Face-To-Face: John Chambers Answers Your Questions

While pleased to hear that Cisco had largely mitigated that problem in the minds of partners, Chambers was not surprised that new issues had cropped up. In particular, partners this year expressed frustration with Cisco's territory managers in the field and some of their meddling ways. In short, partners say they are causing significant disruption to the flow of Cisco goods from the vendor to the end-user customers. Ever the optimist, Chambers expressed confidence in an interview with VARBusiness that his company would successfully address this year's issues.

As we did last year when we produced a package we called "John Chambers & You," VARBusiness editors Robert C. DeMarzo and T.C. Doyle asked Chambers questions posed directly by real partners from the field. First up for this year's edition of "John Chambers & You, the Sequel," was a question that sought an answer on how Chambers felt his company addressed the problem that was causing a near-mutiny one year ago. In the pages that follow, Chambers answers the question about telco product dumping, as well as others that were contributed directly from readers.

CHANNEL CONFLICT WITH SERVICE PROVIDERS
Q: Last year when we sat with you, a number of partners said, "Cisco is struggling with its big service providers, who are effectively dumping product in the market. It's making our lives really tough in terms of competing for business and pressuring our gross profits." Where are you with that issue?

A: I attended a Gold partner luncheon recently and the Gold partners gave us very, very positive feedback. In fact, they said they hope we'll do as well next year with the issues that we raise this year. [The problem] was primarily with two of our large service providers. Even though they produced an awful lot of revenue and we were involved in a number of other areas, it was the right thing to do for our channels and the right thing for us to do for our customers. So, I think most people would give us very good grades on both stepping up [to the problem] and the results they have seen.

CISCO'S GROWTH PROSPECTS
Q: What strikes us is the number of partners big and small that feel a vested interest in your company's success. That's due partly to the many who have a financial investment in your company. This question comes from Oli Thordarson, CEO and president of Alvaka Networks in Huntington Beach, Calif.: "The financial analysts are down on Cisco for one main reason,the high market share Cisco has in the categories in which it competes. They say that with market share so high and market growth opportunities fairly low, Cisco's growth and appreciation could be limited. If so, then is it fair to assume partner growth could also be limited?" What is your response to this gentleman's question?

A: I'd break the question into pieces. First, look at the financial analysts' analysis of the whole networking marketplace; we have some 75 percent of that valuation. So, relative to the marketplace as a whole, they are voting that our future is that of our next 11 competitors combined, times three, which is pretty optimistic. Time will tell whether we can execute well enough to earn that confidence. The issue is exactly what you said, though it's not an issue of Cisco's growth, but rather about the industry's growth. My views are a little bit more optimistic, but we'll see if that's right or wrong.

POSITIONING CISCO IN THE MARKET
Q: Solution providers are wondering how you view Cisco today, so they can position Cisco to their customers.

A: We have broken the market into three segments: our traditional core, which is routing and switching, primarily in the enterprise; the service-provider marketplace; and the current nine and hopefully what will expand to 12 advanced technology [initiatives]. So, if you look at those three segments, core routing and switching will grow between 5 and 15 percent, according to most analysts. We'll see if it's in that range,above it or below it.

The second [thing] is the service-provider marketplace, [in] which most people give us very high marks for value that we add to the network. We have roughly 3 percent of the [capital expenditures] spending today. Many of the service providers are now saying that Cisco could be our No. 1 or No. 2 strategic vendor over the next five to 10 years. You can do the math on that as quickly as I can in terms of the opportunity if we execute well.

The third is the new advanced technologies or advanced markets. You can be your own judge as to whether we will be able to do the classic Cisco move, which is to become the No. 1 or the No. 2 player in that and, if so, how fast will the market grow and what percentage of that will we have? By definition, if you hit in four or five, that's not bad. If you hit in six or seven, that's awesome.

OPPORTUNITIES IN STORAGE, SECURITY, WIRELESS
Q: A number of Cisco, and non-Cisco, partners wonder how the company is performing in the promising storage, security and wireless markets. And then there's the home market. Can you tell them?

A: If you look at storage, where the industry analysts have us completely winning that battle, we're optimistic, but we have a long way to go; we just started shipping and getting revenue in this past quarter. But many people think our strategy, if we execute reasonably well, will help us to become the No. 1 player there. Time will tell if that's right or wrong. Wireless? In the LAN marketplace, there's huge potential growth. It looks very solid there. Time will tell if we continue to deliver. Security? We're really uniquely positioned, because security won't be about standalone products three to four years from now. It will have to be a whole fabric implementation. So, we're already the No. 1 or No. 2 player in most of the security areas, such as VPNs, firewalls, intrusion detection, etc. If we begin to monitor what goes through a network at the port level on the routers and switches, we are really uniquely positioned to be a key player.

Our new movement in the home market, with the Linksys acquisition: We'll see how we play on that. But acquiring the No. 1 player already helps a lot if you already are [the] No. 1 player at 39 percent. We'll be going into other markets, and time will tell if we are as successful as we hope to be. And we won't hit them all. Most key industry analysts would give us unbelievable marks, maybe even better than what we deserve, for how we have executed in a tough market, in terms of technology leadership, customer loyalty, movements into new markets, operational model and profitability, which returned to where it was at the height of the bubble, and yet passing through the product price-performance improvements at a faster pace than ever.

Going from 10 to 100 to a gigabyte capability, that's a tenfold increase at roughly the same prices. We're coming down faster than Moore's law, and yet are very successful in our profit contribution. Very few companies have been able to do that.

THE GOVERNMENT MARKET
Q: Dendy Young, CEO of GTSI, one of your largest government integrators, notes that the one fundamental issue Cisco needs to address is over-coverage in the channel. "The government market is sensitive to competition. Large chunks of Cisco business go down to the lowest possible bidder, not necessarily the one providing the most value. Can you provide some insight?"

A: First, let me talk about the importance of the federal government's business to us. Federal government business has moved from 9 to 10 percent of our enterprise business in the U.S. to 17 to 20 percent. So we have been extremely successful in the past two years. But these were investments that we made two years ago. Now, everybody wants to make the investment this quarter and get the results the next quarter. The same is true with our channel partners, except, just like customers, it takes time. So the changes we made a year ago, in terms of addressing the telco issue, as an example, are showing the results a year later. The changes we are making to the VIP program, the eAgent, the e-learning capability, etc., will show up a year or two from now. The changes that we made in government are really now starting to flow through. What you are seeing, because of the government's nature, is that it tries to drive things down to the lowest bidder...I think what all of us are learning, including Cisco, is differentiating between a box sale and systems sale, and differentiating within a systems sale what the value-added components are to that, whether it's advanced services, professional services, other applications, change management, investment protection, etc. So I think that's what we are all learning when we go to market with the government. What the government is actually telling us is that we need to get closer to many of the systems integrators,not just a good working relationship, but a relationship where we begin to work together on product requirements and solution requirements much earlier in the cycle.

CONSOLIDATION IN HIGH TECH
Q: Ken Presti, a market analyst for IDC, referred to your acknowledgement of brutal consolidation going on in the marketplace. "You're clear about your thoughts on what's going to happen within the vendor community. What are your thoughts about what's going on in the partner community?"

A: I think you are going to see from the manufacturing perspective that it will be brutal. And it's different from what I would have said three to five years ago. Then, I would have described the consolidation that we did as combinations. Now, it's more like musical chairs. While there will be some combinations both in our industry and in other segments of IT, I think, there will be more people who just don't have a chair. They won't go out of business overnight, but over a period of time. It won't be as brutal in the channels, but it will be tough. One thing I hope people respect us for is we'll always share with you what we see. You can deal with issues as long as you see them coming. So, if you know your industry segment is going to consolidate, then you know you've got to decide if you're a mass mover of product with very little support and, therefore, have to have the overhead to go with that, or if you can add a lot of support but have to be able to differentiate that support and price it differently and can adjust, much like the service-provider market did when we were very candid that their primary revenue stream was going to commoditize...People who don't build their businesses to react to those rapid changes will be left without a chair, whether you are a manufacturer or a channel company.

SUPPLY-CHAIN EFFICIENCIES
Q: Steve Raymund, the CEO of Tech Data, your No. 2 distribution partner, I believe,says, "Cisco's collaboration with supply-chain manufacturers has been extraordinary. But is Cisco putting the same focus and emphasis on distribution as it has with its [upstream] manufacturing partners?"

A: The answer would be "even more," but we are doing it across the company. Again, the Gold partners said for the first time that they are seeing our whole senior management move on the issue of partner success and profitability. "You have got to bring that down to your individual sales reps because it is very inconsistent across your field," they have told us...Watch the difference at how we implement our storage strategy vs. our IP-telephony strategy. The IP telephony kind of evolved. Storage will move pretty much across the board at one time. It doesn't mean we won't make mistakes. But we won't make as many. Now you could say, "John, you didn't make many mistakes,you've got 65 percent market share." But it could have twice [as much] in terms of the volume. The market share is hard to beat, but if we had moved as one company with our partners moving at the same time uniformly across all segments of our market with our professional services, with our manufacturing, with our service and support,altogether, unified, we could have probably done twice the volume.

THE LINKSYS ACQUISITION
Q: Andy Swenson president of Integration Specialists, Clearwater, Fla., asks about the Linksys acquisition. "You've said you are going to keep the company separate in contrast to your traditional acquisitions which have been integrated rather quickly. What should partners take away from that?"

A: We are acquiring a major brand and product set into the consumer [space] and the very low end of the commercial space. Those are areas we have not been able to address. It was painfully obvious to me when my son decided to buy Linksys a year ago and my IT staff agreed with him that it was the best choice for him for his apartment. If you look at what we are focusing on, this is a market that is open standards, quick time to market and very low operating expenses. I'm doing what I'm saying my channel partners ought to do: [find a way to deal with low-end margin opportunities]. This is a model that probably has about 15 percent,give or take 2 percent,operating expenses as a percentage of revenue. While it might offer very good profits in the 10 to 20 percent range after tax, it's because the operating expenses are dramatically lower. They have to be, because margins are dramatically lower, because your differentiation is that much lower. So, we will be entering it with channels that they have done very well with, and also with an operating-expense model that is very different than our traditional model. We will, over time, integrate it upward in terms of its ability to play in the environment. But we will not integrate with expenses or the same type of support from us or from our channels.

LIGHTING UP SMALL BUSINESS
Q: Bruce Martin, president of Computers 4sure, an Office Depot company that caters to the "S" in SMB, observes that these customers, and even those who service them, need to be inspired before they will commit to buying. "Can Cisco inspire the small-business owner and the people in small business who are responsible for signing off on an IT order given Cisco's past focus on the enterprise?"

A: That's part of what we do with our branding. By definition, we bought 39 percent of the "inspirational market" because that's the percentage Linksys has. It clearly has name recognition. They do what a Microsoft does in this market. They have the shelf space...But that was a move that I'm surprised more people didn't see us making,not necessarily with Linksys itself, but the logical move to branding and inspiring productivity to the small-business owner and to the consumer.

CUSTOMERS' VIEW OF CISCO
Q: We recently commissioned a wide-ranging study of enterprise IT customers. We asked 300 to rate the top vendors and identify the ones they considered most strategic for them. Respondents include high-level CIOs from Fortune 500 companies. Interestingly enough, IBM came out on top, followed by Microsoft, Dell and Hewlett-Packard. Cisco came in fifth. What is your reaction to where they place Cisco?

A: It's new data. And I'm not in any way challenging the data and whether it's good. But it's dramatically different than what we have seen in the marketplace. I need to look at it in terms of the approach. What it also says is that people are moving to a systems approach. I do know P&G, and they might put us at No. 1, although I could be wrong about that. But that's where A.G. Lafley, their president, puts us in terms of the value-add, including even strategizing with us for their outsourcing decisions, what they were looking for, what should they do, what are the lessons learned, etc. Now you might say, "Cisco, you don't have lots of expertise there." Well, we actually do have a lot of expertise [there]. I'd love to see the data. [I'm familiar with top Fortune companies, but] I have got to understand what's happening with the second tier.

THE MIDMARKET OPPORTUNITY
Q: Some major vendors are moving swiftly to more keenly focus their sales and product strategies for mid-sized businesses,those employing between 101 and 999 workers. There are more than 100,000 such companies. Vendors are packaging their products for this market and tailoring channel marketing programs, offering incentives to bring in new business, etc. Can you tell VARBusiness' readers, how is Cisco moving to address the midmarket and how satisfied are you in terms of the steps and the progress you have made?

A: The midmarket is going to be a very good growth market for IT and [those firms] are very solutions-oriented rather than box-oriented, [although] they don't often have very large IT staffs,if any at all. So it's the market that will be reached almost exclusively through channels, and that's where the channels' differentiation becomes key. In terms of that marketplace and the value we bring to it, I think we are the No. 1 player, but our market share in there is dramatically different than our market share at the high end of the commercial [space], and dramatically different than our enterprise market share. So, we see the midmarket as a very good market opportunity. By definition, I would give us a C . Being the No. 1 vendor isn't bad. But No. 1 vs. what we are capable of doing, I think, has room for improvement.