Interview: Cisco's Giancarlo on pricing and innovation

As the man who oversees switching, voice and carrier systems for Cisco Systems Inc., Senior Vice President Charles Giancarlo is well versed in the company's plans and goals, as well as its research and development efforts. Giancarlo spoke recently with Computerworld.

Q: Which products sell the best for Cisco? Routers are 27 percent of revenue, switches are 42 percent, access technologies, 5 percent, a category called other is 9 percent, and services is 17 percent. "Access" includes optical, aggregation and ATM ]Asynchronous Transfer Mode], while "other" includes security, voice over IP, software and call center products. "Services" is not necessarily the same as what IBM would mean by managed services, but it includes support as well as software support.

Q: What products will Cisco emphasize in coming months? Routers and switches are a fundamental thing for us, and we innovate and incorporate value into those products over time. There are also a number of new technologies we're investing in. Nearer term, those are IP telephony products, wireless LANs, security and storage. Some are already selling hundreds of millions of dollars a year and will be at $1 billion. Longer term, we have investments in the hopper at multiple different stages.

Q:What level of investment is Cisco making in R&D as the workforce has gotten somewhat smaller? We're operating in a healthy fashion, with $3.3 billion in the current year for R&D, which is roughly down 10 percent from the peak of $3.77 billion in 2001. But everything is relative, and considering the market overall, we're a healthy spender on R&D. The reduction in R&D is partly [workforce] attrition. But our effectiveness is better than one and a half years ago.

Q: What is the jobs level now compared to the high point? We're at 35,278 and were just under 40,000 in early 2000.

Q: CEO John Chambers said you have seen price performance improvements in nine out of 10 product categories in the past year by 10 percent to 40 percent. That doesn't mean prices have dropped by 40 percent, I suspect. I hear some of your customers complain that Cisco is priced high, so what do you say to them? When we say we've had price performance improvements in nine out of 10 categories, it means in one way or another. We have a regular development engine and literally thousands of products, so there is the product life cycle of 18 to 24 months included in that as well. Price performance improvement could result from substituting a higher-performing card or a box into a switching configuration for the same price, or it could mean we've reduced the price.

Are we high priced? We freely admit we are probably the higher-priced company out there. Not to sound Darwinian, but we also have the highest market share, so how is that? We've been increasing market share, not because we're the biggest, but because we focus on lowering total costs and providing customers with services they need in the network and making sure they have the lowest total cost of operations.

A customer's capital equipment cost is a very small portion of the overall cost. Would the customer spend more money to get a better product if it reduces spending in other areas? It's not a simple evaluation.

We have focused on investment protection. An example is that there are a lot of management capabilities that might reduce bandwidth and allow a lower price for bandwidth from a carrier. It might mean it takes fewer of our products to solve a problem than from our competition. We often go in with a bid, and it's a completely different design from a competitor, enabling the customer to have a network at a lower price, right up front.

The proof of all this is the results you see in the market and our market share gain.

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