The New Cisco: From Brand Name To New Game

It's been five years since Cisco trimmed thousands from its payroll in one fell swoop. The shadow of such cutbacks, and other things past--the dot-com bubble burst, the end of the Y2K buildout and the tragedy of 9/11--still looms large over some of the high-tech landscape, but Cisco CEO John Chambers feels as if the vendor is finally re-emerging into the sunlight.

The Cisco of today has a new strategy, new people in key roles and more new products than at any other time in recent memory. Company executives believe that the network king can ascend to the throne in an array of markets, including telecom, wireless and video.

To do so, Cisco will have to transform itself from a powerful, albeit bland, networking behemoth to a brand name in the communications application space.

Meanwhile, Cisco may not be flying as high financially as it was in the good ol' 1990s--and it may not be valued at what Microsoft or GE is today--but the company's executives are at least enjoying themselves once more.

But what might Cisco's metamorphosis mean to everybody else in the technology arena? How will the vendor's relationships with solution providers change? How will its friends and foes be affected by a new business model?

No matter where on the spectrum you fall, you'll probably want to take a closer look now at Cisco and its plans for the future.

Cisco has always been a hopeful, ambitious company; it wouldn't have attempted and completed more than 100 acquisitions if it wasn't. But Cisco hasn't been this optimistic in years. The reason? Chambers says his company's position in the minds of customers, its business strategy and its product architecture have not been this competitively aligned at any time in the past half-decade.

Chambers believes that his organization, which generated sales of $24.8 billion in fiscal 2005--up from a previous all-time high of $22.3 billion in fiscal 2001--has reached yet another inflection point. The first came when Cisco moved into workgroup communications after acquiring Crescendo Communications in 1993. Another occurred three years later when Cisco bought StrataCom, positioning itself to become the leader in WAN switching just as interest in the Internet was building.

In 2003, Cisco slid into the consumer market with its purchase of Linksys. Now, with the company's pending acquisition of Scientific-Atlanta and expansion into video, Chambers believes Cisco can transform itself once more, this time from a connectivity-infrastructure giant to a full-service communications player with applications, to boot. If successful, Cisco will be able to play a greater role not only in IT, but also in telecommunications, entertainment, education and medicine, to name a few.

"[Companies] in our industry usually plateau at a certain level after they reach a certain size. We clearly believe we will be an exception to this rule," Chambers says. "We appear to be in the right spot at the right time; we're just trying not to mess it up."

So far, so good. Cisco has emerged quietly as the world revenue leader in office phone systems, a space it wasn't even in six years ago. The company is upending old foes as well, continuing to gain in specific switching and routing segments while some of its upstart rivals stumble.

Take Juniper Networks, which reported sales of $575.5 million and earnings of $105.5 million in the fourth quarter of 2005, ended Dec. 31. But when the company said future sales growth would likely be tepid, its shares plummeted by 21 percent in a single day in January, prompting three top securities firms--Prudential, Goldman Sachs and Bear Stearns--to cut their outlook on Juniper's stock. One analyst, Bear Stearns researcher Wojtek Uzdelewicz, said in a research note that Juniper "is facing increasing competitive pressures, with management turmoil adding to the company's challenges."

In the meantime, while upstarts grapple with their futures, other Cisco rivals appear to be stuck in the past. 3Com, for example, is trying to make gains on Cisco--its 5500G-EI switches were judged recently by The Tolly Group as superior to comparable Cisco devices--but can't seem to turn the corner. 3Com lost $11 million in the second quarter of fiscal 2006, which ended Dec. 2, 2005, and recently replaced longtime CEO Bruce Claflin, who cited family and health issues as his reasons for stepping down.

One way Cisco is widening its lead over rivals is by changing the competitive landscape. Chambers and chief marketing officer Sue Bostrom note that none of Cisco's principal rivals competes in as many categories as Cisco does. While that kind of diversity can trip up some giants--think Sony, Hewlett-Packard and Tyco--it works to Cisco's advantage as long as the company's fortunes revolve around its core IP networking platform.

So far, customers and partners alike seem willing to invest in the company's plans. For Calence, a former Cisco partner of the year, sales of the vendor's equipment and services are increasing by double digits year over year.

The Tempe, Ariz.-based company, which sells nine figures' worth of Cisco gear each year, has followed the networking giant into security, IP telephony, e-learning and other new areas, and it's likely to follow Cisco into video for the next generation of applications as well. The alliance, in fact, proved so beneficial to Calence that the company has managed to expand beyond its home territory--the Southwest United States--to St. Louis and New York. "No question, Cisco is the catalyst for our growth," says CEO Michael Fong.

One reason for Fong's loyalty is Cisco's newfound confidence. Although the company has always demonstrated its drive, rarely has it exhibited the aplomb it does today.

Look no further than Cisco's proposed acquisition of video giant Scientific-Atlanta for $6.9 billion. Cisco recognizes that extracting more out of core routing and switching--markets of which it now owns 70 percent market share or more--will net only so much in the way of return. So Cisco needs to set its sights higher, or at least on some point beyond core networking.

That explains the company's desire to solve bigger, more complex business issues it refers to as "themes." Those include the next-generation IP network, video and security. Charles Giancarlo, chief development officer and senior vice president at Cisco, says the company plans to work with Microsoft and other high-profile names in the tech arena to flat out "close off some of the architectural issues" that make securing cyberspace so difficult.

"Internet security is a lot like physical security," Giancarlo says. "We haven't stopped bank robbers, [but] as we start closing off these architectural holes, it will be much more difficult for hackers and bad guys to be as effective as they were in the past."

Of course, going after bigger opportunities has its downsides, too. Critics charge that Cisco has no business venturing into new areas when it hasn't yet fully mastered those in which it currently competes. Even some of the company's own technical people acknowledge that integrating products from all acquirees is an "ongoing mission."

Then there's the Cisco brand, which doesn't exactly resonate on Main Street. Giancarlo, for one, says, "I'm lucky if my family knows what I do for a living."

Another challenge? Cisco is trying its hand at business models that are new not only to the company itself, but to other companies as well.

Given all that Cisco wants to accomplish, the company needs to become an expert in everything from consumer purchasing habits to advanced data-center security. Addressing the needs of individual consumers while meeting the demands of sophisticated enterprise customers is something only a handful of companies have done. Those that do it well--GE, for example--have been at it for decades. Almost none has been around as briefly as Cisco has.

To do it right, Cisco must perfect everything from data-center virtualization to video-on-demand. That's no easy task when you consider the pricing, marketing, technological and competitive issues involved.

"We're now a company that has to operate under different business models--not just different markets and channels, but different [profits and losses] that affect how much we spend on sales, marketing, engineering, etc.," Giancarlo says. "What we spend on one market may be quite different than what we spend on another."

He notes, as an example, the difference between the enterprise and consumer markets, both of which Cisco is competing in today. The gross margins Cisco achieves in the consumer market through its Linksys division are half what they are in the more traditional enterprise markets. On the flip side, the company's operating expenses in the consumer space are less than one-third what they are in the enterprise space. "We've certainly become more complex," Giancarlo says. "But I believe we're a richer company, too."

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