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Cisco Powers Through Recession

LAS VEGAS - Flanked by a coterie of gadgets in a private suite at the USA's biggest consumer electronics show, Cisco Systems CEO John Chambers might seem like the proverbial fish out of water.

Yet the leader of the computer-networking giant had delivered a keynote speech at the Consumer Electronics Show last week and was outlining its consumer plans.

It's all part of Cisco's audacious gambit to plunge into new markets, spend billions to snap up companies and partner with others, @despite a sour economy.

"We were never more aggressive than we were last year, during one of the worst economic crises we have ever seen," Chambers said in an interview with USA TODAY.

He predicts 12 percent to 17 percent annual growth for Cisco in the next five years, regardless of the economy. "You never want to waste a good crisis," he says.

Chambers - and Cisco - seem to be everywhere.

Last week, it was the sprawling CES in Las Vegas. In September, he was in New York, speaking on education reform in the U.S. That same month, he rubbed shoulders with NFL Commissioner Roger Goodell and Dallas Cowboys owner Jerry Jones at the team's $1.2 billion palatial stadium. Cisco is technology partner at the stadium.

In April, Chambers addressed leaders of General Electric and Florida Power&Light in Florida about a smart-grid project. And he has frequently huddled with the Obama administration on the use of technology in the $787 billion stimulus package.

A buoyant Cisco is even planning a new hardware-software platform - the Cisco Unified Computing System - in pursuit of the multibillion-dollar business for equipping thousands of data centers run by corporations.

Partners become rivals

Numerous acquisitions have thrust Cisco into new markets such as computer servers and business-collaboration software, where the company now finds itself in direct competition with traditional business partners such as Hewlett-Packard, IBM and Microsoft.

On top of that, Cisco rolled out consumer products at CES. The most eye-catching: a home version of TelePresence, its spiffy videoconferencing technology.

Welcome to the reinvention, again, of Cisco. Flush with $35 billion in cash, it has snapped up four major companies for roughly $6.5 billion since Oct. 1. The deals, and others preceding it, are crucial to Cisco's plan to push products that generate more Internet traffic which, in turn, propels demand for its core networking-hardware business.

"We go into downturns and plan as a company to become stronger and more competitive," says Cisco Chief Financial Officer Frank Calderoni. "Cash is king. It enables us to make bold moves."

Tying everything together

Cisco celebrated its 25th anniversary last month, and it appears to be as strong as ever.

Despite a deep recession, its stock has risen steadily - shares closed at $24.95 Thursday - and it whacked $1.5 billion in operating expenses in the past year.

First-quarter results, announced in November, offered fresh evidence that it's emerging from an economic downturn that depressed sales the past year and caused many firms, including Cisco, to shed thousands of jobs.

The $36 @billion networking behemoth already has its hand in nearly every facet of the Internet's operation - from switching systems called routers that find the most efficient path for information, to network-management software and routers that run wireless networks in homes.

As much as three-fourths of the world's digital data flow through Cisco equipment, giving it a decided advantage in extending into new markets. "Our (networking) plumbing ties everything together," Chambers says, ticking off markets including sports and entertainment, "smart grids" that deliver electricity efficiently to consumers, consumer networking and more.

IBM, Intel and others also are expanding their roles in digitizing key pieces of infrastructure, from "smart" electric utilities to electronic medical records.

The potential revenue from so many new markets - worth $138 billion, based on Cisco estimates - is matched only by the lineup of potential rivals for those markets.

While that is good news for consumers in the form of innovation and cheaper prices, it means fierce competition, tech analysts and executives say.

Where the battle lines are being drawn:

Smart grid. @Cisco is one of several tech giants to launch a new smart-grid strategy designed to bolster its presence in a global market expected to be worth up to $171 billion by 2014. IBM, Google and Oracle have announced plans to take advantage of ambitious government-backed initiatives.

Cisco is working with GE and utility Florida Power&Light on a major wireless smart-meter rollout in Miami. It has also partnered with Duke Energy on an end-to-end smart-grid network, along with several other utilities.

"One of the goals of these projects is to improve the efficiency of the electrical grid," says Laura Ipsen, general manager of Cisco's Smart Grid Business Unit. "This is a big market, and not one company is getting to build the whole smart grid."

Videoconferencing and home entertainment. @In October, Cisco announced its intention to acquire videoconferencing-equipment maker Tandberg; it will pay $3.4 billion for the Norwegian company.

Cisco already has staked out its spot in high-end videoconferencing. Its TelePresence plasma screens project life-size images of participants - often from far away - to simulate face-to-face communication.

"Video is at the heart of (Cisco) moving from the plumber (of the Internet) to a thought leader" for sports stadiums, set-top devices, music and other areas, Chambers says.

Underscoring its importance, Ned Hooper, Cisco's chief strategy officer, says 90 percent of consumer content on the Internet will be video.

This year, the company bought Pure Digital, which makes the popular Flip video camera for consumers, for $590 million. "How does Flip fit into Cisco's video strategy?" asks Stephen O'Grady, an analyst at market researcher RedMonk. "Maybe it complements TelePresence and Tandberg, as a low-end product. It means it also increasingly competes with iPhone."

The Cisco-Tandberg deal could ignite a market chain reaction. For instance, it might induce telecom specialist Polycom to work with HP, which competes with Cisco for conference-room video setups, says Diane Krakora, CEO of Amazon Consulting, which is not affiliated with Amazon.com.

Server market. @Cisco's decision this spring to dive into the server business came with the risk that it might irritate both IBM and HP, both of which control big slices of the server business while also reselling Cisco networking gear.

HP, which announced plans to buy 3Com for $2.7 billion last month, now competes with Cisco in the networking market.

IBM is pressing ahead with an anti-Cisco strategy. It has a deal to rebrand and sell Brocade networking products in an effort to wean itself from selling Cisco switches to corporate customers.

IBM had no comment on competing with Cisco.

Juniper Networks said it is "continuing to broaden" its relationship with IBM. IBM sells Juniper switches, routers and security products.

Sports technology. @Cisco has literally hit the big screen at two of the most ballyhooed stadiums in sports history. @High-definition video technology has become a staple in luxury suites, concession stands and throughout gleaming new facilities for the Dallas Cowboys and New York Yankees. There are more than 3,000 video displays at Cowboys Stadium. There are plans to work with stadiums and arenas outside the USA.

"Networks have become part of the way people consume sports," says David Holland, general manager of the sports and entertainment practice at Cisco. "It's not just the viewing experience, but how consumers buy products at a stadium."

A battle royal?

In tackling 30 markets, from sports to the smart grid, some analysts think Cisco is spreading itself too thin - especially when knocking heads with companies that run the gamut from IBM and HP to nimble start-ups.

"What gives me pause is when (Cisco) branches into consumer markets," O'Grady says. "Enterprise companies historically don't do that well in the consumer market."

Cisco's bigger, deep-pocketed rivals say they pose a stiffer challenge because they're leaders in some of the markets Cisco is entering, analysts say.

"I don't think Cisco's (new) unified computing platform will grow," says Paul Miller, vice president of marketing for Enterprise Storage, Servers and Networking at HP. "They lack the expertise of HP, IBM and Dell, and (chief information officers) have high expectations."

Gurdeep Singh Pall runs Microsoft's Unified Communications Group, which includes technology for videoconference and instant messaging. He praises Cisco as a "formidable competitor," but wonders if it can leverage its dominance in networking to, say, the Flip camera market.

Undaunted, Chambers relishes the competition. "If you don't have good competitors, you're not in good markets," he says. "The question is, can we do it in consumer, set-top devices, Flip, music, sports stadiums? I think so."

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