Cisco is stretched in many directions, with big initiatives in the enterprise, service provider, consumer and small to midsize business markets. Add to this the company's $7 billion purchase of Scientific-Atlanta, and it's a plateful. We met with President and CEO John Chambers to talk about why Cisco's reaching so far and how its moves will affect corporate customers.
Can you rank your four lines of business in order of strategic priority and growth prospects?
We think the enterprise network, the commercial/SMB network, the consumer network and the service provider network will completely blur. We've felt for over a decade that those markets would completely come together, with data, voice, video and mobility convergence. We felt that you just couldn't play in one. [We believed] the lines between them would dramatically blur, in part, based on how well service providers executed.
Service provider and SMB are about 25 percent [of revenue] each, enterprise about 45 percent and consumer about 4 percent. So consumer has the potential for the fastest growth. In terms of dollar contribution, the commercial marketplace is where we would anticipate the whole industry seeing the most growth, especially the networking [sector]. The commercial marketplace for us last quarter grew in the mid-20 percent range, while our business as a whole grew in the low teens.
We still have about 45 percent to 50 percent of our [engineering and R&D] resources focused on service provider. Enterprise continues to be the leading-edge user for much of the marketplace, especially as we make our moves into the data centre and with the virtualisation of application servers and of storage. We think the network will become the platform that will deliver services, applications [and more] to all four markets.
Should enterprise customers be concerned that you have too much on your plate right now?
When we go into a market our goal has always been to be No. 1 or 2 with, ideally, 40 percent market share. Our hit rate has been really high, unlike almost all of our peers. Very few of the players in the industry have gotten beyond one or two primary products. We're in the eight to 15 range. So we've had a remarkable track record.
Our natural alignment is toward our enterprise customers. Actually, enterprise points us to what we need to do in service provider, [SMB] and even within the consumer segment. When I [spoke recently] with a large customer, they said they want us to have a security strategy for the enterprise but they want us to have it across service providers and down to the home.
Secondly, many of our ideas have always come from the enterprise side. The Big Three [automakers] pushed us really hard on changing our support model to add the thin layer of consulting. They said 'If we're going to become dependent on you as our preferred player in so many areas, you've got to help us adjust to the new technologies faster. And you've got to tie them together and help us do that. While we might have expertise in some of the areas, we will never have expertise across the board. And while your partners will help us, nobody can help us like you do.'
Our track record has shown we've always stayed committed on issues. Part of the reason people standardise on us is when we say we're going to do something, even if it takes us a long time to get it right - network management we're still trying to get right - we stay with it, stay committed to what we're doing, or if we change we let them know.
The initiatives you're undertaking with application networking and security put you in contention with people who are currently partners. Are you concerned about this?
Philosophically, I don't partner and then compete later. I won't enter into strategic partnerships that I think will not have lasting evolution. Secondly, using IBM as an example, they are my best partner today and they will be my best partner 10 years from now. Third, we see the market evolving very similarly. We share what we're doing with them very closely, they share what they're doing with us very closely. And both of us have the same philosophy.
Isn't IBM's strategy a countervailing notion to providing virtualisation through the network - they are providing virtualisation through the management layer - and doesn't that by its very nature put you in competition?
There will be segments in which we may have overlapping philosophies. But if you take a step back, it's real simple. I will partner with IBM for as long as I think it is strategically very important to my company and I deliver on my ethical commitments. If there's a little bit of overlap in one area, and yet we can dramatically grow the revenues, profits and customer loyalty because of our ability to work together, then [IBM and Cisco] are going to do that. And then we'll let the [market] sort out which products take the lead. We're not going to let our fields mess up each other over a product which accounts for a small percentage of our revenue vs. growing it in other areas.
If you look at IBM's total revenue in the data centre, consulting or outsourcing or in so many other areas, our overlap is a relatively small number. Our ability to grow those others dramatically faster by working together is [more important] than saying that if we have any overlap we're not going to work together. If you overlap too much and your visions of how the market evolves are too different, you can't have a partnership. But I don't think that will be the case.
If you go back to innovation being doing it yourself, acquiring or partnering, remember that 90 percent of the acquisitions in my opinion still fail. But our hit rate has been remarkably high. If you can't acquire, I would argue you can't partner. Partnering is much more difficult than acquiring: At least [in an acquisition] you control the resources for a period of time. I believe that partnering will be one of the four or five major variables that determine a company's success. And partnering is not reselling products. It's really about whether you can go to market together with the strengths of both organisations in a way that gets you competitive advantages and really focuses on delivering the power of the network to your customers.
You have initiatives under way in the data centre, storage, security, application networking, among others. Is there a fear of overloading your customer base, asking them to make too many upgrades, buy too many products, buy into too many strategies, at a time when they are trying to reduce complexity?
CIOs are very concerned about the complexity that exists and the costs of supporting that complexity. But I would argue the reverse: that actually works to our favour as opposed to our detriment. If we can touch so many of those elements off of a common IP open standard that they don't have to worry about changing all their applications, it gives them a lot of flexibility. So when you talk to the CIOs you're finding more and more of them are leaning stronger and stronger to Cisco. They actually pushed us to move dramatically faster in the application area. So it's moved from a transport mentality to something they want dramatically more out of in a shorter time period, and at the same time how do they control the costs with it.
What's your take on how significant a competitor Juniper is in the enterprise?
We do not set our strategy around what our competitors do. We try to get the market transitions right and we listen to what the customers like. And then we listen to what the customers like about our competitors or not. But we try to get the market transitions right. So within the enterprise, if we're right on data/voice/video convergence, the role security will play in that, switching combining with routing and the other elements, then for companies who come at us with a product or two it will be very challenging. Many of the companies waited too long. A lot was written two years ago about how effective some companies would be in the enterprise marketplace. [Juniper] announced their access router way ahead of us. We have had tremendous success in the access routing segment where they have not. It's hard to move into new markets
In each of our product areas, there's a different No. 1, 2 or 3 potential competitor. We made a decision five years ago plus that we felt that the [network markets] would blur. None of our peers followed that. If we're right on that, it's going to be really difficult for them to meet us.
So would it be fair to say you consider Juniper a point product competitor but not a strategic competitor?
It would be fair to say that most of the players in the industry are primarily point product competitors, and their ability to move beyond one or two products has not occurred. We'll see how that goes moving forward. Alcatel has taken an interesting approach in that they're going to be the systems integrators. We'll see how the market plays out. But it's hard to become a leader in more than one product area.
A fair amount of your marketing right now is targeted to business executives. Isn't this a critical time, with all of the initiatives under way, to be talking more to the IT person than to the business person who probably doesn't understand these concepts?
No. Because a lot of CIOs, directly or indirectly, ask you to help them understand what this can mean to the business and why Cisco brings a unique [perspective]. So if you believe that business strategy would, at a minimum, be enabled by networked IT - and I am now beginning to believe that networked IT may actually change business strategy - you've got to educate the business user on what is capable and get them to understand that when you think about a Cisco IP phone, you aren't just thinking about replacement of your prior phone. You're thinking about integrated data, voice and video. You're thinking also about total cost of ownership. You're talking about flexibility in communications, about how you communicate among yourselves, with your peers. You're thinking architecture. So you want them to think of us in that way, whether it's the CFO who has to approve us for a 20 percent price premium vs. XYZ company or the business leader who has to choose between adding 200 sales reps or another physical branch to spending money on the network. Same thing with the data centre. We're sending messages both to the CIO but also, with our usual humour, to the CEO that Cisco's very uniquely positioned to provide security. It's the balance of the two messages.