Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Chambers Promises Changes at Cisco, But the Task Ahead Is a Big One

Shares in Cisco Systems are moving up this morning in the wake of yesterday’s frank epistle to employees from CEO John Chambers.

Conceding that Cisco has been “slow to make decisions” and “been surprised where it should not,” he promised to take “bold steps and make tough decisions.” The consensus appears to be that divestitures are coming.

Cisco has been an acquisition machine during the last decade, but has little to show for it. Obvious candidates for divestiture are its consumer products business, which includes the Linksys brand of home networking gear, and Pure Digital, the makers of the Flip Digital video cameras. Consumer products carry lower margins than other products, and Cisco’s already got enough problems with its gross margins, which have stood at 64 percent since 2008 and gone nowhere.

One problem, the analyst Brian Marshall of Gleacher and Co. wrote in a note to clients issued yesterday, is that Cisco has so thoroughly dominated its core networking markets that it has effectively saturated its market. In looking for new areas to grow into, Cisco has been forced to look for what Marshall calls “adjacent markets,” like consumer networking gear, TV set top boxes, among others, both of which sap the potential for margin growth.

And while it’s hard to argue that Cisco’s low valuation doesn’t create a buying opportunity, there’s a lot more to consider, Marshall says. While Cisco grew its total revenue base by 7 percent from 2008 to 2010, a group of smaller independent competitors–Marshall calls them the “chimps” compared to the Cisco “gorilla”–like Juniper, Checkpoint, F5 Networks, Aruba Networks and a few others–collectively added roughly the same amount of incremental revenue that Cisco did during the same period, and nibbled away at Cisco’s dominance in the process. “Innovative companies can still have an impact in the technology industry even when competing against an 800-pound gorilla,” Marshall wrote.

One ace in Cisco’s deck, Marshall says, is VBlock, a data-center-in-a-box made by VCE, a company Cisco jointly owns with EMC and VMWare, and run by former Compaq CEO Michael Capellas: Cisco adds the networking component, servers and management software, EMC brings the storage and VMWare brings the virtualization. The product is just getting off the ground, but VCE recently said it has a pipeline of orders worth $1 billion and 120 interested customers. It is at least something for Cisco bulls to hang their hats on for now.


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The problem with the Billionaire Savior phase of the newspaper collapse has always been that billionaires don’t tend to like the kind of authority-questioning journalism that upsets the status quo.

— Ryan Chittum, writing in the Columbia Journalism Review about the promise of Pierre Omidyar’s new media venture with Glenn Greenwald