, and expanding the partnership with VMWare and EMC, who are our best partners. But we’re also getting close to Net App and other players within the industry and getting back to the open standards type of question. We’re off to a real good start here.
Now, having said that, do you know who our best partners will be in public and private clouds? The service providers, because it’s in their interest that the pipes are not dumb pipes and they’re not commoditized by the edge players or by the content players. We have a common opportunity here.
What’s the bigger market sooner, private cloud or public cloud?
Public cloud, in the short term. Longer term, the private and the combination, the federation, whatever you want to call it. By the way, we’re already doing that ourselves. We’re already doing our own clouds and we’re interfacing to other peoples’ clouds. It’s classic Cisco. We do it ourselves. Understand the strengths and limitations of it. Then share what our moves will be.
Based on this and other discussions with Cisco executives, it sounds like Cisco’s making a huge bet on service providers and the cloud. Would you characterize it that way?
CHAMBERS: We made the huge bet on service providers back in 2001. A lot of people at that time said we ought to focus on enterprise, we ought to focus on commercial. Service providers are a separate business, not as healthy in direction. We respectfully said we can do the ‘and’ here. And you’d have to argue that we did pretty well in enterprise, pretty well in commercial and very well in the new market, the service provider. They are the logical step for our first real cloud build outs, and there’s not a major service provider that I’m aware of in the world that isn’t at least thinking about potentially doing that with Cisco.
How much of your day is video or telepresence now?
CHAMBERS: I’d say video is half my day. Video could be telepresence or Flips or Webcasts, etcetera.
From a policy perspective, for the health and future growth of the tech industry, do you think President Obama’s leading us in the right direction?
CHAMBERS: I think that the tech industry is in a very good position. You’ve seen that both in terms of the market transitions going on and the business results. It was a very good quarter for technology, as a whole. In terms of technology enabling both business objectives and government objectives, it’s a must. In terms of health care for every American, in terms of productivity, in terms of his goals of job creation, innovation, technology is the logical partner on it. I’d be surprised if that is not what occurs over a period of time.
Unified Computing System, by all accounts, is a remarkable product.
CHAMBERS: Good start.
Today, UCS is tuned toward a segment of the market that understands that data center transition and can afford to make that kind of transition. How do you make it a bigger market opportunity?
CHAMBERS: The answer is pretty simple. You have to make the first major installations go well. Will most CIOs really look hard at our strategy for virtualization? Absolutely. Will they adopt UCS if the initial couple dozen accounts, the majority of them are really satisfied? Yes, they will. You’ve seen the volumes. We announced the [Nexus] 7000 is growing, year-over-year, at 150 per cent. The 5000s, which are the key elements of implementing UCS, grew at 450 per cent. UCS, in terms of number of customers, is off to a great start. But it’s like anything you do. You’ve got to make your initial pilots, first 50 systems work well. If they do, then I think we’re in good shape to get pretty excited about it.