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Cisco exec explains pricing strategy

Apr 19, 20046 mins
Cisco SystemsNetworking

Mario Mazzola, a senior vice president at Cisco and the company’s chief development officer, recently spoke with Computerworld about Cisco’s pricing and its innovation efforts.

Mario Mazzola, a senior vice president at Cisco Systems Inc. and the company’s chief development officer, recently spoke with Computerworld about Cisco’s pricing and its innovation efforts.

Is the reputation that Cisco products are higher-priced fair? And why do you have so many customers if that’s the case?

Our approach, which has been crucial for the success of Cisco, is to look at all the different requirements that make sense for customers. So we do consider excellence in technology innovation as a necessary condition and also the service part of the sales engagement and the relationship with customers as equally important. It’s a global offering from Cisco, with global service, and that is an integral part of our culture.

Our products are based on a lot of reaction from customers. I don’t suggest all the innovation comes from our customers. We consider what are the real problems and challenges they face. We try as much as possible to address customer needs.

In terms of the global cost or price of our product, obviously what is really relevant for our customers is what is the total cost of ownership. That includes the opportunities to deploy in a timely fashion and with obligations to overlay new services.

But what about pricing of products?

We make a point in terms of our strategic process for development to look simultaneously at three major points. And actually, the very first in importance is the price and performance. We don’t want to shy away from producing the best price/performance type of product. The second point is to have more flexibility and more intelligence and more adaptability in our networks. The third one is to have global architectures … which have a long life and do not require any type of forklift upgrade.

Specifically, in the price/performance area. If you look at the last 18 months, in (the) case of LAN switching, we have the best price/performance in 10/100/1000, also known as Gigabit Ethernet interface switching. We introduced it about two years ago on the Catalyst 4000 and then the 6000 and most recently the 7750. Currently, we are shipping at the high end, we are shipping about 35 percent of ports of 10/100/1000. This is by far the best price per port in the industry.

The same applies to 10 Gigabit Ethernet. With more bandwidth at the edge, you need more bandwidth at the core. We honestly believe we have the best pricing for 10 Gigabit Ethernet on our Catalyst 6500 compared to a few other companies, based on price per port. These are not small examples; LAN switching is close to 50 percent of our product revenues.

What does Cisco claim is the price difference in these cases?

It’s always difficult to compare. In a few cases with 10 Gigabit, the competitors are Force 10 and Foundry (Networks Inc.), and most recently Extreme (Networks Inc.). It is more than a 15 percent price advantage … when you consider that we are not asking for a forklift upgrade to 10 Gigabit, but can leverage the existing chassis and can upgrade with this interface, which is not applicable to the competition. … The competitive advantage we provide is substantial.

In relevant cases, we have been able to be competitive on price per port. … We’ve been able, even in a downturn in the economy, to maintain a really high level of investment in engineering. As a result of that, our investments in ASICS and programmable processors are showing up in products, which are imminently cost-effective in terms of bandwidth and in terms of feature richness. It’s not magic; it’s that we’ve been in position, despite the challenging economy, to invest. We’ve spent $3.3 billion per year in the last two years in engineering. It’s not a question of being superhuman or performing miracles; it’s because we’ve been keeping up with our investments because we were in the position to do so.

This means we can put a great deal of emphasis on new technologies. Important examples are IP communication broadly — which is more than voice over IP, because in the next year we will see the addition of video with voice and data and conference capability. We have deployed in large volumes 2 million IP telephones. In quite a short time, we are the No. 3 PBX vendor in the U.S. and the largest in IP telephony.

Speaking of VoIP, what do you tell your customers when they worry about the need for a hybrid voice system that has circuit-switched with IP?

They must bring up the example of Merrill Lynch ( & Co. Inc.) moving away from the Cisco approach. The point about a hybrid system, as long as you’re looking strictly at voice services, clearly a hybrid can be a viable alternative. But if you look quickly at video requirements for video streaming, conferencing and collaboration, then clearly any form of hybrid solution will start to fall apart. You will not be able to clearly provide videoconferencing and video streaming services over a classical circuit-switched Time Division Multiplexing system.

Has the Merrill story hurt Cisco’s sales of VoIP?

Look, Merrill is still an important customer and we want to do for Merrill as much as possible. In the medium and long term, it will become clear about the difference a global IP infrastructure can provide. These are not just marginal advantages. If you want to have any form of advanced messaging and video capability and data collaboration capability, in reality, an IP infrastructure and a hybrid infrastructure, we believe, cannot do it.

Can you describe some of your long-term predictions for networking technology innovations?

Here’s an easy prediction: Essentially all communication will be IP-based in a time frame 10 years from now. Not only will it be difficult to buy a TDM PBX, but also there will be a very strong migration in the service provider space toward IP. It’s a given. We also think that IP combined with Ethernet will become dominant to provide broadband capability, for businesses as well as consumers. And there probably will be a synergy between IP and wireless technology. In terms of enterprises, we think there will be an important evolution in the data center. Overall, grid computing clearly relies a lot on the capacity of the network to be scalable and adaptable. In the data center, there will be more and more clustering, massive multiclustering.

There’s an opportunity in 10 years to have a huge wave of progress and huge wave of increasing relevance of IT and networks as (enabling) all important business changes. All this implies much more of a system approach. In coming years, there’s not going to be just a fast switching or routing box. It’s going to be more of a global system approach to … have flexibility and agility and to reduce the cost of ownership.