Can Cisco turn the downturn into opportunity?

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By Tim Weber Business editor, BBC News website

John Chambers has to ride out yet another downturn

John Chambers is a paranoid man. All smiling, all confident, but paranoid nonetheless.

"Healthily paranoid," he says several times during our conversation.

Mr Chambers is the boss of Cisco Systems. His company has survived four economic downturns: in '93, '97, '01 and '03. Now he is pushing hard to make it through number five (and six, if like Mr Chambers you count the US crash of '08 and the global recession of '09 separately).

Cisco is one of those companies that many have never heard of, but whose products most people are using. The San Jose, California, based firm makes much of the hardware that powers the internet.

This has turned it into a company with a turnover of $39.5bn (£25bn), $8.1bn in profits and a staff of 67,000.

It also makes it a good bellwether to see where the global tech industry is heading.

Cisco's next set of results, out in a few weeks, will be closely watched on Wall Street.

Some analysts are sceptical. Goldman Sachs' Simon Jankowski recently downgraded Cisco from "conviction buy" to neutral, triggering a 5% fall in its share price.

A question of survival

CISCO Founded in 1984HQ: San Jose, California Staff: 67,000Turnover: $39.5bnProfit: $8.1bnChief executive: John Chambers (since '95)

Mr Chambers appears unruffled. He's been here before.

When the dotcom bubble burst in 2000, Cisco lost 85% of its market value - not long after becoming the world's most valuable company. Back then, a quarter of his top customers simply disappeared.

"They were gone," Mr Chambers tells me. "We went from 70% annual growth to minus 45%."

"It was brutal... it was about survival."

And yet, Cisco emerged from all previous downturns stronger - using the crisis to become the market leader in more product lines and more regions.

Now Mr Chambers hopes his paranoia will help him to pull off another turnaround.

Yes, many tech sectors and companies are suffering. Yes, Cisco's stock market value is half of what it was 18 months ago. But Mr Chambers is convinced that Cisco hogs a technology sweet spot.

Betting on the network

A Cisco switch; you may be using one right now.

He has a point. As governments try to spend their way out of the downturn, many - the UK and the US among them - have promised to invest in their digital infrastructure.

By default, this should translate into lots of orders for Cisco switches, routers and other networking gear.

Mr Chambers, however, believes that his company's fortunes will be driven by much more fundamental changes.

"The network is the new platform," he says.

What does that mean in real life?

"It's the capability of consumers to access any content on any device at any time from any location on any kind of network," says Mr Chambers in a well-rehearsed sound bite.

"It does not matter whether the movie is on your Flip [video camera], in the [internet storage] cloud, on your home server or with Disney, all you want is to get the content on your device... you don't want to know where it is," he adds.

It's not a new vision. Microsoft founder Bill Gates and many others have been extolling it for years.

But while Mr Gates believes software will be the driver to make it happen, John Chambers says the key to the solution will be network "architecture", the way how hardware and software fit together.

Building such "exciting architecture", he says, is Cisco's strength.

Capturing markets

And because Mr Chambers is happily paranoid, he pushes his company to go beyond its 12 core product sectors into 28 "market adjacencies" where he sees opportunities for Cisco to grow despite the downturn.

"Now is the time to be very aggressive," he says - but dodges the question whether he might anger key partners in the process.

Cisco has just announced that it will move into the highly competitive server market, threatening the position of IBM and Hewlett Packard - both important resellers of Cisco networking equipment.

"The way we go after a market, we don't focus on the competition," he says. Rather, he wants to focus on markets where fundamental change is happening.

Flipping consumers

Flip video cameras are another Cisco step into the consumer market

Mr Chambers is happier to talk about video, which he says is one of these "adjacent" markets in transition, especially for consumers.

To prove the point, Mr Chambers pulls out a Flip Mino, a very simple but hugely successful digital video camera. One month ago Cisco bought Flip-maker Pure Digital Technologies.

Filming a clip, putting it on the computer and sharing it with friends is a matter of pressing one button and making a few clicks on the computer. Products from other Cisco subsidiaries - Linksys and Scientific Atlanta - ensure the connection between home and internet.

It works not just for consumers, says Mr Chambers. Top managers at consumer products giant Procter & Gamble, he says, have all been issued with Flips to record their creative ideas.

The Star Trek experience

Meeting John Chambers face-to-face... kind off

While the Flip was already a success before Cisco bought the company, Mr Chambers hopes that other home-grown video applications will generate enough web traffic to keep up demand for his networking gear.

One of them is called Telepresence.

During my face-to-face interview with Mr Chambers we pointedly do not shake hands - because I am in London and he is in San Jose, linked up by a sophisticated bandwidth-hungry system of three huge screens that gives a hyper-real Star Trek-style impression of the two of us sitting at the same table.

So far there are only some 550 Telepresence points around the world, but Cisco hopes that companies will be happy to invest in this expensive, no-delay, life-size video conferencing technology. After all, business travel is even more expensive.

To help things along, Cisco just announced a credit-crunched version of the service, and a financing plan to help spread the cost.

"Business travel is dead," claims Mr Chambers, and boasts: "I've had 261 direct meetings with customers around the world this year, and 200 of them were done using Telepresence." As we speak, it is past midnight in San Jose, and he is settling in for a diet coke-fuelled all-nighter of Telepresence meetings with Cisco customers and management across the European timezone.

The threats

So how long will the downturn last?

Maybe it is an industry habit, but like many tech executives Mr Chambers exudes confidence.

He predicts that new technologies and networks will deliver an "instant replay" of the huge productivity gains recorded in the second half of the 1990s.

But what about all the tech companies that have pulled in their horns, stopped to invest in research and development, and approve investments only if they return cash immediately?

"I am worried, it's not healthy for the industry," acknowledges Mr Chambers, and points out that most investments take about three to five years to deliver real returns.

Another concern is the security of the network itself. "Will there be security breaches? Absolutely!," admits Mr Chambers.

Companies, he predicts, will have to prepare themselves for sophisticated "complex attacks by individuals and well-organised groups".

The socially-networked enterprise

That does not stop Mr Chambers from seeing the downturn as an opportunity. "It allows companies to take a step back and change the way they are operating."

It's videoconferencing, but not as we know it

As Cisco pushes in ever more directions, it could easily lose focus.

In response, Mr Chambers wants to introduce a "social networking" management structure. Many small groups are getting the authority to make big decisions.

"Look, I'm a command and control guy," he says - laughing as he bangs his fist on the table.

Letting go won't be easy for him, but he argues that he'd be even more worried if Cisco wouldn't make the change.

The $34bn cash pile

John Chambers is also determined to grow the company the way it is most famous for, through acquisitions.

Compared to other enterprises, Cisco has a fairly happy track record when it comes to integrating firms like Flip.

The drive to buy will continue, promises John Chambers: "I didn't raise $34bn of cash just to have a nice financial cushion."

Cisco will make "multiple moves" in the consumer field soon, he says and predicts at least as many takeover deals this year as Cisco did during the past two years.

These deals will push Cisco into new markets, buy fresh ideas and bring in good talent.

Mr Chambers and Cisco need these deals, if only to keep his paranoia at bay.