Next Big Bet of Cisco
In a three-story building of concrete and smoked greenglassoppositeCisco Systems (nasdaq: CSCO - news-people )' San Jose,Calif. headquarters, the grand design oftheInternet is in its finaltests. Behind security and a roaringairconditioner, 150 computernetwork switches go through theirmockpaces with thousands ofcomputers: Each switch moves 2.5trillionbits a second. Soon thatcapacity will hit 15 trillionbits, meaningthat the switch couldspew out the equivalent of 400feature-lengthmovies every second.These data traffic cops are thebrains of themassive computingcenters popping up whereverelectricity is cheap:in Prague, Iceland,Greenland and Wenatchee,Wash. The biggest ofthese data factoriesare packed with 400,000servers and consume 250megawatts of power,half the output of asmall nuclear power plant.
This is what the online computing revolution has become,agiantelectricity hog of Internet searches, phone calls,blogposts,wireless downloads, bank transactions and officedocuments.Andvideo, lots and lots of video. Every weekGoogle(nasdaq:GOOG - news-people )'s YouTube adds 57,000clips to its library. Cisco'sownWebEx service, designed forvideoconferencing in the office,hostsup to 7 million minutes amonth. The giants oftheInternet--Microsoft (nasdaq: MSFT -news-people ), Google, Yahoo (nasdaq: YHOO - news-people ),Amazon--plus fast-moving Chinese upstarts likeBaiduand TenCent, arebuilding more of these giant centers.Microsoftfigures it willexpand its network of data centers 64-foldover thenext few years,just to handle some 200 services, includingXboxonline gaming, videoand corporate software rented over theWeb.Microsoft has scenariosof trucks loaded with thousands ofserverspulling up to feed itsdata centers as needed, straight intoaCisco switch.
A handful of big hardware makers will profit fromthisworldwideboom in data centers, including IBM, Intel(nasdaq:INTC - news-people ), Hewlett-Packard (nyse: HPQ -news-people ), Dell (nasdaq: DELL - news-people ) Computerand EMC. But the most profitable slicebelongsto Cisco. Its biggestswitch, called the Nexus 7000, sitsabove themall, unifying acomputer center's crazy quilt ofengineeringstandards into a layerof control that Cisco can own.
This big boy has a list price of $75,000 but runsmaybe$500,000once it is loaded with security, software andopticaltransmissiongear. Its little brother, the Nexus 5000, startsat$36,000 andmoves up the same way. A 250-megawatt data center,andthere aredozens on the drawing board, is a $200 million saleforCisco.There are scores more planned at the 30- to50-megawattlevel, eachof which means another $40 million for Cisco.
Across the street at headquarters, Cisco ChiefExecutiveJohnChambers is ready to rake it in, the culmination of a15-yearplanthat began when the sales executive took over andmadetheacquisition (the first of dozens) of a small switchingcompanyfullof the brightest engineers around. Now, thankstothisunprecedented construction boom of data centers, Ciscoispoised tovault to the foremost ranks of high technology,alongsidethe $100billion (revenues) giants Hewlett-Packard and IBM.
Cisco is not even halfway there. It took in $39.5 billioninthefiscal year that ended July 26; on that it netted $8.1billion,or20% of sales. But Chambers is marshaling his $26 billionofcompanycash ($5 billion more than Microsoft has), thousandsofengineersand, of course, his own relentless, even haunted,focus."We willmanage more devices, and service them in real time,thanthere arepeople in the world," says Chambers. "We are alone inhowmanymarkets we dominate … I spend no time worryingaboutthecompetition."
It is quite a plan for a man who was humbled whenCiscoexplodedin a blast of dot-com hubris at the turn of thecentury anditsstock fell from $80 to a low of $10 in 2002. Chamberskeeps onhisoffice wall a check for 38 cents, his bonus for that badyear.Sixyears and $54 billion in stock buybacks later,the59-year-oldChambers has taken his shares back to just $22.WallStreet hasn'texactly come around to lauding the stock astheblue-chip growerthat it is. But if he can keep Cisco growing athisoptimal 14% ayear, by the time he is 65 revenue will hit$87billion. Then maybethe respect will start flowing.
Cisco figures that by 2012 businesses, governmentsandresearchlabs will be spending $85 billion a year just on thegearto keeptheir online infrastructure up and running. SellingCisco'sclassicnetworking equipment into this is already aprettyopportunity,worth more than $10 billion annually just for onelineof computerswitches. (A switch moves data packets withinonenetwork, such asbetween two PCs or servers, while a routermovespackets betweenseparate networks, such as from the Internet toyourhome Wi-Finetwork. Cisco is the number one seller both ofswitchesand ofrouters.)
But Chambers wants more. Over the past five years hehasspentmore than $10 billion on big acquisitions like WebEx,aservice forholding meetings and sharing documents overtheInternet;Scientific Atlanta, a maker of set-top boxesfordigitaltelevision; and Linksys, which makes consumernetworkinggear. In2005 he even looked at buying Research InMotion(nasdaq:RIMM - news-people ), maker of the BlackBerrysmart phone, but decidedhedid not want to be in the business ofselling consumer devices.
Chambers has drastically reshuffled hisorganization,alienatingand confusing many who work there, in thehopes of makingsense ofall the new business opportunities. He'salso taken tobackingcompanies started by Cisco stars, all butknowing he'll buythem.In the past five years $20 billion more hasgone intointernalR&D in areas like video meetings,security,softwaremanagement, surveillance, even interactive signsforstores.
Using a high-definition videoconferencingsystemcalled"telepresence," Chambers has gone from spending 60% ofhistime onthe road to now carrying out half his sales callsfromasecond-floor conference room at headquarters. Eventuallyheplansto travel by Cisco-developed hologram. "Video istheonlytechnology I've seen CEOs turn around and sell to otherCEOs,"hesays. "Overall we cut travel in Cisco by 20% last year andwillcutit another 10% this year."
While the Internet looks pretty smooth, the storage,computer,andtelecommunication standards on which things operateare almostasdifferent as a canal is from a superhighway. Unifyingthem intoonesystem is the job of that Nexus switch, which tookseveralyears andperhaps $1.7 billion in engineering effort todevelop.The Nexus 7000has 1,500 patents.
If the network is unified, it can also be managed fromoneplace.With the new box, Cisco promises that Microsoft can makeitsnetworkbigger without adding staff to run the machines.TheLawrenceLivermore lab, which is planning a 30-megawatt datacenterwith acomputer 20 times more powerful than the best it hastoday,canmodel nuclear explosions at 8 trillion bits a second; aCiscoswitchhas to manage this swarm of simultaneous computationwithoutlosinga bit. Earlier this year Microsoft used two of themachinesin itsrelease of the online game Grand Theft Auto 4. Whenitpulled theplug on one, the other picked up the traffic witha1/60,000 of asecond loss of data.
The 7000 and the 5000 (names are not Cisco's strong suit)dothetricky work of unifying servers, data storageandvirtualizationsoftware (a way to get one server to do the workofseveral so youget more bang from each). By making the Internetdomore for thesame money or less, Chambers can sell even moregearand win overthe green hearts of its customers. Powerconsumption istech'sbiggest headache (see chart). At currentgrowth ratesdatacenters will consume 3% of global electricitysupply by2010. Chambers says his switch uses 8% lesselectricitythanolder switches do.
In a sign ofhowmuchthe supply of energy is changing the game, Cisco chose tobuilditsnewest data center in North Carolina, not India, becausethepowerin North Carolina is more reliable. British Telecomusessoftwareto send data to whichever of its 23 global data centershasthebest electricity prices. Cheap labor is nottheissueanymore.
One selling point Cisco is not making a big deal aboutiswhatthose big management switches may do to the server computersofitspartners like HP and Dell Computer: turn them intoevencheapercommodities. One computer or storage device is prettymuchlikeanother if the switch is in charge, and Chambersrisksalienatingthese customers when they find out how much he willstepon theirturf by controlling more of the storage andserverbusiness."Anything that loads the network, I make money on,"saysChambers."I do not go into a market where I will not be numberoneor two."
Over the past year HP has purchased a350-personcompanyspecializing in the design and construction oflarge datacenters,and paid $13.9 billion for Electronic DataSystems(nyse:EDS - news-people ), in part for the managementsoftware andconsultantsneeded to run all tho******puters. HP sellscargocontainer "pods"crammed with up to 6,000 computers, allconnectedto a single trunkline to the Net.
As for Cisco biting into the server business, "WhywouldCiscowant to come after us?" says Paul Miller, HP vicepresidentformarketing of enterprise storage and servers. "Theycould tryandbuy EMC or Dell, or even spend years growing it inside.I'dwelcomeit, I just question how they could getthere."
Dell has been working with the big data centersonspeciallydesigned systems, betting that the biggest customerswillmaintainproprietary systems and demand cheap parts. IBMseescompaniesmoving into lots of smaller centers, whereCisco'snetwork-centricmodel will not matter as much. EvenGoogle,ostensibly a customerfor the 7000, has started offeringWebEx-typevideo, as a no-chargeaddition to existing services.
Chambers, as calm as a tightly coiled salesmangets,declares:"The organization with the best vision of themarket,fromdashboard to product to strategy, will win," he saysfromhisunassuming conference room. A studied modesty, along withaverycertain and level West Virginia twang, goes intoeveryaudaciousnumber he spouts.
Cisco, he says, already dominates 25 differentproductmarkets,like networked storage, Internet telephones and ofcourseswitching("and Google leads in one"). His 66,000 employees"are afamily,and we are changing the world. I know every majorillness ofmyemployees, every one of their children's." Within twoyears,hesays, Cisco services will be sold on Cisco's behalfby"ahalf-million people from Wipro (nyse: WIT - news-people), Cap Gemini, Accenture (nyse: ACN - news-people )."
Harvard Business School, he adds, was just by to see howhedoesit. His walls have pictures of every product line earninginexcessof $1 billion, along with John Chambers in the companyofworldleaders. What his chair faces, though, is the 38-centbonuscheckthat came as he was struggling to turn Cisco around fromthe90%stock drop. "Jack Welch told me you only have a greatcompanywhenyour life is threatened," Chambers says. By survivingandfinding anew way to grow, he says, "I developed confidence."
In 2001 Chambers laid off 15% of his workers and movedfromamostly U.S. network router business to overseas sales andintonewbusinesses like security and office telephones runningontheInternet. Known as an acquisition machine, Cisco wentfrombuying23 companies in 2000 to scoring 2 in 2001.
The business was on its back, but Chambers still wantedtogrowand keep margins high. Always a parsimoniouscompany--evensalesmenwho fly 200,000 miles a year go economy--Ciscodispatched ahandfulof finance executives to scour departments fornew areas ofgrowth.The group promised additional funds to developthe products,butthese rarely showed up. Research and developmentwent from$3.9billion in fiscal 2001 to $3.1 billion in fiscal 2003.
Chambers needed a big hit in order to increaserevenuewithoutraising internal costs or taking on a chancyandcomplexacquisition. And he had to keep his best engineersandsalesmenhappy. Soon after the mass layoffs a few starCiscoplayers, whomight otherwise have left, were given $84 milliontostart a datastorage firm called Andiamo. The company grew toabout300employees in a year, at which point Cisco, itsonlycustomer,agreed to buy the company for $750 million.
Silicon Valley has always embraced a star systemforgreatengineers, but some insiders were shocked by the gap."Johnmade300 people rich, but he pissed off 25,000 other people,"saidoneformer executive. The so-called spin-in company may havebeenhardto justify by Andiamo's tiny revenue. Placed back insideCiscoithas made several billion over the years, however, andkeptCisco'sresearch and development costs low.
In July 2005 those stars of the storage spin-in leftCiscoagain,ostensibly for retirement. By October they had startedacompanywith Cisco money called Nuova Systems, joining one ofthefoundersof VMWare and an early star at servercompanySunMicrosystems (nasdaq: JAVA - news-people ). Theirgoal was to create an operating systemthatcould span an entire datacenter, taming the confusion in onebox.
It was the beginning of Nexus, though this spin-inhadmorestealth than Andiamo. Chambers backed Nuova with $50millioninAugust 2006 and gave access to Cisco's most prizedsoftwareandsemiconductor knowledge. At the time, it was portrayedasjustanother investment.
"I'm pretty sure John heard about us throughaventurecapitalist," says Nuova cofounder Prem Jain, managinganironicsmile. Big customers like Microsoft were brought infordesignplanning early on, so Cisco could be sure Nexus wouldalignwithwhat the biggest buyers need.
Cisco bought Nuova last April for $678 million, partofitcontingent on its meeting sales targets. This was a nicepriceforsomething with no venture capital investment and norevenue.TheNexus 7000 was then developed inside Cisco in tandemwithNuova'sproduct, which became the 5000.
All this research funding of outside projects hadsomeharmfuleffects inside Cisco. When the stars left to startNuova,Chamberselevated three executives to positions that put theminline aspossible successors. All three have since left Cisco.
"Spin-ins are a creative model to accelerate innovationandbringin engineers you couldn't normally recruit--andfinancialgains goto entrepreneurs, not venture capitalists," saysJayshreeUllal, a15-year Cisco veteran who built the 7000 then leftlastMay as theNuova people came back in. "But it's a nightmarewhenthe guy in thenext cubicle is a multimillionaire and youaren't,because youweren't chosen." She left Cisco for personalreasons,she says,adding that she had to deal with a lot ofunhappyemployees over thespin-in structure.
Chambers says all three left not over Nuova, but in responsetoanew style of management he has installed at Cisco. "Theyweregoodpeople, but they were command and control people," he says."Ihaveto have collaboration, with sustainable, repeatableprocessesbelowthe CEO level."
Much the way the Nexus switches unify the sprawlingcomplexityofa data center, Chambers has searched for ways to handlethehumanchaos of engineering and selling a diverse set ofproductsfor theworld. In the last few years, Chambers replacedatraditionalstructure of senior managers leading largedivisionswith a puzzlingseries of groups, councils and boards, eachmade upof people fromradically different backgrounds. Some groupsandcouncils deal withfunctions like manufacturing, otherswithconcepts like ecology.
John McCool, who took over from Ullal in runningtheswitchbusiness, sits on a Cisco Green Board, anEnterpriseBusinessCouncil, a Development Council and anEnterpriseArchitectureGroup. All but the Green Board havebudgetresponsibilities, and hehas to form common concepts and goalswithpeople he barely knows,while running his own business andhearingfrom his lieutenantsabout what happened at their groupmeetings.
How does he keep from going nuts? "Good question,"McCoolsays."This is an evolving problem. The forces compete. Thetrickisknowing when to move back and forth." Given the complexityofaworld run on data centers, he adds, "This is the way alotofcompanies are going to have to go."
Lots of Internet companies are struggling to adjust tothechaosthey helped create. Google has loosely joineddevelopmentandoperating groups numbering as few as five engineers;peoplemovequickly from one job to another. The immense profitsfromexistingproducts cover inefficiencies in developing the nextone.
Jain, who left Cisco and started Nuova because he was tiredofthebureaucracy even before Chambers started the newsystem,seespotential for choking future products because ofthecommittees.Add in the goal of $100 billion in revenueswhileholding bigmargins, he says, "there is no outside model forwhereJohn wantsto take this. We are on our own."
Alone at the top, Chambers says he is moving fasterthanever."There are a different set of market transitions thaneverbefore,"he says. "Can we lead, grow at 12% to 14%? It'salmostunheard ofat this level." Succeeding means keeping track of alotof movingparts. But, then, that's Cisco's business, isn'tit?
Posted by Forbes Magazine
Web: www.wwteq.com
PCB: http://www.wwteq.com/wwteq_Category_423735_1.html
PCBA: http://www.wwteq.com/wwteq_Category_2068177_1.html