In the event you had the opportunity but passed around the chance to invest in Cisco Systems in the beginning of the decade, you are most likely nonetheless kicking your self. But not understanding about Cisco six or seven years ago was understandable; compared with Microsoft or perhaps Oracle, Cisco continues to be unfamiliar towards the common public, and its CEO, John Chambers, has small from the nimbus of stardom that surrounds Bill Gates and Larry Ellison. These souls who had the prescience to drop just $1,000 on Cisco's stock in 1990 are now walking about having a nest egg worth almost $50,000. How did this specific business, which got its begin creating the decidedly unglamorous router, develop so rapidly however so determinedly into a monopoly that, in its personal space, rivals Microsoft, Intel, and International Company Machines?
The answer is discovered in Cisco's frugality and interest to clients (reminiscent from the way IBM utilized to complete company). To not mention an acquisition technique that tends to make Napoleon appear like an isolationist. But Cisco isn't content material with becoming the large fish in its personal business sector. Because the business heads in to the subsequent century having a networking item line that is as close to end-to-end as something within the business, Cisco officials have set a objective that could not be loftier: to emerge from relative obscurity by bringing exactly the same kind of well-liked recognition to networking that Microsoft has brought to software program and Intel has offered to hardware. As for energy, Cisco officials wish to add a third leg towards the industry's most exclusive alliance, the so-called Wintel duopoly. Contact the new triopoly Wintelco.
Astronomical projectionsThe numbers in Cisco's annual report appear just like the altimeter around the space shuttle. The company's marketplace capitalization has risen from $4 billion two along with a half years ago to much more than $43 billion these days. Its net sales elevated from just much less than $382 million in 1992 to almost $4.1 billion within the fiscal year that ended in July 1996. Its stock was trading at about $72 a share at our press time, whilst Bay Networks--regarded by numerous as Cisco's main competitor--hovered about the mid-20s. And investment analysts at Alex. Brown & Sons rate Cisco a Strong Buy. Cisco acquired or made minority equity investments in about 25 companies between late 1993 and the finish of 1996, and business officials intend to purchase about a dozen much more this year. The ultimate objective from the acquisitions is to render a mortal blow to any companies trying to compete with Cisco within the end-to-end networking arena. "If you group all our products together, it's tough to top what we have," says Selby Wellman, senior vice president of Cisco's company units. "In the following 12 to 18 months, we'll further distance ourselves from the competition."
Cisco's outlook wasn't always so rosy. Though it made a fortune and garnered Windows-scale marketplace share by selling routers--the standalone boxes that scan network traffic and send it along to its proper address--only 18 months ago the business had become a small stale. The advent from the Internet and WANs necessitated the deployment of switching technology, which maintains bridges between network devices and distributes LAN traffic much more efficiently than routers do.
Eighteen months ago, Cisco had already made several acquisitions and was developing switches, but its reliance around the cash-cow routers, each of which can cost tens of thousands of dollars, made the business appear stodgy and old-fashioned towards the Internauts from the business. All of this changed in the 1995 NetWorld+Interop trade show in Atlanta, when Cisco formally announced an aggressive public mission to acquire any companies or technology it needed to become a complete networking vendor. "The networking segment from the business is enjoying the biggest growth rate within the history of high technology," says Mr. Wellman. "We can't get the products out fast enough, so we had to partner."
Perpetual motionDespite the acquisitions (14 within the 36 months prior to this writing), business officials say that fully 80 percent of Cisco's products are developed in-house, often by engineers who started with smaller companies. "The other reason we acquire technologies is to gain world-class development talent," Mr. Wellman says. Cisco acquires another kind of talent to fortify its highly regarded sales force. "Cisco has an incredibly dynamic and aggressive sales organization," says Richard Villars, director of network software program research at International Data Corporation (IDC). "They're the Computer Associates of networking."
The sales group is known for its willingness to meet face-to-face with as numerous clients as possible. This approach begins in the very top from the Cisco pyramid, with CEO John Chambers. The unassuming chairman would perhaps be uncomfortable with the pyramid analogy, preferring to characterize what Cisco does as a true team effort designed to make its clients happy. "There is a one-to-one relationship between customer satisfaction and profitability," Mr. Chambers says. "A lot of companies lose sight of that." He personally reviews as numerous as 15 "critical" accounts each morning, often calling around the clients himself--in person--to straighten out any problems. "If I pay interest in the top, everyone else will pay interest, too," he says.
The other element of this throwback approach is Cisco's frugality. The company's campus sits in a typical Silicon Valley company district near Route 101 in San Jose. Its grounds are contemporary but unadorned with the modern art and basketball courts discovered on numerous from the Valley's other corporate playgrounds; Mr. Chambers's modest office is indistinguishable from dozens of others about it. And all employees, including Mr. Chambers, fly coach and double up in hotel rooms at offsite meetings. "My definition of leadership is, Don't ask someone else to complete something you wouldn't do," he says.
Nonetheless, a thread of realism runs through the inspirational Cisco credo. The company's main objective is extreme profitability through marketplace domination, and Cisco officials are determined to achieve that within the quickest way possible. One example: the business acquired switching vendor LightStream in 1994 and integrated its products into Cisco's Asynchronous Transfer Mode architecture. The LightStream products became enormously profitable, but the ATM marketplace was nonetheless outpacing Cisco's ability to develop products for it. In response, Cisco rocked the business early last year by acquiring StrataCom, a leading ATM vendor, in a deal valued at about $4 billion. StrataCom's item line was considerably much more comprehensive than LightStream's and allowed Cisco to leap towards the head from the ATM marketplace. "One of our strengths is the ability to eat our young when the marketplace grows so fast," says Mr. Chambers.
In his estimation, it's this ability to scrap something and move on that separates companies like Cisco and Microsoft from the rest from the pack. "The companies that get in trouble are these that fall in love with 'religious' technologies," he says. "The key to success is having a culture with the discipline to accept change and not fight the religious wars."(For an opposing perspective, see our interview on page 90 with Fore Systems' Eric Cooper, who is famously devoted to ATM.)
The whole ball of waxAs networks expand and the people who administer them have much less and much less specialized knowledge, numerous novice users are demanding a much less cumbersome alternative. Think of it because the difference between an audiophile who carefully selects each component of a stereo system and the guy who just wants to hear the music and buys a Sony tower. "We're trying to create a very complex, secure, reliable networking world, and the way clients can deal with this complexity is to deal with fewer vendors," says Mr. Wellman. "We're constantly expanding our technology so that people don't have to deal with multiple vendors." Mr. Chambers says he was rather surprised to read a Forrester Research report that said roughly 40 percent of all people would prefer an end-to-end vendor. "I didn't think it would go any higher than about 15 percent, but apparently numerous people wish to see another IBM, albeit an IBM of 40 years ago," he says.
This move toward end-to-end vendors is reshaping Cisco's appear. Whilst the trade press has regarded companies like Bay Networks, 3Com, Cabletron, and Fore because the main threats to Cisco's dominance, they are rarely on Cisco's radar screen these days. "The markets have voted; we're bigger than the following four or five networking companies combined," says Mr. Chambers. "I see IBM and Nortel as our most likely end-to-end competition, but much more as systems integrators."
The numbers bear him out. According to Mr. Chambers, Cisco currently enjoys marketplace shares of 84 percent of routers, 73 percent of IBM Systems Network Architecture equipment, 63 percent of branch access devices, 38 percent of frame relay devices, and 35 percent of LAN switches. But in strengthening this end-to-end dominance, Cisco will likely evolve into a much more sales-focused organization. "It has moved away from becoming a technology business toward becoming a sales and service provider," says Mr. Villars of IDC. "IBM could compete with Cisco, but it's missing products in some strategic markets, and its reputation is for borrowing technology rather than buying or building it."
One persistent concern about Cisco is how the business will integrate all these products into one cohesive, comprehensible family. "The company's item catalog looks just like the phone book; it can be really confusing," says Don Miller, a senior analyst at Dataquest. "They need to integrate and assimilate their products as soon as possible, but creating all this stuff sing together is difficult." Much more skeptical observers wonder if Cisco will ever be able to make its products fit together seamlessly whilst nonetheless providing acceptable performance. "Networks have too numerous layers and too numerous protocols. I can easily see 15 much more years of turmoil surrounding the integration issues," says Jerry Michalski, publisher from the business newsletter Release 1.0. Mr. Villars says these problems are compounded by Cisco's lack of a unifying network management platform such as Bay Networks' Optivity or Cabletron's Spectrum.
Cisco officials have answers for all these concerns, starting having a soon-to-be-implemented series of Internet-based network management products and services. Rule No. 1 at Cisco isn't to enter a marketplace unless it can be at or near the top--and within the case of network management, the company's late arrival may turn out to be fortunate. "The network management marketplace hasn't asked us for leadership until recently, and we will invest much much more heavily in it in 1997," says Don Listwin, senior vice president of Cisco Internetwork Operating System (IOS) development. "The advantage to our clients is that they've had minimal installation of network management until now, and our Web-based products are much much more fluid than other vendors' server-based tools."
It might seem curious that a business that seemingly puts the Midas touch on every new marketplace it enters--and that has ambitions to join the Wintel fraternity--has been able to avoid the bloodhounds at Antitrust. Although business officials acknowledge that the massive StrataCom acquisition finally brought up Cisco around the federal government's radar, they don't plan on having to weather any serious scrutiny. "We learned early that it's better to partner and share revenues than to complete everything your self," says Mr. Chambers. "We've stayed away from the issues that get people in trouble: we don't give something away, and we embrace small companies. Microsoft's partnering record has been atrocious, which is why the government looks much more closely at them."
Chance NICsWith Microsoft's and Intel's development blueprints already closely tied and both companies focusing aggressively on Internet-related development, Cisco officials say the company's involvement with the two titans will only increase as networking capabilities migrate from routers and switches into everyday computing devices. Somewhere along this journey, Mr. Listwin figures, Cisco finally will become the third member of a triumvirate. "You won't hear however how strategic Cisco is towards the other two, but 1997 could see an emergence of a closer alliance," he says. "You'll have three best-in-class companies, and within the exact same way people have chosen Windows NT and the Pentium Pro, people also will choose Cisco IOS."
This plan is already well under way. In January the business announced an expanded agreement with Hewlett-Packard, historically one of Cisco's closest partners, that will involve the cross-licensing and integration of Cisco's routing technology with HP's server and networking lines, the joint development of Web-based network management interfaces and Internet security protocols, and an extended worldwide customer-service initiative.
Cisco may never dominate every last networking marketplace, but the business is going after as numerous as possible. Its focus in 1997 likely will include areas such as network management, security, and voice and data integration. The business is building a router that Mr. Listwin says is "one or two magnitudes higher" than something that has come before it. (Press speculation has placed its speed anywhere between 40 and 80 Gbps.) Cisco will keep its focus around the corporate sector, but the home marketplace may not be far behind. Mr. Wellman says the business will continue to target the large enterprise, ISPs and telcos, and small and medium-size businesses, too. "We'll see a tremendous convergence of voice and data in to the ISP and telco infrastructure over the following ten years. Small businesses are finding a gold mine when they do company over the Internet, and the natural extension of all these markets is in to the home," he says.
All this leaves Cisco perched squarely within the catbird seat. "Cisco is in one from the most interesting positions within the business right now," Mr. Michalski says. "Use from the Internet will shift dramatically within the subsequent ten years, and Cisco is within the best position to invent some kind of hybrid technology that will compose its physical infrastructure." Others say the business must coddle its customer base sedulously as networks evolve. "We're coming up on a transition period where existing routers are running out of gas," says Mr. Miller. "This will make users decide whether to upgrade or to switch to something else, and there will be a significant number of products that will very visibly compete with Cisco's. It's a marketplace the business can lose if it doesn't handle it adroitly."
It's this kind of challenge that the folks at Cisco relish, because behind their hospitable smiles and congenial handshakes lies the fear that it all could come crashing to a halt. That is just the way Mr. Chambers likes it. "We worry about getting too far from the customer because companies that get fat and happy get in trouble," he says, smiling. "It's that paranoia that keeps us on top. We make Andy Grove appear relaxed."
If Cisco were a network, Ed Kozel would be the hub. Cisco's chief technical officer and senior vice president of company development is responsible for strategic technology planning and acquisitions--heady tasks in such a fast-moving field.
"We don't pretend to be on top of all the innovation that is occurring," says Mr. Kozel. "Instead, we try to establish an environment where we are attractive to small, innovative companies." Along the way, of course, Cisco has also established a reputation as an aggressive acquirer of other companies.
Robbing the cradleMr. Kozel says Cisco is primarily interested in acquiring companies with new products that haven't however hit the marketplace; in this way, it avoids having to reshape another company's products. (Mr. Kozel cites Granite Systems as an example of this approach: the Gigabit Ethernet startup was acquired by Cisco for $220 million in September 1996 and will release its first products midway through this year.) In common, Mr. Kozel says, Cisco is looking for companies that have leading-edge technology in growth markets. "In other words, we expect the acquisition to pay for itself in three years."
Because Cisco is an "applied technology and not a basic research business," Mr. Kozel says it has not been actively pursuing photonic switching, a networking technology that analysts believe is four or five years from significant deployment. However, since Cisco's company with major carriers requires it to anticipate customers' needs at least one year in advance, the business is "into" a new technology that is further along: wave division multiplexing.
WANs, around the other hand, represent a major target for the company's company development team. Although CEO John Chambers has admitted Cisco came late towards the WAN space, the business took a major step toward the integration of voice and data with its $4 billion acquisition of StrataCom in April 1996. Mr. Kozel and his team are now targeting ISPs and major carriers. He is enthusiastic about "packet on SONET," or IP frames on Synchronous Optical Network fiber. But since "most from the world doesn't have access to SONET fiber," Cisco is also supporting Asynchronous Transfer Mode.
Mr. Kozel has some serious reservations about IP switching and Multi-Protocol over ATM (MPOA), two competing standards of ATM delivery. Despite the fact that Cisco is offering ATM, Mr. Kozel has doubts about the standard's future. He argues that neither approach is suited to carry rich data in WANs, especially offered the number of destinations that Internet users typically visit. "You can't support all from the signaling across that public backbone, and both MPOA and Ipsilon's approach require signaling." And although he thinks ATM is fine as a campus backbone technology, he believes it has stalled significantly for wide area data networks: "It's dead fundamentally except for very small niche applications." Instead, he believes, Cisco will be able to capture numerous of these large clients with tag switching, a new flavor of IP switching that theoretically reduces the setup time and CPU cycles that ATM requires by "prepopulating" switching nodes with addressing information.
Thinking smallMr. Kozel cites Cisco's ability to adapt as one of its key advantages, including the way in which the business has targeted the small office/home office marketplace. Within the past Cisco sold only high-end professional engineering networks, but three years ago it started to work with Intel, Microsoft, and Compaq to learn much more about distribution and simplify some of its technology. Coupled with Mr. Kozel's formation of an Internet Company Unit in January 1996, this process recently bore fruit with the release of Cisco's Micro Webserver, which was designed to provide small businesses with plug-and-play network access. He does not expect Cisco to personal this marketplace, but the business is actively promoting Internet appliances that will create much more demand for its high-end networking products.
In Mr. Kozel's opinion, "the best opportunities for startups are not related to building the infrastructure." Instead, he encourages young companies to assume that the Internet is ubiquitous. As with the fax machine, which the creators from the telephone network never foresaw, Mr. Kozel sees numerous opportunities for products like fax diverters that route fax traffic over the less-expensive Internet when there is a corresponding IP address available. "TCP/IP goes everywhere. You don't have to pay a cent for infrastructure," he says.
Not surprisingly, Mr. Kozel does not think that Cisco has a choke hold around the networking company. "We live in a marketplace that is completely characterized by open standards," he says, "and the marketplace values nothing much more than time to marketplace." Easy for him to say. Go to become a entrepreneur and learn more today.