Cisco Boss Flexes Market Muscle

By David F. Carr  |  Posted 2002-10-07 Print this article Print

Online exclusive: At Gartner's conference, Cisco CEO John Chambers talked about how the networking giant plans to use its near-monopoly to take on the current market slump.

LAKE BUENA VISTA, Fla.—Despite its depressing effect on sales, Cisco Systems President and CEO John Chambers told Gartner Group analysts that the current tough economy also presents opportunities for Cisco—opportunities that the analysts predict could boost Cisco's price premium.

Appearing onstage at Gartner's Symposium/ITxpo here Monday, Chambers said, "The time you have a chance to break away from your competitors is during market transitions and downturns."

Gartner vice presidents and research directors Joe Baylock and Mark Fabbi agreed Cisco has many of its competitors by the wayside, and they prodded Chambers to explain how he will use the reach and pricing power of a near-monopoly over the networking market.

While Gartner has been talking about this economy producing the best buyers market technology managers have ever seen, Cisco seems to be relatively immune from customer arm-twisting.

The analysts said the price premium Cisco commands for its networking products versus competing wares has expanded from 22% in early 2001 to 72% in the first half of 2002. They questioned whether Cisco will be able to maintain that price difference, along with the 68% net margin it enjoys, and suggested that means the vendor has plenty of room to cut prices.

Chambers said Cisco has been able to maintain its margins by reorganizing (including layoffs, although he didn't use that word) and that his biggest concern is making sure those cutbacks don't hurt customers. He said he doubted the price premium was as great as Gartner's analysis suggests. But he argued that some premium is justified because Cisco is packing more value into its products.

While networking vendors used to compete over "having the hot box," features such flexibility and expandability have become as important as performance, Chambers said. Therefore, Cisco is outfitting its routers and switches to work with more common components and add-on modules.

While buyers may not be happy to hear it, Chambers said he refuses to be lured into imitating "irrational behavior on the part of our competitors" in terms of lowball pricing. Nor will Cisco use its market power to undercut competitors on price, he said.

While holding the line on pricing, Cisco is suffering with the rest of the industry over lower overall technology spending. "Good times for the IT industry will return when business in general turns up," he said.

Businesses will start spending more generously on technology about two to six months after they see their own finances turn the corner, he said. But technology spending will prove to be a lagging indicator, meaning it can't improve until the industries it supports improve, he said.

David F. Carr David F. Carr is the Technology Editor for Baseline Magazine, a Ziff Davis publication focused on information technology and its management, with an emphasis on measurable, bottom-line results. He wrote two of Baseline's cover stories focused on the role of technology in disaster recovery, one focused on the response to the tsunami in Indonesia and another on the City of New Orleans after Hurricane Katrina.David has been the author or co-author of many Baseline Case Dissections on corporate technology successes and failures (such as the role of Kmart's inept supply chain implementation in its decline versus Wal-Mart or the successful use of technology to create new market opportunities for office furniture maker Herman Miller). He has also written about the FAA's halting attempts to modernize air traffic control, and in 2003 he traveled to Sierra Leone and Liberia to report on the role of technology in United Nations peacekeeping.David joined Baseline prior to the launch of the magazine in 2001 and helped define popular elements of the magazine such as Gotcha!, which offers cautionary tales about technology pitfalls and how to avoid them.

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