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Cisco Systems Inc. CEO John Chambers sees a market where the broadband connection is merely the ante and the real game is in execution and services.
Chambers emphasizes that the winners in the volatile broadband Internet game will get to market early and won't get caught behind the commoditization curve, where products become so common they are offered free. Such was the case for long-distance voice service as it soon will be for high-speed data, he says.
And while cable networks may have the early market lead, they will only win the battle against telephony competitors if that commoditization process moves quickly. "What will be interesting is the how long people need to have time to make the transition," he says. "I personally think that if it happens rapidly, the cable players have a much higher probability getting margin market share."
Two to three years is the window," he adds. "If the cable company doesn't have the market share in two to three years they are going to have a real challenge from the ILECs. They have deeper pockets, they have more of the branding and customer touch."
In a recent get-together with Broadband Week and other journalists, Chambers said that cable operators in particular have to get faster at generating new revenue.
"You can't just work on getting access to the home. And then if you look at it mathematically that the services that they are providing aren't even going to pay for the infrastructure bill they will have a problem. Now, if they are able to say that I'm going to increase my capital expenditures and continue to grow faster than my cash flow is coming in you've got show what is the longer-term opportunity in terms of revenue and you've got to begin to show examples of that. The market is very tolerant if you can show how you are going to get there and they can measure how you are doing."
So what is the biggest impediment for the broadband market? Chambers thinks it is located in the last several feet to the home - his, to be specific. At his own house in the Silicon Valley he had to tear up part of the street to install a T-1 line because neither cable nor DSL technology had the reach to deliver broadband to him.
"I think the number one issue is just getting the last provision now at a place where you can either give me one option would be great - but two would be even better," he says. "Then I think about how they make money, because if they don't make money, they are not going to provision out with the speed that you want. That's why I keep coming back to services and how do you get the revenues so that they can generate the money in the capital markets or through the cash flow."
Survival plays into that equation. While much is made of the competition from DSL providers, Chambers thinks cable operators don't see cable modem rollouts as vital to their survival.
"At the present time there is really nobody breaking away," he says. "They are all moving OK but not as fast as many people including myself would love to see them move."
Meanwhile, the capital markets have been slamming broadband players in recent months. Chambers thinks investors are now demanding more of a reasoned approach, balancing potential growth with a fair assurance of profitability.
"Now I think there is a balance on 'Tell me what your top-line growth is going to be and tell me what your path to profitability is going to be and tell me how you are going to get the cash to fund the other.' I would argue it isn't an "or, or, or" it's all three go hand in hand."
Cisco itself has also entered the funding fray, investing more than $1 billion in 110 companies. In some cases they are in markets Cisco wants to enter, while others are companies Cisco may look at buying outright, Chambers says.
As with other investors, Cisco looks at a company's growth and profit plan.
"In the end I think what the market has really come back to and really focused on is "Tell me about your profit growth,'" he says. "That's what will fund availability of capital and the other elements."
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