Cisco may be in a valley now, but broadband could return it to peaks

"I call this the couch commander's dream," says Rob Sprenger, holding up a futuristic "web tablet" which operates the TV, DVD, VCR and music library in the living room of 2001 Internet Way. "I can even take it to the garden with my beverage of choice and from there turn on the play list, the microwave, the lights or the speakers on the patio, or start the Jacuzzi bubbling."

Moving through the house he indicates a bedside picture frame which downloads new images in the middle of the night "for granny to see in the morning", a voice-over Internet telephone which can call Australia for nothing, and a fridge designed to anticipate faults in its motor and summon a repairman with instructions on what part to replace.

Next he produces a Palm Pilot and shows how to call up a live picture on its screen of any part of the house, so that when he is in the car or the office he can check on the kids, the repairman, or whether he left the garage door open. 2001 Internet Way is a show house for the future located at the headquarters of Cisco Systems, the giant Silicon Valley company specialising in Internet solutions, and Mr Sprenger is its guide. It is the future, and as has been said before about trends set in California, it works, up to a point.

There is, however, one problem. To operate, the Internet home needs a broadband cable network, which is still unavailable to the vast majority of Americans and likely to remain that way for many years. This is a big impediment to the fulfilment of the American Internet dream. Only 8 per cent of US families have access to broadband today, compared with, say, South Korea, which has four times the amount of broadband per capita than the US.

The show house, set amid the green and grey futuristic Cisco modules which cover acres of the Valley floor, stands therefore as a metaphor for the thwarted ambitions of Cisco itself, and of John Chambers, the chief executive and visionary leader for the New Economy.

Mr Chambers, (51), is the Elmer Gantry of the Internet revolution. He sermonises with boyish enthusiasm to world leaders, business executives and visiting journalists alike about the future Internet-centric world in which everyone works more productively and more enjoyably.

Wall Street was captivated by John Chambers during the Nasdaq boom, and in March last year valued Cisco Systems at $555 billion (€645 billion), making it briefly the most valuable company in the world. Its corporate culture of invention and frugality was extolled as a model for the egalitarian new age. Executives, not excluding John Chambers, work in modest windowless offices with functional Ikea-type furniture. They fly economy class and drive their own cars. Cisco canteens display notices urging staff to book visitors into Cisco-preferred hotels - which cost $162 a night "rather than the Santa Clara Marriott at $325". "Frugality is a religion," said vice-president Tom McCabe.

Cost-cutting has now become a matter of survival. Cisco is suffering the biggest slump in its history, due to the sudden downturn in the information economy which Mr Chambers likened to a "100-year flood". Just eight months ago, sales of Cisco's Internet solutions were growing at 60 per cent annually, but in the current quarter will fall 30 per cent, as its customers struggle to survive. Share value has plunged from over $80 in March last year to under $18 this month. Cisco is no longer in the top ten US companies. In April the company wrote off $2.3 billion in useless inventory.

This has been a seismic shock in the valley of innovation. Cisco Systems had been a jobcreation machine, building a workforce from 254 in 1990 to 34,617 in 2000. Most new hires joined through the 70 acquisitions Cisco made from 1993 to 2000. But in April Cisco announced that it would lay off 8,500 workers, 1,600 of those in the Valley, and freeze salaries and hirings. There have been no acquisitions of companies this year.

Mr Chambers concedes that Cisco got it wrong and did not anticipate the depth of the economic slowdown or the retrenchment in the Internet economy. There is an acute irony in this. Cisco closes its financial accounts, online, every evening, and boasted of this as an example of how the networking equipment it sold made it leaner and faster and able to prevent Old Economy problems, like excess inventory, build up.

The system failed its champion. Cisco got ahead of itself last year by building inventories to cope with parts shortages which were preventing it from meeting a rush of orders on time, a failure that forced customers to wait months for equipment ordered and threatened it with loss of market share to rival companies like Juniper Networks. The problem was magnified when some clients double-ordered and triple-ordered to get speedy service, then cancelled once a delivery was made.

In addition, some of the upstart carriers which tend to favour Cisco equipment more than the established telephone companies, and which had borrowed money from Cisco to buy its solutions, went under. A number of companies Cisco acquired also went belly-up, including a fibre-optic switch maker bought in 1999 for $500 million. And telecoms companies on which Cisco relied to sell its gear began to cancel orders after over-extending themselves.

Cisco was like a speedboat on a smooth lake that dropped off a waterfall onto rapids, said Mr Chambers in company headquarters at Milpitas, just north of San Jose. Like most of his staff he was dressed in a sleeveless golf shirt, as the air conditioning has been modified to 78 degrees farenheit to save power and money, and employees are now allowed to wear light clothing (though he said he drew the line at Bermuda shorts which were "too challenging").

But how did Cisco get surprised if its much-vaunted internal order system was so good? "Everyone was surprised," he said. "We never built models to anticipate anything of this magnitude. If I knew what was going to happen I sure wouldn't have built up the inventory. What did surprise us was how high the peaks were and how low the valleys of the IT economy."

His strategy now, apres le del- uge, is "to move from focusing on absolute revenue growth to focusing on profitability and earnings contribution".

The company has created an "e-hub" to read warning signals higher up the demand chain, vital in a business where technologies change so rapidly they can be obsolete in 12 months.

The slowdown had brought a "short-term challenge" but in the long term was likely to be no more than a "speed bump", he said, emphasising he has not lost the faith. Warming to a theme repeated at countless conferences and meetings with world leaders before and since the meltdown, he declared (still with a smile on his eager face) that "in the future everything gets cheaper, everything gets connected, voice data will be free, jobs will go global, ecosystems will replace value chains", and "a decade from now every company will be an e-company".

Meanwhile, Cisco still does big business. It has service contracts with most major US corporations and is in demand by domestic and foreign telecom networks and companies like BP and British Airways. It has $17 billion in cash. Cisco remains the largest business-to-business company in the world with $1.4 billion orders a month on the Internet, said Mr Mohsen Moazami, managing director of Internet Business Solutions at Cisco, though he acknowledged that in the present climate, potential clients tended to invest capital only if there was quick profit, and not if it just meant slightly faster PCs.

Mr Chambers emphasised that one of the most important elements for the development of the IT economy, was broadband access. "Broadband buildout is slowing, the competition isn't there," he said, adding that it was a challenge that the US must take up.

"It is now the key technical issue facing the US, and the key economic issue," he said. If there was not wide bandwidth to the home and small businesses, applications wouldn't grow as rapidly, he said.

Nor, he might have added, will the Internet house become a standard feature in US suburbs for a long time to come.