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Technology Stocks : CSCO - Cisco Systems

CSCO 73.11

+0.3%

Oct 31 9:30 AM EDT

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To: damniseedemons who wrote (27)	12/14/1996 7:48:00 AM
From: Rudi Strobl	of 69

Your post # 27: "what was so bad with lowering margins ... as long as revenue increased". The conundrum is "as long as revenue increased": This works as long as the market expands for the widget itself; i.e. that there is market elasticity. CSCO = effectively the market in many areas, but not the on the low end (3COM is well entrenched there). So CSCO could increase revenues in this segment by taking share, say from 3COM. However, there is a limit to this revenue growth. While CSCO units may grow in volume at the expense of its competitors, prices will decline eventually offsetting the revenue gains from unit volume. This development will both contribute and accelerate the commoditization of this market segment. If CSCO were playing in this market segment only, it would then have to reduce its fixed cost structure accordingly to maintain decent (low end) margins. The winner is generally the company that can attain lowest cost producer status. But this is not what we are dealing with here. CSCO has a mixed product/margin portfolio. The fixed cost structure is shared by all products whether hi or low margin. Competitive differentiation is based on the value added by these human resources, not the lowest producer cost position (CSCO's value proposition = "Dear customer, we can take care of your entire network needs so you can go focus on your business"). Ultimately, it is not in CSCO's interest to accelerate the commoditization of the low end router market (say, at 3COM's expense) because any incremental dollar of margin contributes to absorbing the fixed cost structure upon which the entire range of products and services is built.

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