This Is What Happens After A Bubble Bursts... | Cisco's Plunge - YouTube

INTRO: Today, there are a dozen companies with a

market cap above $500 billion, most of which are tech companies.

But, none of these companies were actually the first company to reach the $500 billion

mark.

The first company to reach this milestone was actually Cisco way back in 2000 at the

peak of the dot-com bubble.

This made Cisco the most valuable company in the world but after the dot-com bubble

burst, Cisco lost 77% of its value and it has never recovered to its former peaks.

Looking at the stock graph, it seems like Cisco has been making positive progress, but

this is actually rather deceiving.

You see, Cisco has been aggressively buying back their stock over the past 20 years.

So, the stock has to reach much higher levels for the company to be worth the same amount.

Currently, the price to beat is $118 meaning that Cisco has to rally nearly 100% just to

beat its dot-com peak.

So, here’s how Cisco became the world’s most valued company and their fall from grace.

THE FOUNDING COUPLE: Taking a look back, the story of cisco dates

back to a Stanford couple named Sandy Lerner and Leonard Bosack.

Sandy was the director of computer facilities, and Leonard was in charge of managing the

computers.

Throughout the early 1980s, Stanford students and staff commonly used something called the

Blue Box to link all the computers in the school.

The Blue Box was designed in-house by Andy Bechtolsheim and William Yeager.

Andy developed the circuitry while William developed the software.

The Blue Box was just a simple multiprotocol router, but 40 years ago, this was some pretty

advanced tech with significant commercial potential.

However, William didn’t want to sell the Blue Box commercially, and Andy had already

cofounded Sun Microsystems, so Sandy and Leonard decided to commercialize the product themselves.

And with that, the duo launched Cisco on December 10, 1984.

The name “Cisco” was a reference to San Francisco and the logo is of course the Golden

Gate Bridge.

Despite the quick start, the early days were not smooth by any means.

You see, neither Stanford nor William were happy to hear that these two had stolen their

technology and were trying to profit from it.

William claims that he never gave permission to sell the technology commercially, and Stanford

contemplated filing criminal charges against Cisco for intellectual property theft for

years.

But, eventually, the two parties would meet in the middle and Stanford would agree to

license the technology to Cisco in 1987.

With Stanford on their side, the couple could freely sell their router which was extremely

lucrative.

By the end of 1987, Cisco was selling $250,000 worth of routers every month.

But, the couple had a much larger vision for the company, so they partnered with venture

capitalists Don Valentine and Sequoia Capital.

During this funding round though, the couple lost majority control of the company, and

this was the beginning of the end for the duo.

Don Valentine brought in a new CEO named John Morgridge, and this guy did not get along

at all with the founders.

First of all, he went ahead and replaced several of the managers at Cisco many of whom were

friends with the founders.

And after Cisco went public in February of 1990, he went ahead and fired Sandy herself.

Leonard would instantly resign from Cisco in protest, but this didn’t really accomplish

anything.

The couple also sold all of their stock for $100 million.

To put that in perspective, their 30% stake would’ve been worth $150 billion at the

peak of the bubble.

So yeah, Sandy and Leonard got screwed over, but in a way, it’s actually quite poetic.

The couple stole the technology from Stanford and the VCs stole the company from them.

FLYING HIGH: Though the founders were completely out, this

wasn’t a bad thing by any means.

While John Morgridge had a lot of beef with the founders, he knew exactly how to grow

the company.

At first, John targeted corporate clients with large scientific departments.

Cisco promised to unify their science departments by linking all of their tech together.

Around the same time, local area networks or LANs were blowing up in popularity, and

Cisco became one of the go-to companies for setting up and linking LANs.

Between 1991 and 1992, Cisco’s sales nearly doubled from $183.2 million to $339.6 million.

Similarly, their net profit jumped from $43.2 million to $84.4 million.

This explosive growth won Cisco the title of second fastest-growing company in the US.

But, it didn’t take long for mainstream competitors to enter the scene with the biggest

one being IBM.

You see, IBM had been growing their own network business for years called System Network Architecture

or SNA.

SNA was a proprietary network that was specific to IBM computers, and given that SNA was limited

to IBM computers, Cisco more or less ignored the network.

But, in September of 1992, IBM announced that they were going to license their Peer to Peer

Networking protocol used in SNA.

Cisco instantly fired back claiming that they were going to modify their own Peer to Peer

Networking protocol so that it can be used with SNA.

Despite this fiery start though, Cisco gave in within just 12 months and ended up helping

IBM develop and license the protocol.

Aside from cooperating with IBM, Cisco decided to partner with AT&T as well.

In 1993, we saw the emergence of a new data communications protocol called ATM or asynchronous

transfer mode.

ATM allowed for high-speed transfers of data, voice, video, and images without the use of

routers.

Instead of fighting the new technology and embracing routers, Cisco decided to enter

a joint development project with AT&T and StrataCom.

Together, they developed the standards for the new technology and ensured that it could

be used with existing networks.

These high-level partnerships combined with the rapidly growing network space allowed

Cisco to continue flying high throughout the 1990s.

By 1998, Cisco crossed the $100 billion mark in market cap, and in 1999, they would go

on an acquisition spree.

They bought a total of 17 companies that year with valuations as high as $6.9 billion.

It seemed like a trillion valuation was just around the corner, but then, the dot-com bubble

burst, and that marked the end of Cisco’s domination.

RETURNING TO EARTH: Though Cisco’s stock price plummeted, the

executives were still quite optimistic about the future.

After all, it’s not like the crash was specific to Cisco.

So, Cisco turned their focus onto new avenues for growth which led to the consumer space.

Back in the early 1990s, regular consumers had basically no need for routers and network

devices, but with rapid internet adoption, everyday consumers were quickly becoming a

larger part of the picture.

So, in 2003, Cisco spent $500 million to acquire the consumer router and network company Linksys.

Soon after, they launched their Human Networking advertising campaign.

This campaign basically marketed Cisco’s vision of not just linking together technology

but linking together humans from around the world.

It’s not really clear how effective the campaign was at increasing sales, but glancing

at the comments, it looks like people really liked the music they used in the ads.

Anyway, aside from targeting consumers, Cisco also looked for new ways they could target

corporate customers.

They had already linked together infrastructure, so the next natural step was to link together

people and that brings us to the Webex acquisition.

In March of 2007, Cisco acquired WebEx for $3.2 billion and this got Cisco into the video

conferencing space.

On top of all this, Cisco was also trying to expand into emerging markets.

For example, Cisco spent $1 billion to establish a globalization centre east in Bangalore India.

They also purchased several companies from emerging markets such as Starent Networks.

Despite all their efforts though, Cisco hasn’t really gone anywhere in a long time.

If you look at their revenue graph, it hasn’t moved in a decade, and their net income graph

doesn’t paint a better picture either.

So, what happened?

STAGNATION: One of the biggest factors holding back Cisco

is being spread too thin.

Throughout the early 2000s, Cisco constantly focused on expanding into new sectors and

industries, but they didn’t execute any of these particularly well.

For example, remember how Cisco bought Linksys for $500 million in 2003?

Well, they sold it to Belkin in 2013.

The acquisition amount was not revealed, but it likely wasn’t that favorable for Cisco.

Similarly, the WebEx acquisition didn’t go too well either.

Cisco’s vice president of engineering, Eric Yuan, suggested transforming Webex into a

mobile-friendly video system.

And given that Eric was one of Webex’s first 20 employees and knew the industry inside

and out, it probably would’ve been a good idea to listen to him.

But instead, Cisco rejected his idea and Eric ended up quitting and founding Zoom.

As you can see, it’s not like Cisco was entering bad industries.

In fact, they were entering great industries, but they weren’t executing well in any industry

which made it easy for competitors to overtake them.

Speaking of competitors, we have Cisco’s second shortfall which is market saturation.

One of the keys to Cisco’s fast growth was that there was very little competition in

the 80s and 90s.

But now, the server, router, and networking markets are extremely saturated.

Basically, every tech company you can think of has their own server business whether that

be Netgear, Dell, Huawei, or Lenovo.

This increased competition has made it much more difficult to secure market share and

shine above the rest.

But, by far the biggest problem with Cisco is that their core business is losing relevance.

Historically, the core of Cisco has been selling networking hardware to corporate customers,

but many corporate customers no longer need Cisco’s hardware.

Instead of buying hardware from Cisco and using the hardware to offer cloud and server

solutions, corporate customers are just building their own hardware.

Companies like Google, Amazon, and Microsoft have no desire to rely on Cisco for hardware.

Now, it’s not like they’ve cut all relationships with Cisco, but with time, they’re becoming

more and more independent.

And unless Cisco finds a new way to appeal to these customers, it won’t take long for

their stagnation to turn into a decline.

UNCERTAIN FUTURE: Despite all of these shortfalls and lack of

growth, Cisco is still one of the biggest companies in the world.

Currently, they hover around the low 30s on the fortune 500 list with a market cap of

$250 billion.

Looking forward, while Cisco’s networking future isn’t so clear, most Cisco investors

argue that Cisco is no longer a networking company.

Even though a majority of Cisco’s revenue still comes from providing infrastructure,

Cisco investors argue that what’s more important is where Cisco is investing their money.

And the vast majority of Cisco’s investments today are in services, applications, and security.

Whether these investments will actually pan out is yet to be seen, but even if they don’t,

Cisco is by no means in danger of collapsing.

They’re still extremely profitable and it would take decades for such a company to fall.

But if their shift away from networking doesn’t work out, it becomes more and more unlikely

that Cisco will ever return to their former glory.

But that’s just what I think.

Do you guys think Cisco can make a comeback to the top 5 or top 10 companies in the world?

Comment that down below.

Also, drop a like if you’re glad that you didn’t buy Cisco stock in 2000.

And of course, consider joining our discord community to suggest future video ideas and

consider subscribing to see more questions logically answered.