Q&A: Cisco CEO shares thoughts on service provider market

Cisco CEO John Chambers shared some specific thoughts on the service provider market – including 2006 goals, the role of video, and the impact of consolidation – with Network World President John Gallant and Managing Editor Jim Duffy. (See full interview.)

What are your specific goals for the Service Provider line of business this year?

Service Provider is obviously the most challenging in terms of marketplace because they tend to form allegiances and keep those for a very long time. I think they tend to have a philosophy of multi-vendor as being one of the ways they differentiate themselves. Time will tell if the market evolves, like I think it will, that the same strategy that drove enterprise customers to a preferred vendor… I think service providers are going to play a very key role on how the market evolves and I think they’re naturally positioned to provide that to consumer and SMB, but I think their enterprise segment will be larger.

So we’re going to continue to push on it very aggressively but it is probably the most challenging segment because the enterprise customers have largely made this decision. They understand the total cost of ownership and if they trust somebody enough with the track record and develop that to do this in total, you find them actually standardizing more and more. Can we achieve that in Service Provider? Time will tell. I think mathematically, given the industry’s going to go through such tremendous pressure on transformation and on traditional revenue streams to new revenue streams, I think we have a very good shot at becoming the leader playing in this marketplace.

Where is Cisco most challenged in the Service Provider market?

I think a lot depends on how service providers make decisions. If they make decisions on individual products, then you have one set of competitors. If they make decisions on a systems integrator/tying them all together, then you have a different scenario. If you make decisions on how the products are architecturally designed… If this plays out the way that I think it will, we have an excellent chance of winning.

Now the area where if I had to do over and I would have brought my products together quicker is clearly at the edge. And that takes time. You will see us do our job right over the next one, two, three years, both to get a lot of the feature functionality we need in those products as well as the integration. So it really depends on how customers make decisions. If they make decisions with somebody tying it all together for them, then the systems integration players have an advantage. We clearly are aligning with Ericsson. Alcatel has their strengths. If they make them on an architectural play, it really looks good for us in terms of positioning.

What about in optical, you’re bookings were down 40% last quarter…

We had always felt that Layers 1-7 would come together. So I was in optical not for the profits; but that I felt you really had to have understanding of the transport layer with the routing and the switching capability. So I believe that those layers will actually come together. So I’m in optical as much for where I think the products will blur together in the future than for the individual product area. What you’ll see us do in optical is focus very clearly where we think we have both product leadership and reasonable margins. It’s a tough market to be in right now. So we’ll focus where the profits are, where the differentiation is and how we think those products will come together as opposed to compete against the optical segment in total. A large part of what we’re doing is very conscious and very deliberate in terms of where we have our optical products, which accounts we go after as opposed to the general approach.

Is the SA acquisition a game changer for Cisco in terms of product development?

The answer is in part, yes. But the initial benefits are clearly service provider, video provider and the artful capabilities of that. But those skill sets should completely over time come into our consumer marketplace, but over time should also have an impact in the commercial and enterprise. Video in the enterprise is primarily e-learning and video-on-demand communications. Videoconferencing is hard. Only in the last year did videoconferencing really start to get effective. It still requires individuals to put this together for you.

Where we’re clearly headed for video is a part of the approach but literally an element where it ties into our other capabilities, whether IP telephony, call manager, calendaring. SA was a play where we view video as not just a product capability, it is an art. That’s a lot of what IT in the networking segment has been. We feel there we are clearly the leader. There’s also a natural play for video first in service provider in the U.S. where they’re just now going into the ILEC community in addition to the cable companies. But we clearly offer them a play to be able to do it way outside the U.S. with our relationships with service providers around the world.

But to answer your question, we think it was a segment of the puzzle that we needed dramatically stronger capabilities in. It doesn’t complete but it really makes us pretty strong in terms of the expertise. I would clearly weigh it as the one piece that we had the furthest to go in, beyond just transport.

Up to now, you had a fairly complementary relationship with Motorola. Does the SA acquisition change that?

There are segments in Motorola where we will continue to complement each other, there are segments where we might have a little more overlap than before. That makes it harder to have the strategic partnership in a way I’d like to see it occur. It’s just an area that we really had no choice in. We have to play in video and we have to play in an internal competency capability. And there are only two players at the high end. We made a decision that we wanted to go with the one that was available in the market that had a certain amount of critical mass. Time will tell if that was the right decision or not but I feel very good with it.

It’s one of the few acquisitions that, the minute you do it, customers say, ‘I understand.’ I did not have one customer say we think this is a mistake. Even players who weren’t using SA said it’s a brilliant move.

What impact does carrier consolidation have on Cisco specifically and equipment manufacturers overall?

One of the things I’ve always believed is that certain industry trends are inevitable. The mistakes companies make are trying to fight those trends. There are too many players in this industry. It’s very unhealthy to have. So you had to let the consolidations occur. Anytime there’s consolidation there’s a natural tendency to slow down until you get the two organizations together and then prioritize. In the short term it can sometimes have the effect of slowing down orders, but at other times they can say, ‘I’ve already decided, go ahead and speed them up.’ So we’ve always dealt with the market the way it is rather than the way we wish it was, and we try to get ahead of major market transitions rather than behind. So to me it’s inevitable that those consolidations will occur both in the U.S. and worldwide, and it’s more in our best interest to say how do we set it up to come through it in good stead than to say it might have an effect on a quarter or two. The more you ask to play a role in service providers, you may have to defer revenue recognition. Those are trends that I think you just have to say have a high probability of happening and you just have to adjust to them. I just consider that normal market transitions. Will the account teams be affected? Yes, but I think that’s almost an ongoing one.

Telcos are looking to charge content providers for premium QoS. What’s Cisco’s position on that?

Our role, if we do it right, is to provide the capabilities for customers to differentiate by applications, to be able to prioritize or charge differently. I think that is something you should be able to have the capabilities to do. There are a whole bunch of regulatory issues and other issues that doesn’t allow me to give a yes or a no answer. But I think you’ve got to have that type of functionality in your products and then let the market and regulatory bodies sort out how do you do that. That’s an example where you have to build it into your capability – you can’t do it once the market says, ‘Yes, I want to do this,’ or regulators say, ‘I need for you to do this,’ or the customer says, ‘I want to do this.’

This just goes back to the network becoming more important in terms of how business models evolve as well as technology.