President Barack Obama's call for ISPs to be regulated like traditional telecommunications carriers continued to send shockwaves through the Internet industry on Wednesday as the head of Cisco Systems warned that the idea could hurt his company's business.
Internet service providers ordered less network gear during Cisco's fiscal first quarter ended Oct. 25, Chairman and CEO John Chambers [cq] said during a conference call on the company's financial results. The biggest reason was dramatic cutbacks by two or three major U.S. service providers, helping to push orders down 18 percent from a year earlier in North America, he said.
The prospect of so-called Title II regulation, which Obama advocated on Monday, is making U.S. carriers skittish about spending more on their networks, Chambers said.
"We started seeing service provider spending slow a lot last quarter among the three big guys that might be most affected," Chambers said. He cited AT&T in particular, which had already said that its capital expenditures would decline in the coming year. "It will be down dramatically more if we don't get our act together on this Title II issue," Chambers said.
The same goes for other service providers, he said: "If they can't make money on broadband build-out, they're not going to build it out."
Chambers expects the uncertainty to affect business for at least the next couple of quarters. The Federal Communications Commission has said it doesn't expect to have new rules in place until next year.
Obama's proposal drew praise from many consumer advocacy groups and from some Internet companies, including Netflix and Kickstarter. They say net neutrality is critical to keep Internet innovation alive.
Chambers's comments echoed those made earlier Wednesday by AT&T CEO Randall Stephenson, who said the company would hold off on building a planned fiber-optic network in 100 U.S. cities until federal regulators define net-neutrality rules.
It wouldn't be a great leap to conclude that the two executives' comments represented a coordinated message. Chambers pointed out on the call that he's close to Stephenson and other leaders at AT&T, which is a Cisco customer. And where Cisco stands on the issue came through loud and clear.
"It would be a very disappointing end result if we moved back to regulation of the Internet," Chambers said. "We do plan to be very aggressive on this and trying to educate people on all sides about why this is not right for our country."
Chambers hailed the net-neutrality rules that FCC Chairman Tom Wheeler proposed earlier this year, which would allow service providers to prioritize traffic from certain content providers, as a wise compromise. "There's a way to accomplish the goals of both sides," Chambers said.
Cisco's business among service providers, a major part of the networking giant's customer base, has had several rough quarters recently. The reasons are more complex than just carriers holding off on network spending: Weakness in the set-top box business, where orders fell again last quarter, is one major factor. Chambers has cited multiple reasons for declines in the service-provider business, including consolidation among service providers that has resulted in fewer, but larger, potential customers.
There was good news for Cisco in the quarter as well, as orders for the company's switching products rose 3 percent after three quarters of declines. Overall, the company saw revenue rise just 1.3 percent from a year earlier and earnings per share decline by 5.4 percent. Times remained hard for Cisco in major emerging markets, especially China, where product orders were down 33 percent from a year earlier.
During the quarter, the company took a $188 million charge involving the settlement of a patent lawsuit by the Rockstar Consortium, a group of companies that acquired key intellectual property from the former Nortel Networks.
Also on Wednesday, Cisco announced that CFO Frank Calderoni will leave the company at the end of this year. Kelly Kramer, [cq] a former General Electric executive who has held financial roles at Cisco for three years, will take his place.