Cisco Affirms its Taste for Small Companies

Despite decreasing share prices that may make a large acquisition more appealing, Cisco Systems Inc. will likely stick to its pattern of buying smaller, more focused niche companies.

In a question and answer session following his keynote address at Cisco's annual Worldwide Analyst conference in San Jose this week, Mike Volpi, Cisco senior vice president and chief strategy officer, says larger acquisitions may make strategic sense but are more difficult to complete from an operational standpoint. Easily integrating a company into Cisco's culture and avoiding "congestion," while retaining talented people, is more important than the strategic aspect of the acquisition, he says.

"The operational plane is where the rubber meets the road," Volpi says. "The operational plane is much harder to meet than the strategic plane. There are opportunity costs with a larger company that may cost congestion."

As a result, Cisco is not likely to depart from its pattern of acquiring smaller, more easily digestible companies located close to Cisco operations here and on the East Coast.

"Fundamentally changing is something we won't do," Volpi says. "That's the model that works and scales. If we change dramatically we will not get the output."

Acquiring or developing internally are two of Cisco's methods for entering new markets. Another is partnering.

Cisco currently has partnerships with Motorola and Nokia for development of IP-based third generation (3G) wireless Internet access devices, but analysts should expect a closer coupling between Cisco and Nokia, Volpi says.

"Wireless Internet is an important tornado market," he says. "Culturally, it's a good fit with Nokia and Motorola"Cisco is drawn to Nokia, however, because of the Finnish company's product breadth and management and marketing of handheld devices, Volpi says. Ericsson, the leader in wireless communications, recently partnered with Cisco rival Juniper Networks to develop mobile IP gateways for wireless Internet access.

Partnering will become trickier, though, as Cisco moves "up the stack" and more into the software industry. Cisco is looking to develop or acquire more service control and communications services software to fill out is AVVID architecture, a reference framework for building voice, video, content and security-enabled enterprise data networks.

Service control and communications services software are the next billion-dollar opportunities for Cisco, says James Richardson, senior vice president of Cisco's enterprise line of business. Cisco will likely bump into some of its "ecosystem" partners as it moves into these markets, Volpi says.

"We are big believers in ecosystems, especially as you move higher up the stack," Volpi says. "Occasionally, we become a member of the ecosystem to accelerate a market we care about. But if we are too strong in the ecosystem it can be detrimental. We will be surgical in going into the ecosystem and up the stack."

Other topics Volpi addressed were the age and comprehension of Cisco's IOS software, and Cisco's view on Gigabit Ethernet in storage-area networks (SAN) and in the WAN. Volpi was asked if it was time to update the 16-year-old IOS code base with a "next generation" operating system that may be more modular, flexible and perhaps a little less comprehensive. Volpi says it's unlikely that IOS will drastically change.

"Age has little to do with it," Volpi says. "The IOS suite of protocols is adapted to the Internet. The code evolves from being in the networks. The crown jewel of IOS is its base of learning. We're better off continuing our innovation on IOS. Its richness cannot be substituted and it can effectively run the core of the Internet."

With regard to Gigabit Ethernet, Volpi says the technology's cost per gigabit per second is a "compelling value proposition" for the metro network, and will flourish in environments needing nothing more than raw, cheap bandwidth. But SONET will be the medium of choice for sophisticated quality-of-service requirements, he says.

As for SANs, the industry will eventually migrate to IP over Gigabit Ethernet to interconnect SAN "islands" and to decrease latency associated with existing SCSI and Fibre Channel storage networks, Volpi says.