Q&A With John Chambers

The Cisco chief is having fun again with his 'new' company

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In his 14 years at Cisco, John Chambers rarely smiled as much as he does lately. The energetic CEO believes his company is better positioned today than at any other time in the past five years. One reason? Acquisitions. But these aren't just any deals. Over the years, Cisco has bought so many companies--105, to be exact--that news of another buyout could numb even the closest industry-watcher. The most recent acquisitions are steering Cisco in a new direction and transforming the face of the outwardly staid company. In an interview with VARBusiness senior executive editor T.C. Doyle, Chambers explains why he's having such a good time.

VB: The new Cisco is a more complicated company to run today, but it seems to be more fun. Is it?

Chambers: I am having fun again. During the 1990s, it was a lot of fun. And much of the reason it was fun was that we were building an organization and we were making a difference in companies', governments' and individuals' lives. We're doing that again. I think we're really hitting the next generation of the Internet on the effect that it can have on business and society. So as high-level as that sounds, it's really what's happening, and Cisco is right in the sweet spot as we move from being a networking company--being the plumbing of the Internet--to a communications/solution company [that's] the implementer of the Internet's capability. I believe the network will go from being a transport mechanism to being a platform, with all of the implications that go with that.

VB: How big can the new Cisco get after all? Dell's at $30 billion. Microsoft's at $40 billion. HP's at $80 billion. Is there a certain point at which a tech company tops out, as with IBM?

Chambers: Well, I think there are three elements to your question. The first is simply this: "Is there a law of large numbers?" The answer is "yes," if your customers buy boxes or systems that are only slightly interrelated, other than by brand.

If your customers buy architecture and there are adjacent markets that are loosely [connected] at first and then tightly coupled together later, the law of large numbers actually works in your favor in terms of your growth rate. That's clearly what we've seen in the enterprise accounts and the emerging markets, and [what] I think we'll continue to see, as long as our architectural view, from both a technology and business perspective, plays out.

The second part [has to do with] the size of the market. You may be executing great, but if mainframes are only at a given level, and PCs or printers are only at a given level, etc., then all of a sudden the size of the one or two major markets you're playing in could be a factor.

Besides the networking market, I think we're on the front end in terms of what it can be in absolute size and in terms of adjacent markets. If you look only at routing, then [we're limited in terms of growth]. If you have 70 percent of the market for routing and 70 percent for switching, then you're completely tied to the growth of those two segments of our market. But if you begin to think about it from [the perspective of] routing, switching, security, data center, home, wireless, video, small business and the low end of small business--which we have only a 10 percent market share in--then I don't think market size is our limitation. It's more, what percent of the market can we get? Can we grow faster than the market? Can we grow market share in those categories as we've done with others?

The third [aspect] is whether you can retain your hunger and your aggressiveness and whether you can remember what got you on top in the first place. What got us on top was being customer-driven, focused on market transactions and partnering.

We said from the beginning that our goal is to create unprecedented opportunity for our customers, our employees, our shareholders and our partners. We said that 14 years ago when I came to Cisco, and that hasn't changed.

So, do you stay with your culture, even if part of your culture is to change? Do you catch the market transitions right? Are you in the right market to begin with? How are your customers going to buy? Right now, all of those look pretty solid. That's not to say we couldn't improve in any category, because you always want to strive to do better. But we're in fairly good shape--probably the best shape in five years--in terms of our position in our customers' minds and in the market, and our architectural play that now looks like it's going to happen.

VB: Let's talk about the acquisitions that you've made. Over time, it seems like more and more are application-oriented companies. What message are you trying to convey? In what direction are you going?

Chambers: We've done 105 acquisitions. Depending on whose numbers you want to use, from 50 percent to 75 percent of them have been successful, actually meeting or exceeding the board of directors' [expectations for] what we were doing. We've developed a culture that accepts acquisitions, a culture that understands why 90 percent of them fail. Our success rate, by definition, is five to seven times that of our peers.

Second, we use acquisitions to move into new markets. And so, as it relates to applications, clearly the next area we're going to move into is collaborative applications and traditional business applications. Business applications we'll partner in; collaborative applications we're likely to do ourselves.

The third part of the [answer] is this: There have been probably three major milestones in terms of our acquisitions that have either delivered [in terms of Cisco's success] or had the potential to make a huge difference.

Clearly, Crescendo was the first one, which grew into over a $5 billion market per year for us. StrataCom was the second; that was our movement into the services-provider market. Linksys was the third, a move into the consumer marketplace. And now there's Scientific-Atlanta, which is a move into the video marketplace. Within each of those, applications will play a role over time.

So as a follow-up to your question: You're right in seeing more of our movements encompassing at least a segment of applications; that's clearly an indication of moving into new markets.

VB: Is there a hidden gem among the application-oriented acquisitions? You love all your children, but pick a favorite.

Chambers: Well, you've given me the right answer; I do love all my children. But there are honestly some that grow bigger than others. And I'm interested in the biggest and the ones that have the most impact across the board. I think it really has to do with our original movements into voice applications, where we learned what we knew and what we didn't know. So it's the early ones [that] you learn from and yet lean on that become so key.

But I think as you look [ahead], video clearly will be the majority of the load on the network. As the Web moves from a transaction-based [platform]--for a Google search or an inquiry about bookings--to true interactions, business models [will change]. Video applications will be, perhaps, the gem of the future.

VB: In terms of acquisitions, is there a major piece Cisco is looking for, or are spot acquisitions all that's left?

Chambers: Movement into new markets is done through acquisitions often--probably half the time. The other half is done through a Linksys-type purchase. Then there are internal developments--telephony, for example. Our security strategy was internal, too, even though it was complemented by acquisitions. I think you'll continue to see us move in waves. Your question was very observant in the sense that you'll probably see us more in the applications space--collaborative applications, in particular--or in areas that complement what our partners bring to market.

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