Interview: Cisco discusses service providers

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

Q: What's your assessment of the current state of Cisco's service provider business?If we were to have said three years ago that we were 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 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.

Q: 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.

Q: So that's the mistake you alluded to in your keynote. 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 say how do we learn from each other.

Q: In addition to being customer driven, particularly with the ILECs and RBOCs, what else do you need to do partner with them?We have the potential to be a true business partner, the CEOs 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 percent; 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 themselves 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.

Q: 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 on it. I think most of them would agree.

Q: Are you getting some positive feedback from the ILECs and RBOCs on it?I think we're in the best shape we've ever been in with the ILECs and RBOCs and PTTs. Not to say we can do better… but the best shape ever.

Q: 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 the trust and 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… I think 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 though that was a temporary market that was evolutionary. What you just outlined is a very similar decision time, we'll tell if we were right or wrong on it.

Right now, we see people 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 do an interim step and protect your customers' evolution than we are in going into a market, like the hub market of prior times.

Q: 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. We're skipping what we view to be an interim step in terms of how the market evolves.

Q: 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 a frame and ATM to the IP. It's got to be an evolution, not a revolution on getting there.'

Q; Upstart carrier Velocita filed for Chapter 11 this week. Cisco had a major investment in this customer. Was it wrong?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.

In markets, we will run the race. We're not going to let someone pull away from us because we didn't have a car in the race. 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.

I think the potential is there for 40 percent to 50 percent of our business to come from service providers. I personally would be surprised if that did not occur.

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