Routers and switches are the dull anvils on which the internet revolution has been struck - as essential and colourless in their own way as storage systems. The technology may be dull, but the firm that has risen to become one of the top five companies in the world by selling switches is anything but.
Cisco Systems is one of the most dynamic companies in Silicon Valley. In 14 years, it has grown from nothing to be worth $13bn in annual sales. In recent months, a lot of this growth has been in the UK, with a 70 per cent increase in business this year compared with 1998/99, making it Cisco's fastest-growing market.
Cisco has a corporate culture as unique in its own way as the SAS Institute or Microsoft, with ethics so squeaky clean that even consumer advocate Ralph Nader, that scourge of corporate America, is an investor.
Yet it has swallowed up companies with a greater appetite than even Computer Associates - more than 60 so far - with barely a hiccup. It has gone through three changes of top management without a blip on the sales and profit growth charts. And if that's not enough to make it interesting, this should certainly grab your attention: one of Cisco's co-founders once appeared naked on horseback in Forbes magazine. Put simply: Cisco is not your typical hi-tech company.
Looking after the pennies
Under the reign of chief executive John Chambers, the company is now poised to grow at an even faster rate, moving into new business areas at a breathtaking pace and challenging all-comers. Exploiting its stranglehold on the corporate network market, the company is taking on the likes of 3Com in the small and medium sized business sector, and challenging Lucent, Nortel Networks and Alcatel in the telco equipment race. It's even taking on the telcos themselves by promoting internet protocol (IP) telephony as a low-cost alternative to the traditional telephone networks.
Not content with all this, the company is getting into network software in such a way that it may soon find itself head-to-head with Microsoft.
There have been a few growing pains for Cisco, however. In May this year, the company's stock slid 13 per cent after an article in investment weekly Barrons suggested that Cisco's acquisition strategy was creating "a house of cards" that was waiting to collapse.
Stock analyst Thomas Donlan berated Cisco for its "pooling of interest accounting" method, which means the company does not put the cost of an acquisition or merger against earnings. Donlan argued that this creates a false picture of the company, because if it used the more usual purchase accounting method it would have no profits for the foreseeable future. While Chambers was reportedly piqued by this criticism, the company hasn't changed its course.
His quest for world domination is being masterminded from Cisco's headquarters in a campus of 35 almost identically ugly buildings spread across a desert drive in San Jose. If the buildings are grim on the outside, they are even worse on the inside, with blank walls and rows and rows of identical 12ft-square cubicles. This is Dilbert-land, and it's obvious that most employees work cooped up without the benefit of natural light.
Cisco corporate lesson number one: the company is parsimonious to an extraordinary extent. It has been so ever since it was founded in 1984 by college sweethearts Leonard Bosack and Sandy Lerner. There is no wasted money at Cisco, no budget for wall hangings to mitigate the utilitarian gloom. Nobody, but nobody, travels first class.
There is, however, money for free sodas, gymnasium rooms, cafes, shops, banks, dry cleaners and so on, that operate across the campus catering to the employees' every whim. That, of course, is an investment aimed at keeping staff as close to their desks as possible.
Cisco corporate lesson number two: everybody works hard - very hard.
What a difference the net makes
One area where expense has never been spared is the corporate network: a state-of-the-art, internet-based system that links employees, suppliers and customers in a far-reaching and intimate way. In Cisco's case, the network is the company. That's corporate lesson number three.
Don Listwin is every inch the Cisco executive. The grey T-shirt under dark jacket with matching Chinos scream 'smart casual, but ready for action'. Listwin is executive vice president, which means he is responsible for all of Cisco's US operations and much else besides. He sits on Chambers's four-man executive board, along with chief financial officer Larry Carter, chief technical officer Judy Estrin and the man responsible for worldwide operations, Gary Daichendt.
So if anyone knows where Cisco is headed, Listwin is the man. He sees Cisco expanding in a number of directions, but all of it under the umbrella of the internet, or more accurately, the IP standard.
"The internet is in the very early stages of what I think it can become," said Listwin. This in itself is a surprising statement, because many would consider that the internet has travelled quite a way over the last decade. Listwin, however, is banking on a lot more growth, especially where there are new commercial possibilities.
"I was in Japan visiting Sony recently, and talked to the executives in charge of the Playstation," he explained. "They currently get $60 from my son every so often - birthdays, and so on - when I buy him a new game. But they want more than that: they're after his $5 a week allowance. And to get that, they are going to use the internet."
It goes way beyond children's games, of course. Listwin sees the growth coming through areas such as application service providers (ASPs), the integration of voice and video and, crucially, through the success of Cisco's 'IP everywhere' strategy, where the company competes with the telephone equipment providers in pushing voice-over-IP (VoIP) technology.
There are many new opportunities for the company, but what about its mainstream business in the corporate network market? This is 55 per cent of the company's business, and it has a 40 per cent market share. But some analysts believe Cisco may become vulnerable as it focuses on new markets while other companies turn their sights on Cisco's core business.
The sin of pride
Cisco has maintained its core business not through offering particularly cutting-edge technology, but through the perception of Cisco as a 'safe' purchase and through good old-fashioned account management in the style of IBM.
"The number of Cisco people working on our account, based on revenue, is much higher than any other vendor," said Darren Stringer, commercial services director at internet service provider Energis Squared, which operates one of the largest Cisco dial-up networks in Europe. "It addresses the market very aggressively, and certainly has the desire and capability to move into new markets. The only risk for Cisco is that it can continue to attract and retain the staff it needs."
Staffing might not be the only problem, however. Meta Group also expects Cisco to come under increasing pressure on prices this year. IBM-style behaviour can also include the odd bit of "price gouging" when the company "routinely answers requests for proposals with product set prices 40 per cent to 100 per cent higher than offerings from 3Com or Bay Networks," said the analyst firm.
So is charging price premiums an indication that hubris may have set in at Cisco? Listwin acknowledges that it is an issue brought about by a lack of competition. "Lucent, Nortel and 3Com all tried to compete and they lost," he said. "Lucent tried to buy enterprise products to enter this market under pressure from their customers to do this and they couldn't. 3Com tried to expand, but couldn't get beyond the small business market."
"Nortel is probably doing the best and the other companies are exiting the market. The bar for entry has got so high that we are the only game in town for the enterprise," he added.
In these circumstances, "our biggest mistake would be if we become like IBM with the complacency and problems that it had", admitted Listwin. But, not surprisingly, he sees little chance of this happening as the company moves forward, shifting its offering to business buyers to meet their needs in the New Economy.
"The video telephony internet is changing work and business processes. The demand will be for applications that support data, voice and video, but enterprises need to believe in the business value," said Peter Alexander, vice president for the enterprise line of business. "We are doing a lot of work with this in areas such as workforce planning, customer care systems and so on, but 'e-learning' and enterprises will not run with video because they don't want to swamp their current network. You need new networking technology here, and we are working with key vendors such as Oracle and EMC to integrate services so that the customer does not have to."
In Cisco parlance, this is called building 'ecosystems' - alliances of major suppliers that work closely with customers to take much of the hard work out of building the network of the future. "The aim is that people don't have to do this themselves - they can go with pre-packaged solutions," said Alexander.
Similarly, Cisco is developing what it calls content networking applications that it hopes will be used by a variety of dotcoms as well as end-to-end business sites and service providers such as web hosters and ASP outsourcers. Cisco's architecture for voice video and integrated data (AVVID), is a key element in this strategy.
Opportunities in telecoms
Until recently, there have been some problems with VoIP technology, such as poor sound quality and limited bandwidth, although Listwin believes these problems are no longer a factor. Now it's just a question of pushing the telcos towards IP, a job that Cisco seems only too willing to take on.
"We are leading the way in VoIP and encouraging the phone companies and applications providers to come up with new and challenging applications," said Alexander.
"If Deutsche Telekom tries moving from voice to data, the business model falls apart," added Listwin. "It's not a technology problem, it's working out a business model."
European telcos are now moving in the right direction, according to Listwin. "Deregulation is creating capital investment in data," he said. "Europe was 15 months behind the US. Now it's six months, and the gap is closing all the time."
Larry Lang, Cisco vice president for service provider marketing, backs this up. "People have different figures but data is overtaking voice very quickly," he said. "The chief executive of Bell South said that the crossover of data over voice happened in November 1999. BT's Peter Bonfield said it happened in 1998. WorldCom's figures show that the revenue crossover will happen sometime in quarter four this year." Competitive Local Carriers' telephone companies are seeing the revenue crossover happening this year as well, Lang believes.
Whatever the timing, Cisco is determined not to miss out on any sales opportunities. "We will be supporting cellular business using technology we acquired from JetCell," explained Alexander. "JetCell developed Viper Cell - an IP to GSM [global system for mobile communications] link - which will soon be in production. The idea is that when you walk through the door of your office building, your GSM phone becomes your PBX [private branch exchange] phone. We are looking to get service providers to sell this as a service to enterprises."
Because of the downward pressure in telco prices, even commercial users have been slow to adopt VoIP, but Lang believes that this is changing as more companies adopt virtual private networks (VPNs).
"The VPN market will go from $4bn to $10bn this year to next," he said. He also has bullish advice for anyone considering a VPN. "Don't worry about the method. Just do it. There is no one particular method or technique you use - it just depends on what you already have and a number of other factors," he said.
BT has also spotted VoIP's potential and has signed up to the Cisco vision. "We spent two years evaluating IP telephony, looking at 13 companies, and decided that Cisco was the best-of-breed on the day," said BT portfolio manager, John Livingston. "We are talking with a number of organisations about helping them set up private networks using IP to replace PBXs."
It's early days - BT has only deployed 350 IP telephones so far - but Livingston believes that the time is right for many companies to start looking at IP telephony over private networks. For Cisco it's a matter of building up a business that it has never had.
It lags way behind the big telephone equipment suppliers such as Lucent and Nortel in supplying telephone network equipment, but maybe IP will be its key to this market. Another facet of the IP everywhere strategy is IP/TV, which includes Microsoft Media technology.
"This is highly scalable video, not video on demand - it's multicast streaming scheduled media," said Alexander. "If someone in a building is watching a training video and someone else wants to watch it, it is simply copied from the signal being sent to the original viewer rather than re-sent from the source. This is video without swamping the net."
But it's not just the corporate environment in which Cisco sees its future. Listwin can see opportunities everywhere - and we mean everywhere."The King of Jordan has been here meeting with John Chambers to discuss ways in which we can help him move his country from an agrarian economy to a modern economy," he said.
"Within the next two years, China will have the biggest internet in the world. We estimate that the internet is a $523bn business now, and is growing exponentially thanks to breakthroughs in fibre optic technology - a technology that is developing faster than Moore's Law."
It's clear Listwin considers Cisco's role to be more than just a supplier of boring old routers. In his world, Cisco is the driving force of a revolution that is re-shaping the world.
It's more than just a question of having the technology: Cisco has mountains of the stuff waiting in the wings. In Ciscoworld, the question is: is the world ready or, as the company advertising puts it, "are you ready?".
The home of the future?
Not everything's rosy in the Cisco garden, however. One area where it has failed to shine is the home. The wired-up house is no longer a sci-fi myth, with home users, especially in the US, starting to look at home networks.
Sounds crazy? Many UK homes now have more than one PC and as high-speed network connections such as digital subscriber line (DSL) become more popular, users are starting to link home computers together so they can share one fast DSL connection.
Cisco has once again put its forward-thinking cap on, and believes this is only the beginning. The company is working with a housing developer on a community development in Los Angeles that will have 13,000 residential units and six million square feet of commercial space. The aim is to have the whole development wired for broadband connections and wireless internet access from the start.
The idea is that the houses and shops will be filled with intelligent devices communicating with each other and the outside world. The fridge will be ordering from an internet shopping service when stocks run low, and the bath will be programmed remotely. Everybody will have a home that is as wired as Bill Gates's mansion.
"If you strip away the hype, wiring homes is almost as straightforward a proposition as it would be if we were talking about a new office complex, and that is universally accepted," said Illuminata analyst, Jonathan Eunice.
He believes Cisco will be a success in the home space. It will need to boost its sales in this sector - so far it has a paltry share - but as with all of Cisco's expansion plans, the company hopes to draw on the changing market to alter its own position and market share.
This is a company preaching revolution out of a kind of beneficent self-interest. In markets where it doesn't have a credible offering, the company wants to move the world forward to the next stage where it does have technology: large organisations, small organisations, telephone companies, cable TV, the homes of the future and just about everybody else.
If it's networked, Cisco aims to supply it. Can it succeed in all these areas? Will it overstretch itself? We'll see, but based on its track record, you really wouldn't want to bet against it.
It was announced two weeks ago that Don Listwin is leaving the company to head one of Cisco's partners.
|Cisco Systems: company analysis|
|Cisco's unprecedented growth shows no sign of flagging. For the financial year which has just ended, sales have grown a whopping 55 per cent from $12.2bn to $18.9bn. This is amazing growth for a company of this size. Although Cisco absorbed a lot of extra costs this past year, profits still grew 30 per cent from $2.1bn to $2.7bn.|
While some of this growth can be put down to the company's acquisition strategy, Cisco's underlying business is growing at a very healthy rate.
The company's pro forma profit, which excludes the effects of acquisition charges, payroll tax on stock option exercises and net gains realised on minority investments, jumped more than 50 per cent from $2.5bn to $3.9bn.
Cisco's profits have increased for 42 straight quarters - more than 10 years."This is the strongest quarter over quarter and year on year growth we have seen in four years," said chief executive John Chambers at the company's results conference earlier this month.
Chambers went on to admit that the growth was causing some problems with the move into new business areas squeezing Cisco's supply of components. "Lead times hit an undesirable peak in June this year," said Chambers, but the company is taking steps with its suppliers and manufacturers to bring lead times down, chiefly by buying more inventory ahead of time.
Chambers also said that headcount was "growing ahead of revenue", but that this was vital as Cisco expanded into new areas.
acquisitions stack up
|* Includes two purchases in which the price was not made public|
** Not including one purchase in which the price was not made public
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