Cisco Eyes Pricing on Software

Chambers says company may reduce bundling

LAS VEGAS -- Despite criticism from some customers about Cisco Systems Inc.'s pricing, CEO John Chambers said last week that the company may not be charging enough for its technology and needs to modify its practice of bundling software with its networking hardware.

"We need to evolve our software strategy," Chambers said during a roundtable discussion with reporters at the Cisco Networkers 2006 user conference here. "We have a good value proposition [for users]. Do we charge as much as we should, or as much as we could? Probably not."

John Chambers, CEO of Cisco Systems Inc.

John Chambers, CEO of Cisco Systems Inc.Chambers didn't disclose any specific pricing plans, and a Cisco spokeswoman said the company wouldn't comment further on the matter.

Several users at the conference said they were surprised by Chambers' comments, and some wondered whether Cisco will further increase its prices for what many users and analysts already consider to be the most expensive networking equipment and support services on the market.

"My skeptical side wonders if this is a way to raise prices," said Robert Fort, director of IT at Virgin Entertainment Group Inc. "But on the other hand, I wonder if there is some opportunity here [for more pricing options] that I don't know about."

Virgin Entertainment, a Los Angeles-based subsidiary of Virgin Group Ltd., uses nearly 500 Cisco voice-over-IP phones and related gear in 15 stores and at its headquarters. The hardware cost the music retailer about $1 million and was installed last fall.

"We've done very well [on pricing], but Cisco is the Cadillac of networking," Fort said. He added that he shares the widespread perception that users pay premium prices for the networking market leader's equipment and services. However, using Cisco's products instead of rival offerings that aren't as well supported may result in a lower total cost of ownership in the long run, Fort said.

David Langford, vice president of technology at Smart City Holdings LLC in Lake Buena Vista, Fla., said he likely would be opposed to paying separate fees for Cisco's Internetworking Operating System (IOS) software and other products. "It depends on how they do it, but on the surface, I'm against it," he said.

Langford said that bundling IOS with Cisco's hardware makes budgeting and accounting for networking projects easier for Smart City, a provider of communications services to convention centers.

Chambers made his comments about pricing after he was asked whether Cisco charges too much for its products and services. In response, he said that customers have long benefited from performance increases. "One thing we haven't done well," he added, "[is] we haven't charged for software with ongoing fees."

Cisco lumps what it charges for much of its software into the cost of maintenance contracts, Chambers said, adding that the company should more precisely show customers what they're paying for. "There will be some elements of our software strategy that will be bundled forever," he said. "There will be others that will evolve out, and we'll allow customers to choose what they want or don't want."

Chambers also said he thinks that the way Cisco treats software now is ironic, given that half of its engineers are software developers. He contrasted the company's approach with the ones taken by large software vendors. "All the major software companies in the world charge major amounts for upgrades and regular things, and customers don't even blink about that," Chambers said.

Cisco bundles IOS with all of its routers and switches, allowing users to download upgrades for free as long as they sign a contract for one of the many technical support plans offered by the company, said Zeus Kerravala, an analyst at Yankee Group Research Inc.

Cisco does sell numerous communications applications, as well as network and security management tools, on an annual-license basis. But Kerravala contended that the vendor is "leaving money on the table" with its software products and said that it hired a pricing expert last year to help develop a software pricing strategy.

If the company does start charging separately for IOS or other technologies that are now bundled, some users who are behind on software upgrades could see their overall costs go up, Kerravala said. But, he added, costs could drop at some large Cisco shops that may now be paying more than they need to for technical support.

Copyright © 2006 IDG Communications, Inc.

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