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4/22/2011
07:00 PM
Fritz Nelson
Fritz Nelson
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When Oracle And Cisco Face Fire, Their Execs Breathe It Too

Oracle is battling the big players in Big Data with its integrated stack approach. Cisco is battling the commoditization of its core business. As those battles were heating up, Oracle President Safra Catz and Cisco CEO John Chambers came out with a little fire.

If John Chambers was reeling from Cisco's disappointing financial results earlier in this month, which had prompted him to send a memo to employees outlining Cisco's operational deficiencies, he wasn't showing it at the Wells Fargo conference. Dressed like a Wall Street banker and speaking like a cross between revival minister and earnest politician, he outlined his company's accomplishments, including its 20% sales growth among Cisco's top enterprise customers, its 85 new products in the last six months of 2010, and the high marks it received from customers attending Cisco's recent partner summit and technical advisory board gathering.

Because Chambers deals mostly at a very high level, his speeches are sometimes packed with oversimplifications and bromides. About today's challenges, he said that it's "about bringing technology architecture to business processes . . . we used to sell products, but now that's the last thing we talk about." Truth be told, he has said similar things for years.

I jotted down: "Must sell an architectural stack, and how it changes business transformation," but I can't for the life of me decide what he meant. I also noted: "Any device to any content to any network . . . ease of use and simplicity, this will be the way and bringing the architecture together will be key to enabling this." Perhaps when you've supplied the digital plumbing that powers every industry, you've got to make it sound mystical.

Cisco has been a true innovator, Chambers said, but it needs to improve its operational excellence. In other words, Cisco has leading technology, but the list of challengers is growing, especially as Cisco edges its way into newer technology sectors. Chambers said Cisco is under attack from as many as five different business models, and that most of those competitors are willing to accept 40% gross margins. The gross profit margin for all of Cisco was 62% in the first six months of this fiscal year, down from the glory years of 70% to 80% margins.

Cisco's biggest challenge comes from switch manufacturers that bring what Chambers calls "merchant silicon" to their products -- the likes of Hewlett-Packard, Dell, Force10, and Arista Networks (run by Chambers protege Jayshree Ullal). All those vendors are commoditizing a large share of Cisco's revenue, thanks to chipsets from the likes of Broadcom, which pave a do-it-yourself path to 100-Gbps Ethernet switching. Chambers reiterated that Cisco will have to bring its expenses down to improve its profit margin in this highly competitive market. Chambers said on Cisco's February earnings call that despite all of the price pressure on the company's core business, he will not play the pricing game. (Cisco's switch sales declined 7% in the second quarter compared with the year-earler quarter.)

When asked about the fact that Cisco is seeing its lowest margins in years, Chambers said the company will "cut back dramatically" on its resources, and it will focus on its top priorities. "Some areas we will stop," he said, and as we saw recently, that means cutting loose marginally effective square pegs like the Flip consumer video cam.

Regarding his memo to employees, Chambers said, "We are a family. We share transparently our opportunities and our challenges." The memo, he said, was a "call to action . . . a shared plan . . . if you are asking for change, you must paint a crisp picture. That is how you create the sense of urgency."

That plan includes a focus on what Chambers calls Cisco's core areas of focus -- a mantra he recited several times. First, it must continue to lead in routing and switching, which accounts for about half of Cisco's revenues. Second, it must extend its presence in collaboration, presumably in unified communications, but it's hard to tell if its Quad enterprise collaboration product could be next on the chopping block. Third, Cisco must drive deeper into the data center, a place where Chambers, in typically simplistic terms, sees a move not just from "bare metal to virtualization, but virtualization to cloud." Fourth, technology and business architectures, meaning Cisco’s Unified Computing System. Last, there's video, specifically the telepresence systems Cisco has been pushing relentlessly for the past several years.

During the last Cisco earnings call, Chambers noted that second-quarter revenue in the company's "new product" category rose 15% year-over-year and now represents 39% of total product revenue. Cisco's data center business grew 39%, and its collaboration business was up 37%.

InformationWeek's own survey data suggests that while Cisco is still dominant in the data center, at least from a switching standpoint, enterprise buyers see HP gaining fast and the likes of Brocade, Juniper, and Dell in contention. Dell gets high marks for product pricing, and Brocade fares well from a SAN/Fibre Channel standpoint.

"We are not a perfect company," Chambers said. No company is, but few face the competitive pressures Cisco now faces. And few executives are under fire like Chambers is. It's a position he's not used to and won't be in for long, one way or another.

Fritz Nelson is the editorial director for InformationWeek and the Executive Producer of TechWebTV. Fritz writes about startups and established companies alike, but likes to exploit multiple forms of media into his writing.

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