By Rachael King
In a packed headquarters ballroom, Cisco Systems Inc.'s
then-chief executive officer John Chambers offered a fond farewell
to a star executive and friend, Jayshree Ullal. He celebrated her
ability to make complicated things simple and wished her success in
her next role.
He didn't expect that much success.
Within months of the 2008 party, Ms. Ullal became CEO of Arista
Networks Inc., a small startup that has since snagged Cisco
customers including Microsoft Corp. and Facebook Inc., and is
eating into the share of the networking giant's most important
business.
Mr. Chambers couldn't stand to lose sales, especially to someone
he considered family and the rivalry has become personal, according
to people close to both executives. Defeating Arista has become a
priority for Cisco, a company more than 40 times bigger by annual
revenue.
In 2013, Ms. Ullal's image appeared in an internal Cisco
presentation pasted onto a bull's-eye pierced with arrows. "Arm the
field, stop the bleeding and fire back," according to the
presentation.
Now, the fighting is unfolding in court, where Cisco, once the
world's most valuable company, has accused Arista of stealing its
technology. Arista has denied the allegations, saying the Silicon
Valley giant sued only because it lacked smart ideas to regain
business. Each side has notched incremental wins over the past two
and half years with no sign of a resolution.
By the time Mr. Chambers handed over the CEO position to Chuck
Robbins in 2015, Cisco had been through its fifth consecutive year
of layoffs, various restructuring and other cost cuts. It's
struggling to regain the market share captured by Arista and other
competitors, particularly in Cisco's crucial switching business,
which links together computers on corporate networks.
Mr. Robbins said Cisco is now repositioning itself to build
products with more automation and security.
"Because we see companies that get disrupted, you can disappear
in a hurry in today's world," he said in a recent interview. In
June, Cisco promoted a new line of automated and programmable
switches. Mr. Robbins told a gathering of 28,000 partners and
customers the company was on a journey "to change everything."
His predecessor, Mr. Chambers, has said he made mistakes during
his tenure as CEO. Cisco, he said in court testimony, was too slow
to react to a fast-changing market. He declined to be interviewed
for this article, as did Ms. Ullal.
On Wednesday, Cisco reported that revenue fell for a seventh
straight quarter.
This account of how a Cisco insider became one of its fiercest
foes is based on interviews with current and former executives of
Cisco and Arista, court testimony and records, and unpublished
corporate documents and emails reviewed by The Wall Street
Journal.
Mr. Chambers, 67, now Cisco's executive chairman, is credited
with the company's extraordinary growth phase in the 1990s, largely
by buying smaller companies, including Crescendo Communications
where Ms. Ullal worked.
Ms. Ullal, who rose to become one of Cisco's most valuable
executives over her 15 years at the company, ran the switching
division, which allows companies to shuttle data at high speeds. By
the time she left, switching was Cisco's biggest business, with
more than $10 billion in annual revenue, a big reason why Cisco
recovered from the dot-com bust.
Mr. Chambers and Ms. Ullal made a strong team, partly because
they're both extremely competitive, according to former executives
who worked with them. Their priorities and styles sometimes
clashed. Mr. Chambers, a soft-spoken West Virginian, was a
managerial guru and a salesman whose gracious manner skewed more
senatorial than Silicon Valley. Ms. Ullal, raised in India, was an
outspoken engineering and marketing whiz who disliked rigid
rules.
Ms. Ullal grew frustrated as Cisco began moving beyond its core
switching and routing business into areas such as high-end
videoconferencing and consumer electronics, former executives who
worked with her said. About a year before she left, Mr. Chambers
had created dozens of internal councils and boards, which was at
odds with her command-and-control approach.
Cisco's engineering team knew Ms. Ullal's departure would be bad
news, say former co-workers.
Arista was a better fit. The Santa Clara, Calif., startup,
founded in 2004 by former Cisco executives, was small and
entrepreneurial. When Ms. Ullal joined as CEO in 2008, it had
shipped its first product, an unusually fast networking switch for
Wall Street trading networks. The market was worth only about $50
million but it gave Arista a foothold.
It was also a segment of the market Cisco hadn't prioritized.
Ms. Ullal urged her employees to avoid attracting Cisco's attention
at first, said a person familiar with her thinking. As the giant in
the field, Cisco could have "destroyed us with a stray thought,"
this person said.
In public, Arista said it planned to focus on narrow markets
such as high-frequency trading. Privately it was working on
building a flexible and easy-to-program switch that could be sold
to large internet companies that were Cisco customers.
Mr. Chambers didn't see his protégé as a threat until two years
later, when it was too late. In 2010, Arista was on the verge of
winning about $2 million of business from Microsoft, one of Cisco's
biggest customers, according to a March 2011 briefing document for
Mr. Chambers and his own court testimony. The amount was small, but
to Cisco it was a "canary in the coal mine," the briefing document
said.
The Arista product was faster at moving data than Cisco's
hardware, and cost less, according to internal Cisco documents.
Cisco feared that Arista could end up with as much as $100 million
in future annual sales to Microsoft. Cisco was already concerned
about losing business after missing its annual revenue estimate for
the first time in eight years.
Microsoft remains a big Cisco customer. But for the past six
years, Microsoft has been Arista's largest customer, accounting for
16% of its total revenue last year, or $181 million.
Mr. Chambers felt betrayed by Ms. Ullal, a former Cisco
executive said. "To John, it was a relationship question -- 'Why
would you do such a thing?' "
He told executives to keep Arista from winning any new business
from Cisco customers, according to former executives. Mr. Chambers
also sent a 1,500-word memo to employees in April 2011 saying Cisco
was too slow to make decisions and lacked discipline.
That month, the sales team created a "Tiger Team" to track
Arista's every move, thwart its marketing efforts and forestall its
initial public offering plan, according to internal presentations
and emails. As many as 70 salespeople and engineers participated in
"war room" calls where no detail was too small.
In 2012, Mr. Chambers asked four top Cisco engineers who had
created some of its past hit products to secretly start a new
company to compete directly with Arista's offerings. Cisco invested
$135 million in the company, Insieme Networks, and later bought
it.
Arista's technology was faster, more flexible and less expensive
than Cisco's, according to customers and internal sales documents.
Facebook engineers described Cisco as "behind the curve and on
target to become irrelevant" in the data center, according to a
Cisco engineer's email to executives in March 2013. Facebook, now a
customer of both Arista and Cisco, declined to comment.
A Cisco employee presented the slide deck with Ms. Ullal's photo
on a bull's-eye a few months later, calling for "zero loss
tolerance against Arista."
Other customers started complaining. An email from a customer
support engineer in August 2013 to dozens of senior managers,
including Mr. Robbins, the future CEO, said Morgan Stanley had lost
confidence in one of the switching products "after more than 12
months of ongoing software defects, instability and a lack of
needed features." The bank halted plans to use 400 Cisco switches
and said it might turn to Arista.
Morgan Stanley declined to comment.
Cisco interviewed dozens of executives to understand the
problem. The brutal conclusion in a September 2013 report: Cisco
had good ideas and talented employees but a risk-averse culture,
indecisive leaders and too big a focus on incremental products.
In November, Ms. Ullal ran into Mr. Chambers at a cocktail party
in San Francisco, according to a person familiar with the
encounter. The two hugged, and then Mr. Chambers joked to the
former CEO of a big Cisco customer that his one-time treasured
executive had become his toughest competitor.
"Don't buy from her," he said.
Ms. Ullal was irritated by the exchange and told her staff that
Cisco's gloves were coming off, according to the person.
Inside Cisco, a "Beat Arista" document in January 2014 warned
that the impending IPO would provide the upstart the cash to strike
Cisco's most profitable product lines. "Time is now to target their
top 100 accounts -- slow momentum, impact revenue & market
share and help drive an unsatisfactory IPO," one slide said.
About six months later, Arista had an initial public offering on
the New York Stock Exchange. Its shares jumped 35% on the first day
of trading, making Ms. Ullal's 7% stake worth about $260 million,
and climbed another 40% by November.
In December 2014, Mr. Chambers approved two lawsuits against
Arista with the blessing of his operating committee. He struggled
with the decision.
"It is hard to accuse people who are your friends -- and they
are still my friends -- of stealing from you," Mr. Chambers said in
court testimony. "But this was so blatant."
The lawsuits filed in U.S. District Court for the Northern
District of California accused Arista of copying technology,
infringing on 14 patents and taking copyrighted material.
Arista says the suits have no merit. "I'm disappointed at
Cisco's tactics -- this is not the Cisco I knew," Ms. Ullal told
reporters at the time. She later wrote on Arista's blog that older
companies are "often in denial of new technologies and market
disruptions until it's too late."
Arista prevailed over Cisco in a trial late last year over
copyright claims and one patent claim in one of the lawsuits.
The other lawsuit is on hold pending related investigations
being conducted by the International Trade Commission at Cisco's
request. The ITC found that Arista infringed on three of the
patents in dispute, leading it to redesign some products this year.
But the company is appealing a ban by the agency on the import and
sales of products in the U.S. related to two other patents.
Cisco, with a market value of $160 billion, remains the leader
in the networking business, but the much smaller Arista is chipping
away at the fastest-growing part of the switching business.
Arista's share of the overall data-center switching market has
grown from nothing in 2010 to over 9% in 2016, while Cisco's share
has fallen from about 80% to about 58%, according to research firm
International Data Corp.
Mr. Chambers and Ms. Ullal did not see each other again until
last month at a wedding, according to a person familiar with the
meeting. They embraced, chatted for several minutes -- though not
about work -- and appeared in a photo together. Then they went
their separate ways.
Write to Rachael King at rachael.king@wsj.com
(END) Dow Jones Newswires
August 17, 2017 10:47 ET (14:47 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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