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Inside Cisco's redemption plan

Mike Volpi was at John Chambers' side as the company rose to global dominance. Now he's got to find a way to help the former highflier recapture some of its lost dazzle.

    Mike Volpi was at John Chambers' side as Cisco Systems rose to global dominance. Now he's got to find a way to help the former highflier recapture some of its lost dazzle.

    As Cisco's 35-year-old senior vice president for Internet switching and services, Volpi has come at the networking industry from the strategic angle as well as the business side of things. Amid one of the sharpest declines in technology spending in the past several years, Volpi has become a high-profile advocate for the long-term health of the industry and his longtime employer.

    Volpi joined Cisco in 1994, so he was present during the company's huge growth in the late 1990s and at its first hiccup as the telecommunications boom went bust. Cisco was forced to lay off workers, warn Wall Street of reduced expectations and take huge charges to write off unused inventory--all nearly unthinkable acts while Cisco was growing into one of the most dominant technology companies in the world during Volpi's tenure.

    Cisco faces several technology and business challenges in this climate--from the uncertain state of its routing software, called IOS, to the evolution of its storage networking strategy, as well as its relative success compared with its competitors in the most brutal technology markets of recent years.

    The industry is not standing still, despite the current technology malaise. Cisco launched an effort Tuesday to improve the reliability of IOS for network operators and saw a former partner, Brocade Communications Systems, sign up with competitor Nortel Networks.

    In an interview at the recently concluded annual Networld+Interop industry conference in Las Vegas, Volpi touched on a wide range of technology and business topics with CNET's

    Q: Cisco's recent quarterly earnings offered some hope that the technology downturn may have bottomed out. Yet your results are one of the few in the networking industry to indicate anything positive. What are you doing differently?
    A: The collective competitors' revenue has dropped pretty dramatically while we've been able to modestly grow a little bit, which is in a relative sense very good performance. Operationally, we're running the company very well, meaning...we're running a tight ship right now, which is very important in this particular climate. The market is not showing massive signs of recovery, although some things are starting to move just a little bit--enough to give hope but not enough to numerically show we're at a bottom or we've bottomed out and things are turning one way or the other, just a sense that things might be slightly better.

    Do you think you are ahead of the competition in realigning Cisco's business for the current market climate?
    I think we've done a good job at operating our business for this climate, and I would point to the financial statistics as a good metric of that. The business is fundamentally well-run at this point--21 percent after-tax profitability, 63 percent gross margins, inventories are in a good place--we generate cash. Overall, I think we run a pretty good business at this point in time, especially considering the climate.

    "Overall, I think we run a pretty good business at this point in time, especially considering the climate."
    I think we made some good adjustments. Obviously, the layoff we had to do, which is never easy. Fortunately for us, I think we executed pretty well on it, and we only had to do one (layoff round). It was clean, and I think the people that had to leave left with the sense that we did a good job with the process. So I think we took the corrective action we needed to and focused people on doing their day-to-day jobs. I think we've realigned our efforts in an appropriate way, focusing more on the enterprise right now because that's what is selling.

    Is one of the main differences between you and competitors, such as Nortel and Lucent, that you can rely on a stable revenue stream from corporations--in addition to the service provider business--while they made huge bets on network operators at the expense of corporate networks?
    I think the right way to think about it is we have a portfolio of businesses. Whenever you're more diversified, you're more protected from downturns and risk. The concept of low beta--we have a more "low beta" company than somebody else who bets purely on one market type. There's no doubt about that.

    You're now running Cisco's switching business. Who do you view as competitors now amid the tumult in the market?
    There isn't one player that really stands out, but there's a few of them that end up being our top competitors: Extreme (Networks); Enterasys (Networks), a little bit less; but Foundry is definitely in that bunch; Nortel, with the old Bay stuff that's still in there; 3Com and Hewlett-Packard, on the low-end side.

    There's been some confusion over Cisco's storage networking strategy, a formerly hot market and one that is expected to be lucrative in the future. What are Cisco's plans? And why did the relationship with Brocade dissolve?
    There's three phases to the storage strategy. The first one is just about moving storage traffic over an optical infrastructure, so there we have a product called the (ONS) 15540, and there it's just a matter of taking one wavelength (or optical network connection) and moving Fibre Channel (a storage networking technology) over it--very vanilla stuff.

    The second phase of it is interconnecting storage area networks (SANs) using some way of bridging over an IP network. We had two solutions for that. Technically, one is iSCSI over IP and the other one was called FCIP, or Fibre Channel over IP. The Brocade deal was to put an FCIP implementation on our Catalyst switches.

    The third phase, which is not yet launched, is to actually build SANs. We're not yet talking about that other than to say, everybody knows we're doing this project called Andiamo (Systems), which is disclosed. The circumstances with the Brocade deal were simply that they are increasingly viewing us as a competitor and just didn't want to go forward with the FCIP project that we had planned.

    Does that force you to go back and build some technology previously expected from Brocade?

    "So that sense of an infinite desire for bandwidth for certain types of applications didn't happen as quickly as we thought it would or just wasn't there in the short term."

    What have you learned as a result of the technology downturn and its effect on Cisco?
    I don't even know where to start. I've learned so many things. For every up cycle, there's a down cycle somewhere in there. I think whenever you have a disruptive event, like the advent of the Internet, I think both investors and operators, and so forth, tend to probably overestimate the short-term impact that's going to have. I think it's a natural (thing) that's happened many times in the economic growth of the United States and the world economy, but I think the world overestimated the near-term impact of the Internet. I don't think the world overestimated the long-term impact of the Internet, but I think we did (in the short term). There was over-exuberance, an overbuild, and so on and so forth. Facing the same circumstances again, I think we'd all be a little more pragmatic and skeptical about what we see.

    Do you think Cisco contributed to this climate of infinite optimism in some ways, waving the Internet flag and adopting slogans such as "Empowering the Internet Generation" and "Are you Ready?" in advertising, for example?
    I think we have a right (to do that)--it is about empowerment; it is about the power of the Internet and so forth. Things did not happen as quickly as we thought they would in some areas. I think that we, like all other people in this industry, probably over-expected for things to happen in a very short time frame.

    What were some of the key trends that did not shake out--or grow--as quickly as Cisco had expected?
    You can range from a number of subjects, but (let's take) the growth rate of bandwidth, right? Or maybe a better way to characterize it is as the general elasticity of the demand for bandwidth. There was kind of this notion that was probably best characterized by (Chief Executive) Jim Crowe at Level 3 (Communications) that if you drop prices, people consume it infinitely, and that's how bandwidth is.

    The reality is that people, particularly in the short term--meaning in one- or two-year periods--have an amount of bandwidth they need to consume, and above and beyond that they just don't need to consume it, right? So that sense of an infinite desire for bandwidth for certain types of applications didn't happen as quickly as we thought it would or just wasn't there in the short term.

    Where else?
    The degree to which people outsource their network infrastructure--because a lot of notions around the service provider market were that companies will outsource everything they do to an application service provider, to data centers and hosting. The big thing today is outsourced VPNs (virtual private networks). There's this notion that everything will get outsourced instantaneously. And, in reality, we saw in our businesses that outsourcing didn't happen as quickly as we thought it would, and in many cases business models that were based on that notion of outsourcing weren't sustained.

    The simplicity of certain applications wasn't quite there. You look at video, for example, which is starting to happen now in specific applications like e-learning. We all thought we'd be watching movies on the Internet in two years, right? I believe we'll be watching movies over IP (Internet protocol) infrastructure at some time in our lives, but it certainly wasn't in 2001.

    "You know, in some senses the economic climate helps because we have less product lines."
    Are acquisitions still a priority at Cisco in light of the two recent ones, and will the company purchase eight to 12 companies this year as previously indicated?
    You know, there really isn't a quota or number. We are acquiring some companies, and we will continue to be acquisitive, obviously at a much slower place than we were before. The risk we take through the acquisition process will be much lower because now we have the luxury of buying companies when we want to. We'll buy things where there's lower risk, both technical risk as well as market risk--the chances for success are higher.

    Did Cisco at one point during the technology boom, when it was gobbling 20 or so companies per year, do too many acquisitions?
    I think we did an appropriate number for that time. If we were doing that many acquisitions now, we'd be crazy, right? At that time, I think it was an appropriate thing to do. Certainly the process of integration that we built around the acquisitions was very good. Even looking back now with everything we've learned since, I really think we had a great integration process, and I think we've far outstripped any other, either competitors in our industry or any other player that's done that number of acquisitions, as far as our success rate. We really have a very good success rate for our acquisitions, and I think a lot of that had to do with why we bought, how we bought and how we integrated.

    Let's talk about technology for a little while. Given the amount of interest in security these days, what is Cisco's role and how can it capitalize on that trend?
    It's going to be a driver for Cisco, I think, for two reasons: One is that increasingly, I think, our customers are viewing security as a comprehensive solution rather than as a point product type of thing. Security even more so than traditional networking, in that you don't feel secure by just buying a firewall, you don't feel secure by just buying a VPN device or by buying an intrusion detection system. It's really the complement of those products and then the ability of those products to interwork with each other, particularly from a management and control perspective.

    The other important trend in security is that whereas security was usually implemented by buying an appliance--a firewall, a VPN device, et cetera--security is now part of a router sale, part of a switch sale, so when a customer buys a router they assume or want to have a firewall in it. If they buy a switch they want to have VPN capabilities in the switch. For a player like ourselves, who has an ample portfolio of routers and switches, imbedding security and pushing it out into the market is an easier task, and it gives us more knobs to compete with versus a competitor who sells purely an appliance. I can then win the business with security as one of the considerations but not the only consideration.

    Let's turn to software. Recently there has been concern expressed by Cisco executives, as well as some in the networking community, regarding the reliability of IOS, essentially the brains of Cisco's routers. What is Cisco doing to address that?
    IOS has improved a great deal. It certainly is a piece of software that has an incredibly wide range of feature sets compared with anything else on the market because it's been around for a while, so we've implemented a lot of features on it. I really think of it as a competitive advantage, not a disadvantage. The issue that is more frequently sighted by our competitors is there's too many releases of IOS. There are a lot of releases, clearly, but I think that is significantly improving right now, and I think if you go talk to most of our customers they'll be much more pleased.

    There is an effort within Cisco to streamline IOS, correct?
    Yes, there is.

    And how is that going?
    It's going really well. You know in some senses the economic climate helps because we have less product lines. The reason you have lots of trains (versions of the software) is that you have lots of product lines. So again many of our competitors will cite the fact that we have "X" many release trains. Well, we have 10 times as many product lines as they do, so naturally with more product lines you get more release trains. But this climate has forced us to consolidate on less products, a lesser number of chassis, so that makes the IOS integration process much easier for us. It's actually a good time to do it right now because we have less and less platforms. And when you acquire less companies, one of the inherent benefits is you don't have to bother porting IOS to that new platform.