Hi George, Walter,
Saw this article in today's WSJ so thought I'd drop in and post it. Hope you and the other vets out there are all well.
Season's Greetings to all......
December 4, 2003
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May 20, 2003
Cisco Meets Frustration
Entering New Market
By SCOTT THURM
Staff Reporter of THE WALL STREET JOURNAL
Nearly three years ago, Cisco Systems Inc. created an unusual internal start-up in an effort to crack a new market: switches to connect the computers that store corporate data.
So far, it's been a frustrating exercise. Cisco changed sales strategy, overpriced its initial offerings, missed revenue targets, and endured manufacturing glitches. Nearly a year after it began selling storage switches, Cisco won just 7% of the market in the third quarter, according to market researcher Dell'Oro Group, Redwood City, Calif. Cisco's biggest impact to date has been damping sales for market leaders Brocade Communications Systems Inc. and McData Corp.
Far-Off Target
The stumbles suggest just how hard it will be for the San Jose, Calif., computer-networking titan to jump-start growth by expanding into new markets. Chief Executive John Chambers names storage as one of six "advanced technologies" in which he hopes Cisco can generate $1 billion in annual sales. With storage-switch sales of roughly $20 million in the company's most recent quarter, that target is a long way off.
Analysts say Cisco underestimated how hard it would be to transfer its strengths in the switches that direct data traffic over computer networks to the new market. Storage switches traditionally rely on different technology than computer-networking gear and are marketed differently to big corporate buyers. "Some things are a little bit more complex than what you would think," says Tam Dell'Oro, president of the research company bearing her name.
Yet Ms. Dell'Oro, and other analysts, say Cisco is making steady progress in resolving its problems, potentially setting the company up for big gains next year. Its technology generally wins high marks. The manufacturing, pricing and sales missteps are largely history. Tuesday, Cisco recruited a new ally to peddle its gear, storage-computer maker Network Appliance Inc.
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For Cisco shareholders, the struggles come with a silver lining: They will pay less to acquire the internal start-up, Andiamo Systems Inc. Under a formula worked out in 2001 that relies heavily on Andiamo's sales, Cisco could have paid as much as $2.5 billion to acquire the 56% of Andiamo it doesn't already own. But calculations from publicly available data suggest that the purchase price will probably be less than $1 billion when it completes the deal early next year.
Even at that price, "if you look at the performance compared to the investment, you have to say it's a bad decision," says Richard Lee, chief executive of Storage Consulting Group Inc., a Ridgewood, N.J., tech-advisory firm. He says Cisco will pay a greater premium, relative to sales or earnings, to acquire Andiamo than investors now place on rivals Brocade or McData.
Betting on Andiamo
Cisco executives acknowledge the early missteps but say they're pleased by Andiamo's results and the unusual corporate structure aimed at creating a start-up atmosphere inside a company of 35,000 employees. Luca Cafiero, the senior vice president overseeing Andiamo, says Cisco's market share is closer to 15%, considering the portions of the storage-switch market in which Cisco competes. "I don't think that's such a bad point" after a year, says Mr. Cafiero.
Dan Scheinman, Cisco's senior vice president for corporate development, says the Andiamo acquisition will prove to be "a good deal for Cisco shareholders." Cisco is the sole backer of Andiamo and has invested $170 million so far to develop Andiamo's products. Andiamo's 315 employees are the only other shareholders, and many are in line for multimillion-dollar windfalls.
Those rewards provoked grumbling from other Cisco employees. But Cisco executives say the unusual structure helped the company build better storage switches quicker than a conventional approach. Craig Griffin, a director of business development, calls it "a way to supercharge development."
In a way, the Andiamo deal is a remnant of the tech boom. When Cisco executives began discussing storage switches in mid-2000, research firms were projecting that the market would reach $7 billion by this year. In the fall of 2000, the market capitalization of Brocade, an early market leader, briefly surpassed that of General Motors Corp. Cisco formally created Andiamo in April 2001.
'Competitive Bloodbath'
By that time, however, corporations had started cutting back on tech purchases. When Cisco introduced its first products in the fall of 2002, sales of storage switches had essentially stopped growing. Rather than reaching $7 billion this year, industrywide sales will barely top $1 billion.
Cisco ran into problems almost immediately. Executives sent conflicting signals about whether Cisco would sell the storage switches through its own sales force, or through the big makers of storage systems, such as International Business Machines Corp. and EMC Corp. Cisco ultimately chose to work through the system makers, but it had to compete for those firms' loyalty with Brocade and McData. Then, McData jolted Cisco by sharply cutting prices. Cisco responded by slashing its own prices, but the resulting drop in revenue meant that Andiamo missed CEO Mr. Chambers's sales target for the fiscal fourth quarter that ended in July.
Mr. Lee, the consultant, says Cisco's entry into the storage-switch market has led to a "competitive bloodbath" that is hurting Brocade and McData without really helping Cisco. But Jay Kidd, vice president of product management at Brocade, says his company's revenue has grown quarter-by-quarter this year and that Cisco hasn't been "highly disruptive." Brocade customers "tell us they have no reason to change," says Mr. Kidd.
Mr. Lee says next year will be crucial for Cisco's storage strategy. Either Cisco makes big gains on its rivals, he says, or it will conclude that "this is too tough a business to be successful."
Write to Scott Thurm at scott.thurm@wsj.com2
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Updated December 4, 2003
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