SuperComm: Chambers discusses Cisco's position in the service provider market

The percentage of Cisco's revenue from service providers has been halved during the current downturn, from just over 40% in 1999-2000, to the mid- to low-20% range now. Yet a market research firm just disclosed that Cisco sells more telecom gear than any other company, including the traditional suppliers. But CIsco still has room for improvement, as CEO John Chambers discussed in an exclusive SuperComm interview with Network World Managing Editor Jim Duffy.

What's your assessment of the state of Cisco's service provider business?

If we were to have said three years ago that we were [going to be] the No. 1 telecommunications player in the world (according to Synergy Research), and that we would have enjoyed the industry's best cash, profits and market cap, no one would have believed us. And yet that's what we've been able to do over the last three years. At the same time, this downturn has been humbling to us all and that's when you do the soul searching and say what do you need to do better. So where we've done well is when we've been customer driven. Where I've gotten in trouble is where we've made the mistake in thinking we knew more than the customer did. That was true in [our dealings with] the ILECs and the PTTs. We spent the last year and a half recovering from that. The one company that may come out of the downturn in a dramatically different position is Cisco.

So is the downturn directly related to your success in the service provider business?

The downturn gave us a chance to change [and do] what we needed to do better in the service provider market. Where we weren't close enough to the operational people at a BellSouth or Verizon or SBC, we've rebuilt those relationships. In fact, we never really had them. You've got to earn the trust of the operational people and be driven by the operational side.

So that's the mistake you alluded to in your SuperComm keynote address…

Yes. It started off that way, we got too far away from it, paid a terrible price for it and now we're back. I believe this market is coming to the service providers if they execute properly. Even in the hot growth areas, many of the enterprise customers would like to outsource. But they don't want just transport. What they really want is to get value on top of that. How this evolves depends on how quickly service providers transform themselves but also, using Cisco as an example, with our clear leadership position in the enterprise, how effectively we work with service providers and learn from each other.

In addition to being customer driven, particularly with the ILECs and RBOCs, what else do you need to do to partner with them?

We have the potential to be a true business partner; the CEOs [at the carriers] get that. They realize that what we bring to the relationship is much more than being a supplier. Within the supplier ranks, it's do you provide one or two pinpoint products or do you provide an architecture that protects their investment. That's what the opportunity is in front of us. The real question is, can we be as effective with the service providers as we were in the enterprise. In the enterprise, our market share is above 60%; in the service provider market, we're in the single digits. So the opportunity is there if we execute right. We can bring business to them. We can bring solutions to them. We can show them how they can be more effective in terms of internal productivity, but also help teach them how they do this with their customers. They have the potential to be a trusted advisor [to their enterprise customers].

How are they accepting that proposition?

I have to be very careful how I say it. With proper balance and humility, I have to say this is our joint opportunity. I think most of them would agree.

Are you getting positive feedback from the ILECs and RBOCs?

We're in the best shape we've ever been in with the ILECs, RBOCs and PTTs. Not to say we can't do better….

Where is Cisco particularly challenged in the service provider space?

It's not as much in our product capability. It's with the operational people in the accounts. We have not built the relationships there and [weren't] being customer driven by them. That's where we had the biggest hurdles. Those are the decision makers for the equipment.

Cisco seems to be virtually invisible in circuit-to-packet migration. That business seems to be going to the Nortels and the Lucents…

You've got to say what are the real markets and what are the transition markets. Just like we made a decision in the enterprise: when we started to move from routing into LAN switching, a lot of people said we've got to go to hubs. And we decided not to because we thought that was a temporary market that was evolutionary. What you just outlined is a very similar decision; time will tell if we were right or wrong.

Right now, we see [service providers] using the gateways to get their traditional pricing down. We've seen the traditional players you've mentioned doing almost anything to hold on to the business, which is a nice way of saying we'll take all the profits out of the market. We're more interested with how you … protect your customers' evolution than we are in going into a market, like the hub market of prior times.

Analysts expect the Class 4/5 switch replacement market to take off in 2003. Will Cisco be there?

In terms of the evolution of the products to IP, the answer is yes. But in terms of the classic Class 4/5 replacement at this time, that's not high on our radar screen.

Cisco also seems to be challenged in multiservice switching. You went from the No. 3 player to No. 4, according to Dell'Oro Group…

When we weren't listening - when we were trying to go straight to what we viewed was the Old World to the New World of IP - our customers said, 'pay attention. It's going to be an interim step, and while we agree with you where it's going to end up, we want you to help us go from frame and ATM to IP. It's got to be an evolution, not a revolution on getting there.'

Upstart carrier Velocita filed for Chapter 11 this week. Cisco had a major investment in this customer. Was that a mistake?

You want to think of this being a race track. Nobody even qualifies for it if they can't drive very very fast. Nobody wins these races by driving with a foot on the brake. Will Cisco continue to take business risks? Absolutely. Have we been conservative in accounting for the business risks we take? Absolutely. You're going to have misses. What you do is learn from each one and say what do you do differently, and get better and better at that. You've got to really focus on profitability from the beginning.

If you're going to potentially be the No. 1 player in both service providers and enterprise by a lot, by definition you've got to take some risk. Some will work, some will not. The potential is there for 40% to 50% of our business to come from service providers. I personally would be surprised if that did not occur.

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