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Cisco: It's All About Bandwidth, Stupid!

Analysts who've lately focused on a Cisco's decade-long buying binge will surely weigh in on the networking powerhouse's Monday announcement that it plans to acquire Hong Kong set-top-box maker DVN. Yet most of these financial musings, which focus on Cisco's stock price, are missing the point. It's all about bandwidth, stupid.

A typical example of the kind of business writing I'm talking about appeared Tuesday in The New York Times''s Dealbook blog, under the headline, "Does Cisco, the Nonstop Shopper, Need to Rethink?"

"Cisco has spent the last decade acquiring rivals and buying back stock. But investors who bought Cisco's shares a decade ago have received no return on their investment, Breakingviews says, and it's time to acknowledge that this strategy isn't working."

Without getting into a quantitative debate, basically the piece bases its "not working" argument on the fact that stock price and company earnings haven't risen at a rate commensurate with the size of the acquired companies.

Looking toward the future, a possibly more salient criticism takes note of the fact that Cisco now has 59 internal boards and councils to run its various lines of businesses.  "This seems like a recipe for endless meetings, management confusion and reduced accountability," the Times blog writes.

Cisco's new meetings-centric management structure was explored this summer in a widely circulated Wall Street Journal piece, "Seeking Growth, Cisco Reroutes Decisions."

I get what Cisco CEO John Chambers is trying to do here--namely, establish a structure which can process inputs from a whole bunch of people, rather than just the same old hierarchical decision tree (aka the boss decides). Yet every corporate worker instinctively knows that a big meeting is not the venue for a frank discussion. ("Gee, boss, I think your idea really sucks.")

Here's how the plan was explained in the Journal article:

"In order to manage these initiatives, Mr. Chambers has replaced Cisco's top-down decision making with committees of executives from across the company. Some teams provide strategic advice and evaluate the progress of these projects. In total, Cisco now has 59 internal standing committees."

Yikes. (Imagine if you're not allowed to check your Blackberry and have to pay attention to the presentations at these things.) Add to this the intense, data-laden preparation which I've heard precedes every meeting and you've got a prescription for paralysis, not responsiveness.

Which is kind of counterintuitive, when you're talking Cisco, because they've got a solid bunch of executives in their hierarchy. Turn them loose, is what I say.

But none of this is the point of my blog. (I'm a technical guy, not a business person, right?) What I really wanted to note is a fact which became obvious to me back when Cisco bought Pure Digital Technologies, the maker of the popular Flip Video camera, for $590 million this past spring.

I thought this was a brilliant move, or more properly, a meta move. One the one hand, the Flip cameras are clearly an awkward fit with Cisco's bread-and-butter router (and now server) product lines. However, if you want to boost consumers' use of bandwidth, so that (in the most extreme case) the Internet slows to a crawl, in which case you have to add more network capacity, and buy more network gear--Cisco gear, of course--it's brilliant.

Of course, it's smart in a very long term sense. (A billion videos here, a billion there, and pretty soon you're sucking up some bandwidth.)

Monday's DVH acquisition is of a piece with the Pure Digital play. Set-top-box maker DVH is based in Hong Kong, but it has major operations in China. As Hilton Romanski, Cisco's vice president for corporate development, described it in a video posted on Cisco's Platform Blog: "When you look at the Chinese market, it's the largest cable market there is. There are 160 million subscribers in the country. A third of those subscribers are on digital networks today."

Here again there is bandwidth method behind what some financial analyst see only as acquisition madness.

One final thought: An apparently unintended (though maybe it's not) side effect of Cisco's bandwidth-boosting buys is a blurring of the lines between traditional enterprise networks and where consumers reside. In a macro sense, this is already happening, in the sense that corporate workers no longer much no or care where they reside, connection-wise. They're just interesting in the resources they have access to.

Still, I think this blurring of the line between corporate and consumer networks will be something that all networking vendors will have to navigate in the coming few years. In this regard, Cisco is seemingly pacing the pack.

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What's your take? Let me know, by leaving a comment below or e-mailing me directly at alex@alexwolfe.net.

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Alex Wolfe is editor-in-chief of InformationWeek.com.

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