Commentary: Cisco's premium

By Jay Pultz and Mark Fabbi, Gartner Analysts

Cisco Systems has long charged a high premium for its offerings, but customers are beginning to question the validity of such pricing, which has intensified the dramatic slowdown in Cisco's business.

Cisco's financial troubles in

	See news story: Competitors lick chops as Cisco stumbles

part reflect broader industry conditions, and the company has been forced--like other vendors such as Nortel Networks and Lucent Technologies--to take major steps to adjust to a dramatic slowdown in the economy and, in particular, the telecommunications and networking sector. On April 16, for example, Cisco made an announcement that it would reduce its work force by 8,500 employees, or about 17 percent. The company will also write off $2.5 billion in inventory--principally components obtained to address demand increases that Cisco significantly misread.

Cisco continued to build up inventory and staff for much too long given the signs of a softening market. Gartner believes that Cisco viewed itself as immune to the problems that befell Lucent and other vendors, and could have taken advantage of its competitors' distresses. Either Cisco's much-hyped internal systems did not provide an early indicator of what was happening, or Cisco chose to ignore the early warnings. Moreover, the company, in Gartner's view, did too little too late when it finally did act on the problem.

For Cisco, the fall in business is especially steep because the company used its recognized brand to charge high premium prices. Now, however, enterprises closely scrutinize their budgets and thus will not accept Cisco's premium pricing as readily.

Within the networking market, enterprises have a choice between Cisco products and strong campus switching offerings from vendors such as Nortel, Enterasys and Extreme Networks. Cisco pricing is at least 25 percent higher than that of competitors in most cases. Enterprises have started to pressure Cisco either by negotiating more aggressively or taking their business elsewhere.

Gartner advises enterprises to take advantage of these tough economic times by forcing vendors to compete for business. Enterprises can save up to 50 percent of capital costs for networking equipment by using open, competitive procurement processes.

In addition, new directions in which Cisco is pushing--such as voice over IP--have taken off slowly, and competitors have more successfully attacked certain product areas, as did Juniper Networks in high-end routing.

Cisco will have to be much more selective in moving to new technologies. For example, one area that was completely eliminated with this month's purge was video networking--for which Cisco acquired PixStream last year for more than $350 million, an investment it will now write off. Cisco acquired a total of 23 companies in 2000 and 18 the year before. With a big reduction in acquisitions to gain new technologies, Cisco will likely have more difficulty growing.

Cisco remains a strong leader in networking equipment but needs to learn key lessons from the downturn and its response to it.

(For related commentary on troubleshooting a Cisco network, see TechRepublic.com--free registration required.)

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