Cisco's Second Act - InformationWeek

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6/17/2004
09:35 PM
David Ewalt
David Ewalt
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Cisco's Second Act

The networking leader is looking for growth in new markets such as security, wireless, storage, and telecommunications

Cisco Systems celebrated its 20th anniversary not long ago, a milestone CEO John Chambers noted by reflecting on his company's "rich history of enabling the Internet." Yet, before the candles cooled on Cisco's cake, Chambers was looking ahead, as well he should, given the company's continued reliance on a maturing networking business that, in its most recent quarter, still accounted for 70% of revenue. For future growth, Cisco is aggressively branching into six new lines of business--and Chambers is planning for even more.

Twenty years on, Cisco is targeting six advanced-technology areas to supplement its networking business, CEO John Chambers says.

Twenty years on, Cisco is targeting six advanced-technology areas to supplement its networking business, CEO John Chambers says.
"Cisco fully intends to expand its current core markets, expand in service providers, and expand in advanced technologies," Chambers says. "But we will do this from both a technology-architecture point of view and a business-architecture point of view. We listen to our customers very carefully. They will tell us what to do or what not to do."

Last year, Cisco spent $3 billion on research and development--more than 15% of its $18.9 billion in sales in 2003. Forty percent of the R&D budget went to what the company calls advanced technologies. So far, the vendor has targeted six such areas--security, optical, IP telephony, home networking, wireless, and storage--which now account for 15% to 20% of revenue. Chambers believes each of those six segments could grow into a billion-dollar business on its own, and has indicated he would like to expand into four to six more new areas over the next several years.

Just what will those be? Chambers isn't saying. Speaking last week at a Bear Stearn's conference in New York, he said Cisco has identified two of the new markets it plans to enter, but he declined to reveal them. How quickly will the company move? "I'm pushing the team to expand at a faster pace," Chambers said.

Growth in the company's core networking market was only 3% in its most recent quarter, and while overall sales were up 22% from a year ago, the company has yet to rebound to the sales level of the tech boom. Competitors are grabbing share from Cisco in some markets, such as high-end routers for telecom companies.

"Cisco needs to expand beyond its core markets in order to grow," says Joel Conover, principal analyst in enterprise infrastructure at Current Analysis. Conover expects Cisco to devote more attention to business desktops by enabling better communications among workers, concentrating on security and antivirus software, and converting more companies to IP telephony.

Most businesses use Cisco routers and switches to move data around internal networks and to connect to the Internet. Cisco's large and loyal customer base trusts the company and values its products, making it easier for Cisco to sell new products. "Five years ago, I thought of the company as basically a black-box provider in the networking area," says Loren Brown, CIO of Carlson Wagonlit Travel. "We use them for more than that now."

The travel agency has standardized on Cisco routers and uses its call-center products, too. The reliability of those products has engendered a degree of loyalty. "The best news for me is when I don't think about things," Brown says. "There have been no problems." As a result, he adds, "pretty much whenever we're looking at the infrastructure side of the house, we always consider Cisco."

That's good news for Chambers, who describes, in an interview published on Cisco's Web site, an evolution of networking over the next three to five years that involves the "virtualization of applications and services." The overhaul of communications networks from voice and data silos to highly integrated infrastructures is a step in that direction. "This market is going to be data, voice, video, on a single line. It's going to be an IP infrastructure; nobody disagrees with that," Chambers says. "From a market-transition point of view, it's the right time for a new generation of products."

Cisco is queuing those up right now. "You'll see more product announcements this year from Cisco than you've seen in any year before by a factor of two, most all of it from organic growth. It's the best product pipeline I've ever seen as CEO, across all product lines," Chambers said at the Bear Stearns conference.

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