Cisco’s Internet-of-Everything Feet of Clay

Cisco reported their numbers yesterday, and the results can best be described by paraphrasing the theme the Street took up; “they cleared a low bar.”  Cisco had reduced estimates and met or slightly beat them as a result.  Underneath, though, there was no indication that the company has come up with a way to address their problem with fundamentals.

In assessing a network vendor’s fortunes, I don’t care whether you believe that the cloud or SDN or NFV is the way of the future.  What I care about is whether you believe that transformation is cost-driven or revenue-driven.  In the former case, no matter what technology is the path you take on your road, you end up with lower everything because your buyers’ goals are focused on buying less of the stuff you make.  So no matter how many times Cisco talks about more mobile traffic or more connected devices, it doesn’t add up to anything better for Cisco unless somebody is paying more.

The number one problem Cisco has was reflected by a sentence on their earnings call:  “First, the Internet of Everything has moved from an interesting concept to a business imperative driving opportunities across every major vertical.”  Baloney.  The Internet of Everything is a media event and nothing more, and that’s the problem Cisco has.  They have focused so much on telling people that they need to buy more gear to carry more traffic to support the glamorous future, they’ve forgotten that their buyers have to hold their own earnings calls or balance their own budgets.  You can’t tell the rest of the food chain to lie down on a platter so you can facilitate your own devouring role.

To be fair, Cisco doesn’t have an easy problem to solve.  As a market leader, they can’t expect to gain much in the way of market share, which means that even if they promote a massive transformative vision of future benefits to drive future spending, the process of navigating the transition to that future is as likely to inhibit current spending as to expand it.  For a competitor like Juniper or Alcatel-Lucent, a great vision could drive a market-share shift if buyers believed your approach better prepared them.  Cisco can’t hope for that, and in our world of live-by-the-quarter-die-by-the-quarter, Cisco doesn’t even want to get a mild cold in terms of downside.  That’s why they’re increasing their dividend.

So what should Cisco do?  I think the answer is obvious.  They have to prepare for the next generation of the cloud, the generation where it focuses not on reducing the cost of what we do now, but on expanding the value of, and facilitating the transition to, what might be done down the road.  The future is a set of small application components that are dynamically composed to create support for workers and experiences for consumers.  It’s bound together with everything-as-a-service not with the Internet of Everything.  Functionally it’s a blend of the cloud, SDN, and NFV in a single grand package.

They’re not going to do it, though.  Cisco is going to fast-follower itself into a position where following is going to be difficult, and the reason for this is that it still can’t come to terms with software as the framework of the future.  That vision of a dynamic, composed, future that I talked about started with “small application components”, remember?  This is a software notion, and like all the network companies Cisco is weak on the software side.  They’re particularly weak on the management vision, and if there’s any specific single thing that’s critical to creating that glorious vision of “everything-as-a-service” it’s service management.  That’s the bridge between the “now” and the “future” because the more atomic and transitional you make a service, the more cost-effective your process of creating and sustaining it must be.  There’s not a network vendor alive who really values, really understands, network/service management and operationalization.  Even Ericsson, who bought OSS/BSS giant Telcordia and so has the greatest stake in the management game, sees that as a move to promote professional services not as the fundamental basis for its own—and the industry’s—transformation.

Cisco mentions “the cloud” a lot, but the cloud is driven in its present form by the notion it reduces spending on technology.  They talk about SDN too, and that has the same cost-based justification.  They never mentioned NFV on their call, and NFV alone might have the ability to bridge the world of network equipment with the world of management in a way that Cisco could exploit.  I think Alcatel-Lucent sees that possibility, which is why they want to use NFV and telco servers as their link between their current bit-pushing position to a service-pushing position.

The challenge for Cisco, and even for Alcatel-Lucent, may be that NFV isn’t enough anymore, and ironically Cisco’s call may be the best evidence that’s the case.  I get PR all the time from players who want to talk about their “NFV orchestration”, which is essentially OpenStack.  Well, here’s a flash for everyone.  Don’t send me this stuff because I don’t believe it for a moment.  OpenStack is not NFV orchestration and it never will or can be.  What OpenStack is, at the most, is a platform for deploying the components of multi-component virtual functions, a little implementation piece inside a grand model of future services that still remains undefined.  It doesn’t address management, it doesn’t support all the service models needed, it doesn’t define a single virtual vision of how resources, services, and operations all come together in the world of the future.  But OpenStack is poisoning NFV because it’s letting vendors get away with NFV claims that will never actually reap the benefits that operators want.  Cisco could jump on this point and run with it, but as a fast follower, they would have to follow NFV to where it’s being taken, and that is not the place Cisco needs to get to.

Cisco’s most obvious technical theme on their earnings call was “architectures”.  They “believe our focus on architectures is really paying off. As the pace and complexity of IT increases, Cisco’s ability to bring together technologies, servers and solutions across silos should continue to drive differentiation, preference and, over time, gross margins.”  Nice sentiment, John, but not true.  What drives gross margins is the ability to generate benefits, not help your buyers spend less on what you sell.  You are running out of time to figure that out.

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