Cisco’s Clear Goal and Hazy Path

Cisco reported their numbers, and it’s fair to say that they showed that the company has promise but didn’t show there was a guarantee that promise could be met.  To me, a single comment from CEO John Chambers sets the tone:  “Cisco’s strategy, delivering integrated architectures that address the top business opportunities and the biggest market transitions, is differentiating us from our peers and will help enable us to achieve our goal of becoming the number-one IT company the world.”  To read Cisco’s tea leaves we have to dissect this statement.

Let’s start with GOAL; which clearly is to become the number one IT company in the world.  This is to me what differentiates Cisco from the rest of the pack of network vendors.  They alone accept the reality that network equipment cannot drive markets or sustain margins, and there’s nothing that can be done now or ever to change that.  This is the “biggest market transition”, a shift from networking being the value to networking DELIVERING the value.  IT creates the services of the future, and the services are the drivers of profits and productivity.

Now we can look at path to fulfillment.  It’s “delivering integrated architectures that address the top business opportunities and the biggest market transitions”.  To me this shows that Cisco is aware of the fact that networking IS becoming an IT game and that this shift will create both a risk for traditional networking and an opportunity for a new kind of networking.  Cisco wants to jump on the latter to overcome the problems created by the former.

The goal is strong and in my view unarguable.  The path is the question.  Cisco like everyone must start a transition from where they are now.  For Cisco, that’s an incumbent in a space that’s at tremendous near-term value risk—bit-pushing.  They want to get to a place where value can be sustained, the space they loosely call “IT”.  But IT isn’t a house, it’s an apartment building.  Living in IT is a value space to be sure, but right next store is another value trap.  Computer hardware is in the same place networking is.  That demonstrates Cisco’s first big risk.

Cisco has servers, UCS.  Cisco doesn’t have software in the real sense.  Yes they have software products, but even software is a dorm and not a comfy apartment.  In the software space we have a host of operations and other “system” software that has little better hope of generating margins than hardware.  We also have things like UC that have struggled for a decade for relevance, and that are succeeding to the extent they’re cheap.  Lacking any real software to drive productivity, for example, Cisco is unable to deliver new benefits for its servers.  That confines it to network-related applications, a good space to jump off but not a good one to bet your future on.

Network-related applications present the second big risk for Cisco.  Network value is in fact shifting toward cloud-hosted service-layer functionality.  Right now that shift could be utilized by Cisco to raise the number of “network-related applications”, but what is lost to networking in the process of that value shift is lost to Cisco as the major incumbent.  So Cisco is of two minds; do I defend devices and slow the migration of functionality to the cloud, or do I exploit the opportunity for UCS that migration creates?  It’s a clear choice, and it’s the choice Cisco doesn’t talk about because they’ve not made it.

Cisco’s SDN strategy is to build a kind of fence of APIs with onePK, which has the effect of creating the “software-defining” part of SDN by providing service-control links.  Inside the black box of the APIs, Cisco has been working to promote an SDN vision that redefines what “SDN” stands for.  You think it’s “software defined networking?”  The IETF material calls it “software-DRIVEN networking”.  The distinction is that the IETF model for SDN retains most or even all of the current IP universe, and focuses on “bridling” or bounding it by providing for mechanisms for software to exercise direct control.  This is the “distributed” SDN model.  Cisco doesn’t call this out, but I think their ring-of-APIs approach is a good and clever way of addressing the shift of value to software while at the same time keeping as much of that value as possible safely inside the current boxes.

Look at Cisco’s numbers and you see the issue.  They’re more exposed in switching and routing than anywhere else and yet that is where their money comes from.  If they can’t hold margins on those devices then they run the risk of being the broad-jumper who tries to jump from inside the pit on the loose sand instead of on the firm edge.  They need a foundation for their future, and it has to be where they earn their money in the present.

In carrier networking, the major risk battleground for Cisco is metro, and that’s why I think Ericsson’s SDN metro use case is so important.  If somebody big, somebody with good mobile credentials, gets metro just right then Cisco can’t sell gear in the market where most gear will be installed, and can’t link the cloud and mobile SERVICE value as easily to their products.  In the enterprise the battleground is the data center, where the cloud defines the service of the network and the abstract infrastructure that fulfills user demands.  There, startups like Plexxi and incumbents like Brocade have a chance to take control of the key issue, which is how cloud data centers connect—to each other and to users.

Cisco’s just about flat in terms of stock price pre-market today.  That probably reflects the fact that financial analysts are not confident that Cisco can get to its IT-number-one goal, not because it’s not possible to attain it but because they won’t be able to balance the need for a hard take-off point and a soft landing point to jump between the old network and the new.

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