1 Surprising Way Cisco Makes Money

With a $133 billion market cap, networking giant Cisco (Nasdaq: CSCO  ) is the largest player in its field. However, competition is rapidly expanding. Hewlett-Packard (NYSE: HPQ  ) , Alcatel-Lucent (NYSE: ALU  ) , and Juniper Networks (NYSE: JNPR  ) are all aggressively pursuing their slice of the networking pie. Yet, in spite of this competition, Cisco keeps up its domination of the industry. To better understand how Cisco keeps up its top-dog position and continues finding new ways to grow, I recently spoke to Inder Sidhu, senior vice president of strategy and planning for worldwide operations at Cisco, and the author of Doing Both: How Cisco Captures Today's Profit and Drives Tomorrow's Growth.

Mac Greer: What is one surprising way that Cisco makes money?

Inder Sidhu: I would say that our services business is a little bit surprising. Our services business is a large business; it is about $8 billion or so, but it is surprising because we actually have very rich margins, in the mid-60%-type of gross margins for that business. It is a little bit surprising because people often think of services as a much lower margin business. For us, services are right up there with product in the mid-60s as a gross margin-type of business. That sometimes surprises people, but it doesn't surprise us internally because we actually have very high-value services which are much more around the intellectual property of Cisco. So I think the high value, highly intellectual property rich-type of services is one of the surprising ways in which we make money. It is an annuity-oriented business, but it is still 65% gross margin.

Greer: And what do you think the biggest misconception about Cisco's business is?

Sidhu: I would say the biggest misconception for us is that we only innovate through acquisitions and the fact of the matter is that about 70% of our business comes from products and capabilities that are developed internally; perhaps 30% comes from things that are acquisitions or spin-ins or other form of innovation, so we have a good, healthy balance between internal and external innovation that we blend, and we have a good balance between disruptive and sustaining innovation. But one misconception that I have seen over the years is that the only way Cisco innovates is through, on the technology side, is through acquisition.

Check out Inder Sidhu's not-so-dirty secret about P&G .