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| MASTER OF THE INTERNET | |
 July 11, 200 
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ANNOUNCER: Virtually all Internet traffic travels across the systems of one company, Cisco Systems. PAUL SOLMAN: Cisco Systems, the company that wants to be synonymous with the Internet -- and is, at the moment, one of the world's fastest-growing businesses ever, gushing profits at a dizzying pace. CEO John Chambers: JOHN CHAMBERS, CEO, Cisco Systems: We are at the very heart of this new economy, and we're the company that not only is synonymous with the Internet in most people's minds, but we also are the most advanced users of the Internet in the world. We're a company that has the chance to be the most influential and perhaps powerful company in history. PAUL SOLMAN: But how can a company that most of us have never bought anything from already be, according to the stock market, one of the world's most valuable firms? And could Cisco really become the most dominant firm in history? We'll get to those questions in a bit. But to start, how exactly, or even approximately, does Cisco Systems make money? Plain-talking senior VP Kevin Denuccio spoke our language. KEVIN DENUCCIO, Senior Vice President: We're kind of the plumbers of the Internet, and we call it plumbing because we have these wires and cables, and we call them pipes. PAUL SOLMAN: The crucial Cisco product turns out to be a key component of the Internet plumbing system, a router. KEVIN DENUCCIO: The router is what makes the Internet work. It is the intelligence behind the Internet. PAUL SOLMAN: In this room, they run much of Cisco's Internet system. There's a server, a powerful computer on which several of Cisco's corporate web sites reside. There are wires and optical fiber over which digital signals travel within the company, and to and from the outside world, over the Internet. And last, but to Cisco certainly not least, a router, a device that routes the digital signals on the Internet to their eventual destinations. Say you want to visit the NewsHour website, for instance. PAUL SOLMAN: So now I typed in that I want to go to pbs.Org/NewsHour, loyal employee that I am. So what is... what happens now? KEVIN DENUCCIO: So once you're connected to network, this is the intelligent device that works almost like a post office. It understands where you're trying to get to and where that is, and what's the easiest way to get you there, and it actually directs your question, your request, to a server, some computer on the network that's hosting pbs.Org. So every... nearly every communication on the Internet goes through a Cisco router, because it has to find its way around the globe. PAUL SOLMAN: In short, the Internet is just the vast network of wires, fibers, and the rest that hook all the world's computers to each other, and there are tens of thousands of routers, large and small, directing the traffic among them. Big routers are bought by Internet service providers like AOL, telephone companies, corporations, universities-- all large Internet users. These routers cost $100,000 or more apiece. As Internet use mushrooms, so does the demand for them. And the technology is progressing so rapidly, routers need to be replaced every 18 months. So the market is gigantic, it's exploding, and Cisco controls it. But Cisco is not just that, as Marthin Debeer demonstrated to us. MARTHIN DEBEER, Marketing Director: So, Paul, I'm here with the new Cisco IP phone. This is actually the phone that I use every day on my desk. PAUL SOLMAN: This new Cisco product is an IP, or Internet Protocol, telephone, which you can plug into your company's Internet cable and use for all your phone calls, plus lots of other information: Your schedule, the cafeteria menu... MARTHIN DEBEER: Or even the Cisco stock price. PAUL SOLMAN: Can we get the Cisco stock price? MARTHIN DEBEER: Yes, absolutely. Let's see where it closed today. In fact, the market just closed. PAUL SOLMAN: So Cisco is up more than 4%. MARTHIN DEBEER: Yeah, that's what it looks like. PAUL SOLMAN: So I take it you have some Cisco stock? MARTHIN DEBEER: I have a few shares. PAUL SOLMAN: But the real selling point is that once it's programmed with his phone number, Marthin Debeer can connect this handset to the Cisco Internet system anywhere in the building, or the world. MARTHIN DEBEER: Okay, so I'm off. PAUL SOLMAN: Okay, well, have a good trip. PAUL SOLMAN: Say Cisco's Germany office, to which Marthin Debeer now pretended to go, to showcase the advantages of a truly mobile phone. And taking a cue from the ubiquitous white boards that Cisco uses to explain things, we sketched our own impromptu diagram of the Internet and how Cisco's phone connects to it. So say I want to call Marthin in Germany. I take out my cell phone and I send the signal to a local cell tower somewhere, which sends the signal right here to the Cisco campus. So let's say it's sent on an open line to a router, one of those computers that Cisco makes, in Kansas City, which sends it to a router in Bangor, Maine, then down to New York City, say, and then across the big pond, the Atlantic Ocean, over to London, and then to Cisco in Germany. Now Marthin, meanwhile, has plugged in his phone, so he's connected not only to Cisco Germany, but to the entire Cisco network. So now I'm going to call him... (Phone rings) MARTHIN DEBEER: This is Marthin. PAUL SOLMAN: And there he is. So we were beginning to get the picture: Not only does Cisco have a lock on the plumbing of the Internet, it sells new ways to use that plumbing. CEO John Chambers thinks that as the Internet goes, so goes Cisco, and to him that means nowhere but up. JOHN CHAMBERS: There will be no business but e-business in the future. PAUL SOLMAN: No business that isn't e- business? JOHN CHAMBERS: Absolutely. I think people are just beginning to grasp the power. Even the best business minds around the world only in the last year began to understand the tremendous impact this is going to have on their companies, and very often it's the most successful companies or most successful individuals who tend to be slow in catching it. It's the ones who are more paranoid, if you will, or the ones that are struggling that often adjust the quickest. PAUL SOLMAN: Indeed, Cisco has adjusted quickly, expanding into new areas by using its highly priced stock to buy up new technologies, promising competitors. DAN GILLMOR, San Jose Mercury News: And watching Cisco run around like Pac Man swallowing up other companies that might be useful to them, you get the sense of somebody who's moving as quickly as possible not to get left behind. PAUL SOLMAN: Dan Gillmor covers Cisco for the "San Jose Mercury-News." DAN GILLMOR: They want to sell you stuff that works that they can sell you, and they'll buy anything and develop anything it takes to do that. PAUL SOLMAN: If this sounds like the Microsoft monopoly, well, Cisco has been accused of monopolizing the router market. But thus far no one has challenged its tactics, and, as a result, Cisco has continued to grow exponentially, building and building to house both new hires and those who come via acquisitions. But while the pay and stock options are generous, the digs are modest; the perks, humble. Everyone here flies coach. The CEO's office is about the size of a NewsHour correspondent's. Cisco has plenty to feel smug about. JOHN CHAMBERS: Yet we know we could be an also-ran in two years if we don't execute properly. PAUL SOLMAN: Chambers equates Internet years with dog years. JOHN CHAMBERS: One calendar year is seven years in a dog's le; it's seven years in the Internet's life. So changes that took place in our daily living or perhaps in business over decades will now occur in one to two years. PAUL SOLMAN: A case in point: The price of phone. Three years ago, Chambers shocked the industry by predicting it would drop to zero. SPOKESMAN: Could you hear my voice coming through the speakerphone? PAUL SOLMAN: If Chambers is right, phone companies will soon be forced to send our voice signals over the basically free Internet, where Cisco now reigns supreme, a point they were making to customers when we visited. But will the cost of voice communication really drop to nothing? JOHN CHAMBERS: It's now pretty well accepted it will, and our price of long distance calls, for example in America, are going down from 20 cents to 15 to ten to five... it's on its way to two, and it won't be very long before your cable company comes to you and offers you pretty much free voice connections to get your data transport. But over time, people will give away the data connections to attach you to their entertainment. PAUL SOLMAN: But given such rapid change, how does a company stay profitable? JOHN CHAMBERS: You'd better be on to your next product-- your differentiation, your competition will follow-- commoditization. Your next product: Competition will follow, commoditization. What Cisco does either with our products or how we use the Internet for productivity reasons, we're always one to two waves ahead of everyone else. PAUL SOLMAN: One of Chambers' key objectives is to get Cisco to do almost all of its business over the Internet. Sue Bostrom gave us a look, starting with expense reports. SUE BOSTROM, Senior Vice President: I submit it electronically, and I'm paid directly into my checking account for the incidentals in about 48 hours, and my AMEX corporate card is paid directly. PAUL SOLMAN: So you mean, unlike, for example, my own wallet... we're doing this spontaneously. SUE BOSTROM: Right. PAUL SOLMAN: Here we have all these different expense items that I've got here. SUE BOSTROM: You would input those electronically into our line travel expense system, and you'd mail those paper receipts into corporate. PAUL SOLMAN: Oh, I would have to mail them. SUE BOSTROM: You'd mail the receipts in so that when they did an audit, they'd have those receipts available. So it allows us to have one and a half auditors auditing expense reports for 20,000 employees. PAUL SOLMAN: A mere six people to run its entire benefits department. Cisco says it saved $50 million alone by putting its health benefits online. And then there are the customers. SUE BOSTROM: I'll put in my phone number here. PAUL SOLMAN: If Sue Bostrom is a customer, say, contacting Cisco online for help... SUE BOSTROM: And I'll hit "call me." (Phone ringing) SUE BOSTROM: Sue Bostrom. ELECTRONIC VOICE: Call will be answered by... PAUL SOLMAN: The point is Cisco is learning how to do business online, and then selling its know-how and plumbing, to other firms-- just another way to keep the company ahead of the wave; its stock price ahead of the pack. But that brings us back to "the" overwhelming question, at least for investors: Can the company really be worth the Himalayan heights at which its stock haws been selling the past year-- between 100 and 200 times its annual earnings? CEO John Chambers says the numbers speak for themselves. JOHN CHAMBERS: We return about 20% at the current time, after taxes, of our revenues. Our current run rate is over $16 billion. We've been the fastest-growing, most-profitable company ever in history. The analysts are estimating that we'll grow at 30% to 50% per year, and maintaining perhaps the best profits in history in the computer industry. PAUL SOLMAN: Well, of course, that sounds pretty good. On the other hand, if Cisco grew at 30% to 50% for, say, the next decade, it would have sales of between $250 billion and $1 trillion, a sizable percentage of the entire U.S. economy at that point. In the final analysis, then, can the company keep growing for anything like ten human years-- 70 Internet years by John Chambers' reckoning? Well, say the faithful, Cisco will forever teach itself new tricks and remain top dog for years to come. To the skeptics, however, any hopes of becoming a trillion- dollar company, even ten years hence, is simply, to beat the dog metaphor to death, barking up the wrong tree. |
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