You don’t so much interview John Chambers as intercept him. When CRN grabbed half an hour with Cisco’s chairman and chief executive officer, he was fresh from meeting with the world's economic power elite and talking to partners, customers and analysts in Britain.
But tucked into his cozy but unremarkable office in Building 10 of Cisco’s sprawling San Jose, California, headquarters – telePresence, yes, window, no – Chambers is happy to expound.
Having just entered his 16th year as Cisco’s top executive, he’s as affably intense as ever, anticipating questions and subquestions and follow-up questions: a mind percolating before your eyes even as, in conversation, he politely waits for you to finish your thought.
“At the 10,000-foot level, what’s most exciting is that many of the market transitions we anticipated happening are happening,” Chambers says. “The network is becoming the platform not just for all forms of communications and IT, but it’s going to enable a different generation of productivity around collaboration, it’s going to change the data centre, it’s going to change health care, it’s going to be at the centre of everything from security to video. The exciting thing about Cisco and its partners is we’re going to play there together. We are better together.”
Today's Cisco is no longer just the king of networking vendors. The toddler unified computing system – its major server and data centre play – ensured that “there hasn’t been a new hardware player in the data centre for decades, and contrary to all the prognostications, we are breaking away there”, Chambers said.
Cisco’s next big gambit will be getting its partners to fully embrace the cloud. To help them get at that opportunity, executives at the recent Partner Summit in New Orleans rolled out cloud partner programs that give resellers avenues into the cloud, from building clouds to operating clouds to reselling clouds.
The rollout could be huge not only for Cisco partners but for the channel as a whole, since Cisco is widely viewed as the leader in delivering innovative channel programs that bring partners big profits in tough-to-tackle markets.
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he cloud initiative is at the heart of Chambers’ vision, which is far beyond that of a networking and infrastructure vendor with a nifty server play.
These days Chambers is asking solution providers to invest heavily in his vision of network architectures: the idea that the network is the centre of platforms and frameworks for all forms of communications products and services, as opposed to just siloed, product vs product sales.
The architecture play, as Cisco sees it, is all-encompassing, with the cloud as the next frontier. It extends from network core to network edge – data centre to mobile device – and serves as an organising principle for everything from switches and routers to video, servers, wireless access points and security. Cisco can, and does, do them all. And what Chambers is asking partners to do isn’t to be everything to everyone and attempt to sell everything but, in essence, see the architectural forest for the product trees and map the way they sell Cisco to that strategy.
“If you’re selling a single, stand- alone product, you’re ignoring perhaps the strongest thing Cisco does, which is an architectural approach, which protects their investments, allows them to move into new markets relatively seamlessly,” Chambers says.
“Many of our partners will say what level of differentiation they want to add. So there’s room for just making the architectural stack work well together. There’s room for saying, ‘We need to go sell that in a given geography or industry vertical.’ And that’s much better than their counterparts that are selling stand-alone unified communications, stand-alone security, stand-alone wireless, stand-alone routers and switches – which, by the way, were designed to work together,” he says.
Transitions don’t wait
Five years down the line, Chambers says, IT and business processes will be so entwined they’ll be practically one and the same. It’s Cisco’s architecture vision that will best accommodate that trend, he said.
“In people’s minds that might have been a stretch three to five years ago, but when I talk to the top 5 percent of CEOs in the world, they not only get it, but when you sit and listen to them, you can’t tell what’s IT and what is their business,” Chambers says. “It’s starting to occur and plays extremely well for Cisco and our partners.”
The architecture strategy is part of what takes Cisco beyond its legacy as a network plumber and pushes it into the upper echelons of tier-one IT vendors: a long-haul competitor to the Hewlett-Packards and IBMs of the world.
It’s also driving Cisco’s ambition to be the ruling technology power in 30 or more “adjacencies” – Chambers’ preferred term for market and product segments such as health care, smart grid and video, where he believes Cisco can be the No. 1 player, and where challenges are solved in the network. “Have we spread ourselves a little bit thin? I’ve always spread us thin at Cisco,” Chambers says. “The key is market transitions wait for no one. This verticalisation, whether it’s good or bad, is happening.
And unlike our peers that we’re competing against, we share the majority of our direction with our partners, including even the services level where I would expect our partners to generate five, 10 times the services revenue we do, even though we’re all needing to move to a services-led sell and services-led implementation.”
The financial picture
Cisco sceptics say the company’s expansion hasn’t solved the increasingly competitive pressure on its core businesses. In its most recent earnings announcement, for the second quarter of its fiscal 2011, Cisco’s profit declined 18 percent year over year, switching revenue was down 7 percent year-over- year (11 percent sequentially), and routing was up 4 percent (down 7 percent sequentially) – less-than- encouraging numbers for product categories that together still make up about 46 percent of Cisco’s overall revenue.
On the second-quarter earnings call, which took place after CRN’s interview, Chambers says Cisco was going through “a period of transition” that was faster than Cisco anticipated, and that newer and future Cisco products will compete far better at the level of price performance.
Cisco has no intention of competing with vendors on price itself, he says. And beyond the routing and switching declines, the story of Cisco’s newer products – notably data centre virtualisation, up 59 percent year over year, and collaboration, up 37 percent – was definitely a bright one.
But along with softness in its consumer business and concerns for public sector, the numbers served to amplify a third straight quarter of disappointing results. Cisco’s gross margins also tightened to 60 percent, from 65 percent a year earlier.
“Cisco believes its 2011 fiscal year revenue will grow somewhere in the 9 percent to 10 percent range, which raises the question as to whether the company’s growth."
Q&A with John Chambers
Cisco's chairman and CEO sat down with CRN to cover the growth of its channel, why Cisco is a better bet for partners than HP or IBM and what role the network, collaboration, video and other Cisco hallmarks will play in the businesses of the future
CRN: If you were looking to tee up how to motivate solution provider partners and get them to visualise the industry heading into 2011 and beyond, what would you tell them?
JOHN CHAMBERS: If you look at the breadth and depth ranging from such issues as collaboration, it’ll drive a decade of productivity. The first time I’ve ever heard [it] at the World Economic Forum, with top economists from Europe, the US and China, we talked about GDP growth for the next three to five years and beyond, and I asked about productivity and expected a candid answer of 1 [percent] to 1.5 percent, which is what they always say: ‘You can’t drive faster than that.’
All of them agreed that we were in for a decade of productivity growth that was probably two to 3 percent or more. When I asked them what’s going to cause that, they said, ‘What you’re doing, John.’ They said that in front of 100 of my customers, so I could have hugged them right there [laughter], but it would have been inappropriate.
What it does speak to is collaboration is the next generation of productivity, organisational structure, and is almost unlimited and an area I expect grows rapidly for us in the next five to 10 years.
The second thing is there hasn’t been a new hardware player in the data centre for decades, and contrary to all the prognostications, we are breaking away there. We have very much established ourselves. We are in the top three x86 players, we’re winning a lot in the cloud, which is the second generation of virtualisation data centres, the product is winning most of the performance awards, and it isn’t servers separate from the network separate from storage, it’s that combined, first in a physical data centre, then in the cloud, then all the way in your home. And [we] build VDI and other capabilities off of it.
The third area you think about in terms of the approach is video. Video is the next voice. When we built a router, nine years ago now, that did a billion phone calls – voice, if you will – everyone thought we were crazy.
Of course, [5000] or 6000 CRS-1s later, and 500 customers-plus, we are now building a router than does a billion videos.
Solution providers and the industry as a whole hear often about your 30 adjacencies, or the 30 to 50 adjacencies. One thing we consistently hear from channel partners is that they are overwhelmed by the level of opportunity, from smart grid, to video and health care and the rest. How do you want them to prioritise? What do you want partners to go after?
They’re the same issues we have. First of all, be realistic given the market. Which areas do you have differentiation and which areas do you want to invest in? The good news is it’s a portfolio play.
I talk about the very top of our big bets, and I separate them into categories. Small to medium business, IP next-generation network, borderless networks, and then the next generation, data centre virtualisation, video, and then the next generation after that, clouds and what we’re doing with EMC, and smart grid.
You think of it in buckets and those are the major moves we’re going to make. Then we’ll do a portfolio play and tie them all together. I wouldn’t try to be all things to all people. I would say based on the business case, where do you move, but what has to change is you don’t want to take on a competitor on a single, stand- alone product. When I talk with the leaders of large retailers, you can imagine I don’t talk routers and switches, I talk about how does their physical world come together with your virtual world.
Government and health care: You can’t afford the health-care expenses coming at us in this nation or around the world, so we’ll have to see a decade-long run of collaboration and health-care productivity or we’ll break the health-care system. As they said at the [World Economic Forum] – and these are the top health-care experts in the world – all of them [health-care systems] are on the verge of bankruptcy.
There’s no choice but to change. So the nice thing about our partnering portfolio is, yes, I think we’ve hit the market transitions right, yes, we win in many of the areas, we are spread a little bit thin just like our partners, and if you have to prioritise, pick and choose based on the customer segment you’re doing.
What does the next-generation VAR look like? Do they need to be business consultants asking these questions you are? What skills do they need to have as we go through these market transitions?
The major thing is just take it one step up in terms of being able to understand the advantages of architectural sell regardless of how many you sell. The nice thing about the portfolio at Cisco is you can add value on top of that. You can get very sophisticated about what you do from a security perspective, or what does this really mean in terms of video and collaboration to health care, or what does it means in safety and security for customers in terms of how do you combine safety and security in an architecture, with any device, any content. I can take it up one level, second level, third level.
Then there’ll be a set [of partners] that really gets good, that takes this as an architectural play and translates that into either across-the- board productivity and business model changes, or, in a specific industry: defence, or retail or manufacturing, etc.
But all of us have to move. Merely providing a router and a switch and responding to an RFP is probably not going to make either one of us very much money, although I want them to win it like I want my team to win it. Playing at that level, the ability to make money is going to be more in services so services will be a key element of the future.
We are an ecosystem partner, and that’s a lot different than what HP and IBM are doing. They clearly want it for themselves.
You mention HP, and with Leo Apotheker now running the show, we’ve heard a lot of emphasis from HP on becoming a software company and upping its stake as a software company. Does Cisco need to be seen as a software company? What’s the plan to invest in software?
So three separate questions, if I can. First, Leo is a good person and a good friend, and I wish he weren’t at HP. Same thing with Ray Lane, their chairman. And I will feel very guilty beating them. [laughter]
You heard it here first.
[laughter] You did. But it’s hard to change the culture and direction of a company. We spend 13 percent of our revenues on R&D. We acquire a huge number of companies every year. In the last year alone, we spent over $6 billion on acquisitions. That’s hard to do. Our success rate on acquisitions has been off the chart. The Tandberg success, the Starent success, amazingly good.
We in many ways caught the market transition on data centre virtualisation, and our large peers, by surprise. Much like we did when Nortel, Lucent, Alcatel, Siemens, Ericsson said, ‘Cisco, you really don’t understand telephony, you really don’t understand this market.’ We didn’t do bad. We became the No.1 player, probably five times the market cap.
The data centre in this market has similar characteristics. Make no mistake about it, they see us coming – this time we’re not going to sneak up on anybody – but this really is the breadth and depth we offer to our partners that no one else does. We are a partner-driven organisation. Our other peers, you don’t hear that from any of them.
So at the heart, are we perfect? No. Do we occasionally make mistakes? Absolutely. And I want to apologise for the lead times last year and communications with the partners. We clearly hurt them and hurt ourselves and hurt our customers, and it look us too long to fix it. But if you look now, all the lead times, with very few exceptions, are within the range where we want it, and we’ve got a different process that, while there’ll occasionally be bumps during the year or surprises from a supplier, I think you’ll watch us handle it differently.
How often are you meeting with partners?
Pretty often. When I’m on the road, it’s probably a partner a day, minimum, and sometimes large groups of partners.
One of the changes occurring not only at Cisco, but business organisations and governments worldwide. We’re moving from command-and-control, which, candidly, we’re really good at and which I love. But we’re moving to collaboration, teamwork, social networking capabilities.
What’s three to five years down the line now?
Organisational transformations and the effectiveness that goes with it. That will drive a decade of productivity, that’s really big. It’ll save some of these systems close to bankruptcy in health care and it will transform education, internally,to companies as well as education in K-12 [kindergarten to Year 12] systems and higher education – it’s transformational.
You will also see the organisation structure [change]. Suddenly, and I would argue it’s going to be the network, IT will be so deeply embedded in the business process you won’t talk about business process and IT enabling it. They will be one and the same.
Another game-changing acquisition at the level of Tandberg, will we see one this year? You will see constant game- changing acquisitions. We don’t do them just to acquire. We do them when the market is right, when the price is right, and we try to catch market inflection points.
If you’re setting your strategy off your competition, by definition, you are two to three years behind. When our competitors, who haven’t been able to acquire, start to acquire. When our competitors who haven’t believed in a vertical stack begin to do a vertical stack.
So, to me, it’s about execution.
Any holes in the portfolio?
Constantly. The nice thing is we’re right on this architectural issue and there are going to be constant holes you’ve got to firm up. Security is our No. 1 emphasis across the whole company, mainly because it’s our customers’ No. 1 issue. There is no such thing as a secure data centre or network. That is huge for the future and huge for the industry.
So that’s an area [where] we have to do dramatically better – you can’t unless you’re in the data centre, unless you’re in enterprise, unless you’re in service provider, unless you’re in wireless, unless you go all the way to consumer, any device to any content.
I don’t know how to resolve the issue without this. On the positive side, it’s great it’s the focus. On the negative side, you’ve got to say, ‘What took you so long? If you’re the only architectural play, which you probably will be, why don’t you move faster?’ And that’s probably fair criticism.
Security in and of itself can cause a huge upgrade cycle. It’s an architectural play.
prospects are as bright as they were a few quarters ago,” Scott Dennehy, engagement manager and senior analyst at Technology Business Research, wrote in a recent research note.
“While TBR believes Cisco’s overall strategy is solid, the company may simply be too large and dispersed to achieve growth rates comparable to smaller and more-focused competitors.”
When it comes to its key networking competitors, many are looking to exploit Cisco’s aggression as hubris. HP, for example, has been relentless in touting HP Networking wins against Cisco and in December launched a trade-in program through which VARs can save 20 percent on HP networking gear if they trade in certain Cisco Nexus or Catalyst switches.
Attacks all around
Many of Cisco’s other competitors, from Juniper Networks and Brocade on the data side to the marquee names in wireless, videoconferencing and WAN optimisation, have also stayed on the attack against Cisco, painting Cisco’s end-to-end architectural vision as too expensive, too closed, too proprietary.
Some analysts have taken up that mantle as well. A much-circulated November 2010 report by Gartner took aim at Cisco and the idea of single-vendor dominance in networking and infrastructure.
“After interviewing various organisations that have introduced a second vendor into their Cisco infrastructures, it is clear that in most cases today there is no financial, operational or functional basis for this argument,” wrote analysts Mark Fabbi and Debra Curtis.
“The reality is that a single-vendor Cisco network isn’t necessarily less complex, easier to manage or more reliable than a network with multiple vendors when implemented with best practices.”
Chambers acknowledges Cisco's monolithic structure may be a rod for its own back: "On the negative side, you’ve got to say, ‘What took you so long? If you’re the only architectural play, which you probably will be, why don’t you move faster?’
"And that’s probably fair criticism."
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