Scientific Atlanta’s first set-top box designed to bring interactive services to the home may have flunked out in 1993. But a dozen years later, the Lawrenceville, Ga., company’s prowess in delivering and managing video signals in the home and supporting the operation of complex television distribution systems paid off. The company, founded in 1951 by a group of Georgia Institute of Technology professors, now generates $1.9 billion in sales in a year and was sold for $6.9 billion to Cisco Systems Inc., a $25 billion-per-year networking giant based in San Jose, Calif., whose routers and switches dominate the innards of the Internet. Not a bad payoff on the professors’ original $600 investment. Cisco CEO John Chambers recently talked with editor in chief Tom Steinert-Threlkeld about how Cisco expects to earn a payoff on the acquisition of Scientific Atlanta, one of the two main suppliers of set-top boxes, digital recorders and headend gear to the cable industry.
MCN: So, over the last 14 years, you’ve purchased over 100 companies. You do about seven a year. Why Scientific Atlanta and why now?
John Chambers: We make acquisitions mainly to enter new markets. We were a router company. We acquired a switch company. When we were a router and switching company, we acquired a security company. Now, as we move toward the video quadruple play with mobility, Scientific Atlanta was the very logical move.
Great culture, great people. And most importantly they can really make video work. And it’s hard to do. It’s more of an art than a science.
MCN: The timing seems to be good now. But it’s almost a move you would have expected Cisco to make two, three, four years ago.
JC: Actually, a number of the leading cable players, particularly Time Warner, suggested it to me almost two and a half years ago. [Mike LaJoie, chief technology officer at Time Warner Cable] said, 'John, you’re pleased with your growth here?’ And I said, 'Yes I am.’ He said, 'You shouldn’t be, look at how little of the budget you’re getting.’
He said if you think about a move in video, and obviously the advice is on who we like here, you could become much more strategic to us as well as larger. However, at that time we did not have as much confidence with the Time Warner, the Comcasts, the Coxes of the world, etc. And we needed to rebuild that confidence before we built something on top of it.
MCN: This is the biggest acquisition you’ve made. What are the difficulties you face in integration that you haven’t faced in previous acquisitions?
JC: Well, we’ve done three acquisitions of about this size, either as a percentage of our market cap, for around the $7 billion dollar range or a percentage of our total number of employees.
This one will actually be one in my opinion one of the easier integrations, because the cultures are remarkably similar. They’re an extremely well-run company. Jim MacDonald can almost finish my sentences and I can finish his when we describe customers or people or thoughts or process.
So our vision of how the industry evolves is very similar.
MCN: Will you keep the Scientific Atlanta name in the market like you did Linksys?
JC: Linksys is a brand for the consumer. Scientific Atlanta is a brand in the service-provider marketplace. So we are calling it Scientific Atlanta, a Cisco company.
MCN: The quadruple play is a bundle. You come out of routing and switching; now you’re getting into video. How will you bundle your products and services for the multichannel video market?
JC: The answer is: Very tightly. But the important issue here is now that it’s obvious that this quadruple play is going to occur and quote bundling will occur, it is too late.
You had to think about this three, five, seven, eight years ago. So in 1997 at Comdex [the information-technology trade show] in Las Vegas, we outlined how this would come together … and that the future would be based not only on the services coming together with all communications going into the network, but we described it in terms of the network tying together these various technologies where it would become the platform of the future.
So we made that decision almost eight years ago. And we began to build our products, our strategy, our implementation across service providers, enterprise, commercial and the home. First, not really tying them together, then loosely tying them together and then over time tightly tying them together.
So I believe this consolidation of the market is inevitable. We fully intend to lead in that marketplace and maintain our industry leadership of number one in almost any product area we go into, which no high tech company has ever done before in more than two or three product areas.
And I think that really comes back to the basic philosophy that innovation isn’t just about doing it yourself.
MCN: And another high wire act that you’ve got to perform and execute well on is serving multiple customer sets within this market. You now become an arms supplier to cable companies, telephone companies, mobile broadband companies, in all likelihood satellite companies. How do you keep them all satisfied?
JC: Well, I prefer to use the term the Switzerland of the industry as opposed to the arms provider, for many reasons. And most important, that’s how our customers are going to describe it now.
If you would think about our heritage coming out of the enterprise marketplace, we are the major provider of technology to all the major financial institutions in the world, all the major automotive companies, all the major airline companies. We had a very strong relationship with each customer, each customer had different expectations for us.
So it really depends on what the companies want. If we do our job right, we’ll provide the best products, the best integration, the lowest total cost of ownership, and the ability to protect their investment in ways that others can not.
MCN: Let’s take a practical example. In the Scientific Atlanta world for decades, its biggest partner has been the cable industry. Now it’s shipping about 50 tons worth of equipment up to Kansas to develop the [AT&T Inc.] Project Lightspeed national headend and network-management center. So your equipment, Cisco equipment, now is creating the infinite-channel television service of the future. How do you then to go back to Glenn Britt, CEO of Time Warner Cable, and other cable operators and provide them with the capabilities to do something that will be an order of magnitude better that what you’ve just now done or are in the process of doing for Project Lightspeed?
JC: I think the best products will win if you integrate them together. And so then, it’s more a question of what services do the various companies put on top of it? Glenn and Time Warner is obviously our largest and best relationship in the cable industry, both for Scientific Atlanta and potentially for Cisco in total.
But you’ll see us do very well with Comcast [Corp.], Cox [Communications Inc.] and the other players as well. So what I believe we will do is each of the players will say here is, how I’m going to differentiate [myself], and that’s more of a business-strategy issue. Where our job is to say, 'How do we help them implement that business strategy?’
Some will allow us to get it very, very close and Time Warner is going to be, I think, one of those companies that will allow us to do it. Others will keep us more as a strategic-gain vendor, if you will, or provider to them, if you will.
MCN: What do you see as the opportunity for Cisco both in the home and in consumer electronics?
JC: Consumer electronics may be the wrong choice of words. We want to say, 'How do we enable the electronic devices in the home to connect to the network in a way that allows this quadruple play to apply practically?’ Not just in the home but as you rotate over to the car, as you rotate on the move, as you go into your enterprise business where you work, etc. — going over a combination of networks.
And I think this is one of the things that some people have missed. Cisco is the leader in the network of networks, in other words, the No. 1 player in the enterprise networking, the No. 1 player in the IP service-provider networking, the No. 1 player in the commercial networking. And now the No. 1 player in the home.
And so that gives you a lot of capability for these technologies to play together.
MCN: What integrated services are you thinking of in particular?
JC: Almost all. And I say that kind of openly in terms of our dreams and aspirations. If you think about the services that can be provided to the user, I believe that the way that we will communicate both within the home, the way we’ll communicate to our family across the country or around the world, the way we’ll interface from the home into business will be a combination of data, voice, [and] video, with mobility.
[These services] will change the way we literally watch TV. I think it will not be too distant in the future that we will be able to watch a sports game from 10 or 20 different angles, do our own instant replays.
Your ability to be able from the home to know where your children are. And your first reaction is there are maybe times I don’t want to know if they’re teenagers but yeah, you do want to know where they are. The ability to do a true telepresence call with your family in the future.
The ability to integrate all elements of the home and so when you have a problem, the service provider, cable company or the telco company can nearly fix that problem without having to roll a truck. Or if they roll a truck they already know what the issue is.
MCN: Sun Microsystems CEO Scott McNealy used to say that the network is the computer. You now say the network is the platform. What’s the difference?
JC: Well, the platform is the way that you deliver goods and services and applications to the users. And if you think about that, it isn’t just about where the processors are or where the information is stored or where the application resides.
That will be transparent over time, but you won’t care what your device has on it locally, whether it’s processed there or the application is there, it’s a set-top box or a server there at your house, it’s at a POP [point of presence] down the way or it’s somewhere in the corporate data centers or somewhere on the World Wide Web.
MCN: And that means that what we have considered consumer-electronic devices become network devices, they become access devices. And isn’t the next logical thing for Cisco to get into the access-device market?
JC: We will bring out certain products ourself where the ties are very tight. But we will also do it off industry standards so other players can interface throughout the networked home as well.
MCN: At the present, correct me if I’m wrong, I think Scientific Atlanta revenues will add $220 million, $240 million a quarter to your revenues. You already have $6.5 billion of quarterly revenues. That’s not going to be an earth-shattering addition.
JC: Scientific Atlanta runs about $2 billion in sales a year, so about $500 million in a quarter.
The [$240 million] is how much it would contribute in terms of our statement to this quarter because we will be adding them about half way through the quarter is what we projected. But in terms of the market a simple fact that I think really illustrates the opportunity here.
A half-an-hour video is the equivalent of a year-and-a-half of e-mail. Video is just starting to go over the Net. If we communicate primarily through video-on-demand, which is how I communicate within my company today, our employees communicate more and more through video-on-demand, you begin to combine data, voice and video with mobility.
You’re talking about the ability to load networks, perhaps not at 100% or 200% a year [growth rate] but what they saw in Japan in 300% to 500% a year.
So if there is such a thing as a [killer] application, it is video.
But video by itself will not get the job done. It’s how you combine this unified communications if you will. The ability for data, voice, video and mobility literally to make it completely seamless to user experience.
It used to be an application to a device. Now you’re talking about any application to any device or any device to any application the reverse way. That opens up a lot of room in terms of what video could mean to the future.
MCN: Any surprises so far in merging with S-A?
JC: I think the merging surprise has been how good it works and how similar the cultures were. Very often when you do an acquisition then after the acquisition then you find out all you didn’t know and sometimes those are unique bumps.
It’s been the reverse at Scientific Atlanta. The more time that we’ve spent together, I think, the closer our cultures have grown together. A lot of what we viewed [as] their skill strengths were not only there, but even better. Most important when you talk to your customers their eyes light up in terms of their opportunities, and then they say don’t mess it up.
So I guess the biggest surprise is that there hasn’t been a big surprise.