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OPINION: THE WEEKEND INTERVIEW JULY 24, 2009, 10:58 P.M. ET Silicon Valley Survivor Cisco’s CEO says Internet 2.0 will drive productivity growth in the new, new economy. By MICHAEL S. MALONE San Jose, Calif. The crash has hit Silicon Valley as hard as anywhere else. The only consolation is that this time, at least, it didn’t start here. But while other firms are hunkering down and trying to survive, networking giant Cisco Systems ($130 billion market value, $40 billion in annual sales) continues to stride forward. “Even in this downturn,” says chairman and CEO John Chambers, sitting at the table in his modest, memento-crammed office, “We intend to be the most aggressive we’ve ever been.” A decade ago Cisco was known for building the switching systems (called routers) that find the most efficient path for information on the Internet. These days it has a presence in just about every corner of the Web’s infrastructure—from networking hardware (switches, gateways and the like) to network management software (CiscoWorks) to the Linksys router that runs the wireless network in your home. As much as three-quarters of the world’s digital data now passes through Cisco equipment, the company estimates. This massive expansion has come not merely by internal growth, but through one of the biggest (and most successful) merger-and-acquisition programs in high-tech history. Despite taking the same hit as the rest of the computer industry earlier this year, Cisco’s stock is climbing (up 17% to more than $21.50 in the last month), the company has cut an incredible $1.5 billion in operating expenses, and earned an upgrade this week to “outperform” from Credit Suisse. It has also announced a major sponsorship of the 2012 Olympic Games in London. Cisco is feeling so confident that it is even planning a new integrated hardware/software platform (Cisco Unified Computing System) that puts it in direct competition with its former strategic partners, IBM and Hewlett-Packard, for control of the multibillion dollar business of equipping the thousands of data centers run by large corporations. Meanwhile, Cisco has had no major layoffs during this economic downturn and made no salary cuts. Six weeks ago the company announced its intention to pursue 30 disparate new market areas—from sports to the smart grid (delivering electricity efficiently through digital technology) to cloud computing (using thousands of computers to share work)—simultaneously. View Full Image Zina Saunders “You never want to waste a good crisis,” Mr. Chambers says with a smile, and he has publicly predicted an average 12% to 17% annual growth over the course of the next five years whatever happens to the economy in the short term. “We basically wrote the press release for five years from now,” he says, “and now we plan to live up to it.” Mighty bold talk. Chatting with Mr. Chambers, I find it easy to forget we’re in the worst recession in a generation. To hear him tell it, however, this is the perfect moment for Cisco to outrun the competition, just as it did during other crises in the often feast-or-famine world of high tech. “Each time we emerged out of it a stronger company, with more market share, and we moved into more [adjoining] markets,” he says. Yet Mr. Chambers wasn’t always so optimistic. Those who watched him on television in early 2001 when the dot-com bubble burst—and who could read the signals (his courtly Southern accent going flat and unemotional, his natural ebullience replaced with a dry delivery of facts)—saw a man looking into his own career grave for the second time. The son of an obstetrician/gynecologist father and a psychologist mother who also owned a restaurant, John Chambers was born in Cleveland but raised in West Virginia. That explains both his accent (rare in Silicon Valley) and his love of the outdoors. “I grew up fishing, hunting and swimming,” he says. “I lived in the river.” In fact, after this conversation he was set to take, on his own dime, 20 company executives on a fishing trip to Alaska. Mr. Chambers credits his parents with giving him a doctor’s approach to business problems. “They taught me to focus on the long-term health of the patient, and not to treat symptoms but the underlying problem.” They also gave him an obsession with maintaining his health, giving him advice he admits to ignoring as a young man. “My father told me not to ride motorcycles or jump of bridges—both of which I foolishly ignored.” He’s more careful these days, although he recently learned how to fly a helicopter. As is mentioned in every biography of the man, John Chambers is a severe dyslexic, although that didn’t keep him from earning a law degree from West Virginia University and an MBA from Indiana University. “He had this very optimistic attitude about everything,” his childhood reading therapist would later say. “He was just not going to fail. One thing I notice as I hear him now on TV is that he still has that attitude.” Mr Chambers never practiced law. Instead, seeing the future in computers and business, he joined IBM in 1976 as a salesman. Seven years later, he went to work at minicomputer maker Wang Laboratories, where his career climb was meteoric: By 1990 he was executive vice president. It was at Wang—a billion-dollar company that seemed to die almost overnight in 1990 because of bad management and a failure to adapt to the personal computer revolution—where Mr. Chambers faced his first career crisis. “I felt I knew what we needed to do, but I wasn’t able to convince Dr. Wang to take the risk,” he says mournfully. He says he is still haunted by the cost: “37,000 people lost their jobs, and the shareholders lost everything.” In 2001, five years into his tenure as CEO of Cisco (the only company that answered his job application after Wang), Mr. Chambers stared disaster in the face again. In the fall, Cisco, with a market capitalization of $500 billion, was the world’s most valuable corporation. As he departed for a Christmas vacation, the company had a 26-week backlog of orders and was enjoying 70% annual growth. He returned to an industry that had collapsed. Orders had disappeared, inventories had evaporated, and by the middle of January, he recalls with a shudder, “the 70% growth went to minus 45%. That’s a drop of 115%. I thought that was mathematically impossible.” But, under Mr. Chambers’s leadership, Cisco kept its cool. There were losses and there were layoffs, but after the cuts Cisco gained market share against its even more damaged competitors—and hasn’t stopped. Cisco’s growth plan has combined audacity in acquisitions and attacking new markets with strict, even ruthless, control over costs. “We’ve learned our lessons with each downtown in this company’s history,” Mr. Chambers says, “and we’ve fine-tuned them as we’ve gone along. Now we have our playbook, with its four key elements, and we’re going to run that game no matter what the short-term situation looks like.” The first element of his playbook, he says, is to “be realistic,” that is, to gauge how many challenges are created by the economy, and how many are self-inflicted. The second is to “assess your situation,” which means to ask how long a downturn will last and how deep it will be. “And,” Mr. Chambers says, “it will usually be longer than you think.” His third element is to “get ready for the upturn,” and the fourth is to “get closer to your customers.” Says Mr. Chambers: “We added that last one in ’97,” after Cisco noticed too late that its customers were sliding into a recession. Mr. Chambers has three more unwritten rules, for good times and bad. The first is “watch the stock market”: “When the [dot-com bubble] crash came in 2001, the stock market had been going down for a year, but we hadn’t really noticed. I watch it a lot more closely now,” he says, an especially good idea after Cisco replaced General Motors on the Dow Jones Industrial Average on June 9 of this year. The second is to “always have more cash, not less.” “We didn’t have enough cash going into 2001,” Mr. Chambers says. “This time we went into it with $34 billion. That wasn’t accidental.” Finally, Mr. Chambers’s third unwritten rule is to “be aggressive.” Coming out of the 2001 crash, Cisco embarked on one of the most spectacular acquisition programs in high tech history—more than 130 companies to date—in the process expanding its product lines from computer networking routers to local area networking switching, voice-over IP (the technology that allows Internet telephony), and home networks. High-tech companies are notorious for killing the firms they acquire, but several of Cisco’s major acquisitions (including Linksys, Scientific Atlanta and WebEx) have turned into billion dollar businesses. Mr. Chambers credits this success to letting acquired companies continue to do what he bought them for and keeping their management. Since the 2001 downturn, Cisco has embarked on a radical reorganization that Mr. Chambers believes best positions the company to compete. Cisco was an early adopter of new technologies, pioneering online commerce. By 1999 it had booked 90% of its orders on the Internet. Now Cisco has kicked into high gear as the world enters what Mr. Chambers calls “Internet 2.0.” This Internet 2.0, Mr. Chambers says, will be all about pervasive video and collaboration tools. It will power the social networking Web world to even greater heights. Much more importantly for our economy, it will “drive productivity by 2% to 3% per year,” he says. Mr. Chambers plans to have Cisco build and run Internet 2.0. That’s why he’s turning on old allies such as HP (they used to work together pursuing the data center business) and embracing new ones. That’s also why he’s embracing video technology, from video cameras to videoconferencing (he “visited” 270 offices around the world last year, 200 of them virtually). And it’s why he’s reorganized Cisco around small, fast-moving product groups—called councils and boards—and sent them off in hot pursuit of markets in full expectation of every one turning into a billion-dollar business. Unrolling all of that may take a decade or more, and John Chambers intends to be around to see it happen. He certainly has the genes for it: His father, 84, remains his most trusted adviser. Mr. Chambers also intends to be happy along the way. He bounds into the interview looking at least a decade younger than his 60 years, and in the course of our conversation pulls out and demonstrates Cisco’s new, low-cost HD Flip digital movie camera. “It’s CEO idiot-proof,” he laughs. Mr. Chambers was offered one of the cameras as a gift from the manufacturer, Pure Digital Tech, last year. He refused to accept it unless he paid retail. This March he bought the company for $590 million. Mr. Malone, a columnist for ABCNews.com, is the author of the recently published “The Future Arrived Yesterday” (Crown Business). ------------------------------------ -- INFORMATION OVERLOAD? Get all ZESTMedia mails sent out in a span of 24 hours in a single mail. Subscribe to the daily digest version by sending a blank mail to [email protected], OR, if you have a Yahoo! Id, change your settings at http://groups.yahoo.com/group/ZESTMedia/join/ PARTICIPATE Share media news, discuss journalism issues and network with media professionals across South Asia on this mailing list. Just write to [email protected] TELL FRIENDS TO SIGN UP If you got this mail as a forward, subscribe to ZESTMedia by sending a blank mail to [email protected] OR, if you have a Yahoo! 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