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Summary:

Cisco is in trouble. It screwed up, and John Chambers acknowledged as much in his memo to employees Monday, which was later published on the company’s blog. The company’s biggest problem is that it has strayed from its core competency, a focus on networking.

John Chambers, Cisco CEO

Cisco is in trouble. It screwed up, and John Chambers acknowledged as much in his memo to employees Monday, which was later published on the company’s blog. Chambers didn’t go into the details of what has gone down, but after years of following the network giant, we can say straight up that Cisco let its eyes stray from the ball. By not staying true to its core networking focus, Cisco managed to let its market share come under pressure from incumbent players and upstarts. It also allowed rivals to set the agenda for the next big trend in networking: the idea of one unified network.

As traffic becomes increasingly dynamic and comes from myriad networks — be it wireless or from a web server hosted at Amazon — the older ways of building out static networks no longer make sense. They add too much overhead. Think about the work Open Flow folks are doing to separate the data plane from the control plane of the network. This is in response to these shifts in traffic, a shift that Cisco rival Juniper is also watching and plans to address according to Pradeep Sindhu, director, vice chairman of the board and CTO of Juniper. In an interview with Om last month, Sindhu said:

The nature of traffic today is increasingly dynamic. And so the old ways of addressing and building networks, with very statically provisioned technologies, like circuit switching, is essentially dead. So you have to rethink this architecturally. Point number two is that I believe that the traffic is going to get a lot more stochastic in nature. In other words, unpredictable, both with respect to any given circuit and with respect to the sources and destination the amount of usage will continue to explode and they will get more and more dynamic and unpredictable.

So while Cisco bought up Pure Digital, the maker of the Flip camera, and focused on creating separate networks for video traffic to flow over, its competitors pulled the entire concept of networking out from under Cisco’s feet. And Cisco does best when it focuses on the network. For example, its cloud computing business, where it reinvented the concept of a server to combine the computing and networking into one box was a visionary idea that fit perfectly with the shift toward the cloud model that was occurring in the computing business. Yes, Cisco gear is expensive and proprietary, but the company built on its familiarity with enterprise customers and its existing foothold in their data centers to expand.

In the last few years, Cisco’s forays in the consumer space, video, telepresence and even collaboration have distracted it from what it’s good at on the core networking side. A good example of this is its telepresence initiative. Instead of building a platform that customers could integrate into the far-flung offices of remote employees, Cisco went with a proprietary, high-cost system that people who might otherwise work remotely must travel to in order to take conference calls. Yes, telepresence is beautiful, but for the wider audience, it’s not worth the cost and hassle when Skype or even Logitech’s LifeSize is out there offering a cheaper, easier alternative.

So proprietary may be acceptable in an area where Cisco has a huge market share, but in consumer and telepresence — where it’s trying to build users and adoption — it forgot that a key tenet of creating a platform is either making it incredibly usable and or incredibly open. Cisco tends to favor closed ecosystems, but unlike Apple, its consumer products don’t have the same usability or cachet. So this refocusing of Cisco’s on five priorities that include core routing and switching; collaboration; cloud computing; network architectures and video is good news for the most part, although video is a huge category.

In an analyst report issued Tuesday morning, UBS Analyst Nikos Theodosopoulos noted that while the Chamber’s memo was a recognition of mistakes made, it could become a turning point for the company, perhaps leading Cisco to sell off low-margin or low-growth businesses to focus on a few lines of business. He wrote:

On Monday, CEO John Chambers wrote on a Cisco Blog upcoming tough decisions the company will make given recent earnings disappointments. Cisco will remain focused on five priorities: leadership in core routing, switching and services; collaboration; data center virtualization and cloud; architectures; and video. These priorities are not surprising in our view. … Some actions investors may favorably perceive is a reduction in target markets to a more manageable number (e.g., from 40+ to less than 10), and organization structure adjustments to reduce bureaucracy (e.g., elimination of councils/boards). We also would view divestment of low growth, low margin businesses as positive (e.g., consumer, set-top box, home networking).

Cisco has been able to stay ahead of the curve in the service provider market by making gigantic routers for dealing with unimaginable traffic at the edge of the network, a problem that it predicted would occur as broadband networks proliferated and services delivered over the network required more bandwidth. It managed to disrupt the giant computing vendors by consolidating servers and networking in one box, and still has plenty of innovation and knowledge locked inside the 70,700-person company. Cisco may have screwed up, but if it refocuses, we shouldn’t count it out.

  1. Wow, just wow. Cisco is finally getting called to the carpet for their flagrant mismanagement. The years of infighting, focusing on empire building, chasing off the top talent if they didn’t work in ‘emerging technologies’ and somehow mythically believing collaboration is a management style is coming back to hurt them in a big way.

    Closed, proprietary, and outdated systems such as the Catalyst and Nexu lines getting trounced in performance and features by smaller more nimble and most importantly more focused competitors, coupled with Cisco’s debacles in the consumer, server, cable, switching, and appliance markets have enabled Juniper, Arista, F5, Aruba, Palo Alto, and Riverbed to grow very large businesses off of the customers who are continually underserved by Cisco.

    Let’s see if John gets past the rhetoric and can make some real changes there or not, til then – still a strong sell. Although a good activist investor like a Giancarlo from Silver Lake would have a field day divesting the junk M&A buys Cisco made since he left.

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  2. Not quite so. Network devices much like others have been overly commoditized when Huawei stepped in. Giagentic routers will not cut it longer term
    Commoditized dial tone (Telco) & air time (Cellco) drove accelerated adoption of VAS (value added services) as next source of revenues.
    VAS meant mostly expanding out of the box; totally the opposite of what’s listed here to go back to the core forte…
    Cisco needs to move into the Cloud where the services are (for now…) low hanging fruits and can help take a lead and later sustained position.
    It does not mean to drop the open/unified-network dearm though

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  3. A few things that went wrong for Cisco:
    • It diversified in some wrong directions (combining home router biz with set top box , and not foreseeing the fast advent of convergence (SA $6.9B acquisition), video is also a bit controversial (going by the market’s tepid reaction to Flip)
    • Underestimated emerging Asian players – Huawei and ZTE
    • Being less competitive in its core products technology – Juniper is gaining grounds.
    • And mainly misreading the growing power of consumerization – as cited by Quentin Hardy in his article in the March issue of Forbes, at a time when businesses want more consumer technology, Cisco seems to be trying to sell consumer products as if they were biz gear – high quality but expensive.

    And a few which seem to go right:
    • Deep pockets – $40b in cash and another $40b in annual revenues
    • Big investment in R&D ($6b)
    • Recent announcement of collaboration software business to increase productivity
    • Chambers’ acknowledgement that things have gone wrong and steering to correct

    Feb 10, 2011 – the day Cisco lost 15% of its market share (and Juniper gained 76%) cannot be forgotten so easily by the once bellwether of the global technology sector……

    Also talking about networks, what’s your take on moving from “just switching packets” to “deep packet inspection”?

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  4. Cisco, John Chambrrs, should look at the work being done at the Palo Alto Research Center (PARC) regarding content centric networking (www.ccnx.org) to get a view on the future of the router and the network. Routers will have cpu and on-board storage – they will absorb functionality like CDN (content distribution network) into the network versus those applications being deployed on top of the network.

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  5. > By not staying true to its core networking focus, Cisco …

    Stacey, also don’t forget Cisco and its iPad also ran vaporware tablet they called the Cius (what a waste of people’s time and attention when Cisco announced this about a year ago – brings new meaning to the word ennui).

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  6. Hi Stacey,

    Why Cisco CEO John Chambers has got to go!

    Accountability starts at the top and in my personal opinion Cisco CEO John Chambers is soley responsible and should be held soley accountable for what ails Cisco, meaning, he’s got to go! (as the video interview confirms).

    I mean, in the video, a megalomaniac John Chambers (at least in my opinion), is preposterously proposing that all of Cisco’s business and government customers model their own management structures after Chambers’ convoluted management structure at Cisco.

    Then audaciously and shamelessly this week, John Chambers’ wrote a memo that blames Cisco employees for what ails Cisco (below, I’ve corrected a small portion of Chambers’ memo in yellow to make it accurate in my opinion):

    “As I’ve said, our (my) strategy is sound. It is aspects of our (my) operational execution that are not. We (I) have been slow to make decisions, we (I) have had surprises where we (I) should not, and we (I) have lost the accountability that has been a hallmark of our (my) ability to execute consistently for our (my) customers and our (my) shareholders. That is unacceptable. And it is exactly what we (I) will attack.

    “That said, today we (I) face a simple truth: we (I) have disappointed our (my) investors and we (I) have confused our (my) employees. Bottom line, we (I) have lost some of the credibility that is foundational to Cisco’s success – and we (I) must earn it back. Our (My) market is in transition, and our (my) company is in transition. And the time is right to define this transition for ourselves (myself) and our (my) industry. I understand this. It’s time for focus.”

    In a stunning rebuttal of his memo above, Cisco CEO John Chambers was quoted in The Wall Street Journal:

    One way he teaches his direct reports to delegate is to “spread them thin,” he says. Eventually they “realize they can’t keep their head above water and if they want to swim they have to give [some responsibilities] to their teams. Thirty [new businesses] is more than almost any senior executive thinks is manageable,” Chambers adds. “The real point of going to 50 is to keep people open minded.”

    The CEO says he doesn’t have a limit in mind for the number of new businesses that Cisco can pursue. “We honestly don’t know if the right number is 20 or 30 or 40″ new growth initiatives, Chambers says. But he adds, “It’s no longer a question of will the structure work.”

    Again in my opinion, the head of Cisco CEO John Chambers has got to roll, and if Cisco’s Board of Directors are not up to making that decision, look for Cisco’s shareholders to make it for them.

    Sincerely,

    Brad Reese

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  7. John Chambers has failed to groom and retain world class talent. Think Mike Volpi, Charlie Giancarlo, and more recently Tony Bates. He needs to go immediately. Other positive steps to turn around the ship:
    1. More than half of John’s direct reports should be fired for incompetence
    2. All board and councils should be dissolved, put about 5 division GMs in charge
    3. About 50% of the empire building SVPs, VPs, Senior Directors and Directors should be fired
    4. Push accountability and decision making down the organization. Hire some fresh talent for heavens sake, enough with people who go home by 4 PM and collect huge paychecks
    5. Get out of Consumer, set top box, and me too businesses

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