Cisco’s Chambers Comes Clean on Lost Market Share

With over $30 billion in cash and strong market leadership in nearly every business it operates, Cisco Systems is a networking and IT goliath. That doesn’t mean that it’s infallible, however.

During its Analyst Day conference on Tuesday, Cisco (NASDAQ: CSCO) executives explained their plan for future growth and also responded to some tough questions about eroding market share.

“Looking back over the last 12 months, in the first half we lost market share in both routing and switching,” Cisco CEO John Chambers said. “When you have new generations of products and you make changes it literally is years two through five when you get the benefit. The first year or two, when the products are a little bit long in the tooth just as the new ones are introduced, you often lose market share.”

Over the course of the last two years, Cisco has aggressively been updating its routing and switching portfolio with new and updated products. During 2008, Cisco introduced its Nexus core switching lineup and its ASR application services routers. This year Cisco released its ISR Gen 2, which updates its aging ISR portfolio.

“I don’t like losing market share anytime,” Chambers said. “But if watch what occurred in the most recent quarter as an example and look at where we are now, we’re back to gaining share in routing. With the introduction of the ASR 1000, it’s already up with over 1,200 customers and the volume is starting to ramp up nicely.”

During Cisco’s recent first-quarter fiscal 2010 analyst conference call, Chambers said that Cisco had over a thousand ASR 1000 customers at the time, and that he expects sales of $500 million for the platform during fiscal 2010. Cisco’s ASR routing platform debuted in March 2008 after $250 million in research and development.

With switching, the story is a little different as Chambers attributed some of the market share loses to Cisco mismanagement.

“In the switching area we — and this is my fault — we had multiple switching groups which actually at times competed,” Chambers said.

He added that the switching engineering unit has now been reorganized, so that now all of the switching parts development groups report into Cisco exec John McCool.

Additionally, Chambers said the streamlined switching organization now enables switching components like ASICS , as well as software, to be shared. According to Chambers, the reorganization will ultimately lead to a leveling out of Cisco’s switching product direction and market share.

During 2009, Cisco also introduced its Unified Computing System (UCS), which brings Cisco into the server market — and with that, new rivals.

In addition, Cisco competition in its core switching and routing markets has ramped up over the course of the past year, with HP, IBM, Dell, Juniper, Brocade and Alcatel-Lucent all trying to gain share. HP has recently been ramping up its ProCurve networking business unit and is in the process of acquiring networking vendor 3com. Both Juniper and Brocade are ramping up their own businesses and both vendors provide OEM equipment to IBM and Dell as well.

Still, Chambers seemed mostly unfazed.

“If you haven’t got good competitors, you’re not in good markets,” he said. “Make no mistake about it, we’ll see very good competitors in HP; we partner with Microsoft at times, we compete with them sometimes; we partner with Intel and EMC … Always in every market we’ve entered, [we] get a fair share of business.”

Though Chambers added that the key to his company’s competitive success is technological innovation and operational excellence, it doesn’t mean that he thinks Cisco can relax its guard.

“If you ever take competition too lightly, you’re already in trouble,” Chamber said. “So there is a lot of healthy paranoia about it, but we have no fear here.”

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