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Cisco
Cisco, the Fool, and the Future

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By Jhutchinson
February 20, 2001

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Hello all, this may be lengthy, but I beg you to stick with it, somehow it will be worthwhile.

I've been away from the Fool for nearly six weeks now, and trying to catch up on 1,024 posts is next to impossible. So it was with regret that I learned a few things upon returning:

-Cisco misses, price gets whacked
-Fool restructures, TMFs get whacked

Not a good day. First, to every TMFer that was pink-slipped - thank you for being part of this community. To every TMFer still working the boards, thank you too. And to those of you bemoaning Cisco's 10-point fall recently into the lower 20's...do you still have a job?

If so consider yourself far more fortunate than the above mentioned TMFs; or more fortunate than 250,000 DaimlerChrysler employees who will lose their jobs (perhaps you are one of them?); or more fortunate than those who wagered on a dot-com job and crapped out recently.

Perspective goes a long way, don't you think?

I may have been away, but this is one website, one community that I absolutely need. I have said before how much I value the Fool and the guiding principles by which it operates. I was truly saddened to hear the news. But I was not surprised. As an advertising-supported operation, the writing has been on the wall for some time. Now, I don't expect the Fool to shut down anytime soon, but I believe serious changes are needed. And this is true of the Internet-at-large.

A company in this space, providing a free service and supporting that with business partnerships, advertising space, and product sales (books, Foolish 8 spreadsheet, etc.) must maintain sufficient profit levels to operate, grow, expand. Pretty obvious, right?

So, when I read that the Fool had cut 150 jobs (if memory serves correctly), what is that telling me? What is it telling you?

Compare it to DaimlerChrysler - which is eliminating so many jobs to reduce cost, to boost profit (or in DCX's case, to reduce losses). Think on that for a minute. People have to lose their job in order for the company to make money.

No revenue. Or, more accurately, not enough revenue. Advertising supply on the Internet is far outstripping demand. Classic case of deflating prices, perhaps? If the Fool is ad-supported, and let's be honest, they have a hell of a lot of ads, what has happened to change its profitability model that caused (what I think is) a massive reduction in overhead? I have no way of knowing but I suspect the 150 job losses was close to a 50% workforce reduction.

Falling revenue. I don't know, as well, what anyone else's thoughts are on this but I have some ideas to share with you...and I will in just a minute -

But now bring Cisco into the fold (or any major U.S. company). A tech darling. A mint printing profit after profit. And it stumbled. Yes, even Cisco stumbled. And in its product space, could its woes be the same as the Fool's?

Too much supply, not enough demand? Now, of course there is no recession - right? Think Cisco's numbers will get better? Not in the short term.

And my personal thought on this is that the Fed killed the economy. Yes, as respected as Mr. G is, they overestimated and over-hiked. Now, in January, they have run hard and fast to the other end of the spectrum, having cut 1.00 point out of a total 1.75 points from '99 into '00; and, not to belabor the point, too late for that, what does the Fed's action tell us (forget the CNBC spin)?

They were wrong.

What drove Cisco's growth over the last five years? Internet infrastructure, perhaps? Massive networking equipment sales for an exploding Internet market?

Where is that market now? Sure the hard times at LU and Nortel and other networkers may 'suggest' an opportunity for Cisco to recapture market share.

But when coupled with Cisco's recent struggle, could it not also suggest a larger weakness in the overall technology corridor? I think when you put Cisco, Dell, Microsoft, and a thousand other companies together - and find them all missing earnings and guiding future revenue estimates lower - the picture is pretty clear.

The 50% drop in the Nasdaq was no fluke. And neither is the subsequent drop in 'darling' stock prices. Now, according to IDC, the GartnerGroup and other consultant know-it-alls, companies are not planning on reducing expenditures for technology (I'll have to find that data again, but somewhere around 60% of CIOs are expected to maintain or increase spending in 2001 - and I think I read that here.

Care to wager on that? The picture is fairly clear now. The economy is in trouble - this is no soft landing - but it is also not the time to panic, or take your money out of the bank - none of that 1920s stuff.

The economy is only in trouble NOW. It won't be six or twelve months from now. Our investments are only in trouble TODAY. But one, two, five years from now they won't be (well, they better not be).

Perspective is everything, isn't it?

The fact is the economy was under so much pressure from too many sources; it was acting no less differently than a dam forcing a trillion gallons of water through a one-inch hole. The hole is gonna lose.

But eventually the waters recede, and so too will these waters. Cisco remains at the forefront of a continuing technological evolution. An evolution that has peaked, but not because it's dead, it's been slowed; and, it is also moving in new directions.

I believe that Cisco will resume growth by attacking such new directions, and improving upon existing business models, products, and infrastructure.

What do you believe?

Which brings me back to the Fool.

I would rather have a place where I can share my (sometimes rambling and moronic) thoughts and have a few hundred people tell me I'm wrong, and a few hundred tell me I'm right, and have a place where people I respect (that means all of you) share their thoughts and ideas (and then I can tell them whether they are right or wrong) on stocks we are all investing in.

I would also rather have a place, like the Fool, that is uncorrupted by the media and investment community at large. There is no spin from this site, is there? Everything the Gardner's espouse is deployed in the context of the website. This is as honest a website as you will find as it relates to personal investing and money management.

Furthermore, I would rather have a sense of community (that's what this is, it's a mini-town) where I can go where I want to go, and learn what I want to learn. I don't know if that made sense, it sounded different in my head than when I typed it - but I hope you get the idea.

And now we come a little more full-circle. If Cisco is to survive and grow it will happen by a renewed economy, and as Cisco goes, so go many of its suppliers. (I own Pericom Semiconductor - a wafer manufacturer and 10% of its business is with Cisco - think they aren't hurting right now?) That is not to suggest that Cisco is the only tide to lift all boats. But it is a big part of that tide.

But that begs a serious question. What tide will lift the Fool? Ad revenues will not simply double or triple with a renewed economy. The demand/supply model isn't going to change. As noted above the layoff is about saving money, which suggests either a shortage of income, or a reduction in future expected income.

So I can only see a few possible avenues for the Fool (and I'm no business genius so I may be either flat wrong, or I may be missing others) and they are:

1. Fool merges with larger entity
2. Fool folds/continues to reduce workforce to meet anticipated income
3. Fool couples advertising support with subscription support

As I said I suspect there are other options, and I'd like to hear them, but here is my take on the three above.

1. Please don't. Suppose AOL/Time Warner buys the Fool and folds it into AOL - those of you who are not AOL subscribers will likely have to pay to access the Fool. (This is an example, but I think of all the potentials out there AOL, already a Fool partner, would make the most sense, and be the most likely). Furthermore, as time passes the merger ultimately corrupts one of the entities - and this would be true no matter whom the Fool could merge with - and respectfully, the Fool would become corrupted (against the wishes of the Gardners, and to their own dismay I'm sure).

Ultimately the Fool would become lost in the morass of electronic media messages and would no longer be the icon of personal financial freedom that I believe it is.

2. A possibility. Let's be clear about one thing. Although supported by ad revenue the Fool has investment partners. These partners want returns (that's called ROI :)) - when the prospect for returns over the long haul dims, guess what happens to the partners. Money dries up - they dismantle, take what they can and go home. This would not happen for some time, or until it became clear that recent countermeasures (read: layoffs) are not working to increase profitability.

And guess who is an investment partner: AOL

3. The last hope for us all. And perhaps the best. Though it is difficult to take this stance, all things Internet will not always be free. The basic business model of the dot-com is proving that, and the Fool is clearly susceptible. So I ask you: would it be worth $5/month to maintain this community? What about $10?

For all the learning, tools, information etc., it is cheaper than, and as thorough as, say Investors Business Daily, or the Wall Street journal. You also don't have to recycle it.

Playing around with some numbers and ideas I came up with this:

Assume 500,000 paying subscribers at $5/month; that generates annual revenue on the order of $30 million. And even if you're already paying for an ISP, you aren't increasing substantially the amount you're paying. And for $60 a year, Cisco would only have to increase 1.2 points at 50 shares to repay your investment.

Now let's assume the Gardners are feeling good about things and they take 1/5th of that revenue and exchange it for ownership... each subscriber would own 12 shares of the Fool. That's probably illegal, but some working such as that, a sort of Fool constructed Drip, could accomplish that (and I admit that idea popped in at 12:30 am, and perhaps was better left where it was, but it's out there - just as the solution is).

Having strolled through all of that: This is a website that has impacted my life. It is a site that has made me a smarter investor (not necessarily better, but I'm getting there). It has accomplished its mission for me, and it continues to do so. I don't know which TMFers lost jobs recently, but I'd like to; as a member since 1999 I'd sure like to say thanks to them. I'd like to tell them that at least one fool, I mean Fool, loves this site, loves interacting with the other people here, loves hearing from folks like TMF Spirit (one of my faves - hope she's still here); I would like to tell them that this one Fool has been enriched, educated and amused because of their efforts. And I would tell that to the Gardners too.

And I would certainly offer to pay the equivalent of two grande cappuccinos at Starbucks per month for the privilege of keeping this ?revolution? alive and uncorrupted.

Would you?

hutch