Cisco: Good Now, Could Be Better Later

Cisco reported their numbers, which were much awaited and which the Street viewed as highly favorable.  The stock is up nearly 10% pre-market on the results, with both revenue and EPS beating estimates and guidance seen as generally good.  Given that most tech companies were weak this quarter, the results are impressive and you always have to look at breakout players (positive or negative) to try to see what’s happening.

To start with, cloud and servers are happening.  Cisco’s UCS move is paying huge dividends for it even now.  Not only does getting into the server space give Cisco a major new market area to go after, it also positions Cisco exceptionally well for the coming era of the cloud.  Servers and networks are cohabiting in the future, not just blowing kisses and exchanging longing glances, and I think Cisco knew this was happening.  So did other competitors, but they weren’t bold enough (or perhaps rich enough) to jump on the transition.

Switching/routing revenues wouldn’t have saved Cisco’s quarter no matter how good their execution was, but they did hold their losses down relative to others and that suggests to me that Cisco is gaining market share on virtually all its competitors.  The reason, I think, is that Cisco is better able to sell solutions to both enterprises and service providers given their server (and thus cloud) incumbency.  It’s not that enterprises are building private clouds (hardly any are doing more than dabbling) but if you see a technology transformation in the wings, you look to players who have you covered during such a period of change.  Who better than the only big server/network player in the market?

Interestingly, Cisco is hardly a revolutionary player, a driver of transformation.  Look at Chambers’ comment on SDN: “Helping our customers move beyond the hype of software-defined networks or SDN to a much more complete solution….”  Cisco has played a strong defensive game with SDN.  They focused on APIs (ONEpk) and they focused on delivering the results of SDN without delivering anything massive in technology change.  That strategy has allowed them to front-sell benefits while at the same time diminishing the pressure to migrate away from current (undepreciated) network assets.  Others played into Cisco’s hands by soft-peddling the central intelligence of SDN that was the only possible driver for its rapid deployment.  We still don’t have a suitable end-to-end SDN model that doesn’t evolve out of current protocols and products, and that favors the Cisco position.

So are they unbeatable now?  No, because they still have two issues to deal with, both in the provider space, but both with potential to rock the enterprise.

The first issue is mobile.  Chambers on mobile:  “We do see budgets shifting from wireline to wireless….”  In point of fact, the shift is more significant, it’s a shift decisively to metro.  Cisco has a strong position with carrier WiFi but it’s weak in 4G.  That means that its major network rivals (Alcatel-Lucent, Ericsson, Huawei, NSN) can expect to have more account control as operator budgets shift to their traditional comfort zones.  Cisco cannot make themselves into a RAN-and-IMS player at this point, so they need to be a killer play in metro infrastructure.  They have the pieces, but operators tell us that Cisco isn’t confident here yet.  As long as that’s the case, it’s harder for Cisco to make a big play.

The second issue is network functions virtualization.  NFV should be a poster-child for Cisco’s cloud-network strategy.  Yes, it’s true that some appliance deals might be lost to cheap commodity hosting of  virtual functions, but Cisco knows that if NFV takes off enough to really impact feature spending in the network, it will create an even bigger network-coupled hosting opportunity in the near term.  Even if we’re right and Cisco fears that long-term trend, for darn sure their share of the hosting infrastructure that would accompany NFV deployment would far outweigh their losses.  Nobody else in the industry has the assets to make NFV work like Cisco could, and yet the company is relatively silent about NFV.  Operators tell us that Cisco is working out a solution as a Cisco product, which would be logical.  The question is whether they’re being too coy about it, and both wasting the chance to build credibility and giving competitors a free shot at defining the market.

NFV, as I’ve said all along, is a cloud-based architecture for creating software-component-based network services.  Even if the NFV body hasn’t fully converged on that view, that’s where this is going—or it’s not going anywhere.  Cisco has their own distro of OpenStack, the logical basis for an NFV cloud.  It has the internal message protocols, it has software functionality ready to be translated into virtual functions.  All the good stuff needed.  The thing is, there’s a vast repository of open-source stuff there too, and in fact OpenStack is open source.  If Cisco takes charge here, they could make carrier-grade virtual functions right now and largely eliminate the risk that NFV would validate open-source software for service logic because few open-source products are certified carrier grade.  If Cisco lags, then a horde of startups will do carrier-grade virtual functions (Metaswitch’s IMS is an example) and Cisco loses a lot of opportunity.  Moving now might also let Cisco partner with people like Metaswitch to create an NFV-based IMS/EPS implementation, which would destroy Cisco’s major competitors’ mobile advantage.

Cisco has done well.  Cisco will still likely outdo its competitors, but both these Cisco weaknesses could be exploited if those competitors get off their own duffs.  It won’t hurt Cisco next quarter, but it could dim prospects for 2014.

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