Cisco’s numbers for the quarter just ended were decent, but their guidance for the current quarter was a disappointment to many. Yeah, Cisco did the usual dance about macro-economics and currency fluctuations, but you can see the Street is concerned that either technology shifts or operator pressure on costs (or both) was impacting Cisco. The question, if these impacts are real, is what Cisco could do about it. If you look at Cisco’s earnings call, you see what might be a Cisco strategy emerging, built around UCS. Is it the right approach?
For a decade, my surveys have shown that the primary driver of network change is data center change, and the vendor who controls data center evolution tends to control network evolution. IBM was the unchallenged leader among enterprises in everything data center for a long time, but in 2013 they slipped to parity with Cisco and they’ve declined a bit since then. Part of the reason, I think, is that Cisco realized that data center evolution reflected IT evolution in general, and you need to get control of that process to be a big winner or even (gasp!) the next IBM.
The data center is shifting from being a small-ish number of multi-tasking large systems to a vast complex of blade servers, racks, and switches supporting virtualization or cloud computing. When vendors like Cisco or Arista talk about cloud strategies and offerings, it’s this data center evolution they’re targeting. The “cloud” has become a general term to describe IT based on a broadly deployed and loosely coupled pool of servers, connected by LAN/WAN switching and routing. That networking is extended to users primarily through carrier virtual services, so most enterprise network equipment spending is focused in the data center.
So Cisco’s strategy is simply to win in the data center by offering a complete portfolio of products that address the migration from “mainframes” to racks of blade servers. In doing so they have a great shot at controlling the data center network and through it, network evolution in the enterprise. Nothing in the way of technology shifts is needed; it’s Sales 101.
It’s Sales Planning 101 to say that if you’re riding a wave to success you don’t try to jump off. Cisco would gain little or nothing by pushing through big technology shifts in the data center, shifts like white box switching and SDN. Their problem is that a news story that says “nothing is happening” isn’t clicked on much, so the media looks for big changes they can claim are imminent. SDN news produces SDN interest in the enterprise, and that could threaten Cisco’s orderly harnessing of a single sound business trend.
Cisco’s strategy for that is to lance the boil. You take the top end of SDN, the part that standards people always get to last anyway given their propensity to do bottom-up development, and you tie up the eventual benefits and business case in APIs and tools that deliver “software definition” to the stuff buyers already have and Cisco already makes. Application-Centric Infrastructure (ACI) is a kind of sissified SDN, something that promises the end-game without the changes in technology. It does some useful stuff, as all top-down approaches tend to do, but it’s a defense mechanism.
Nothing wrong with that, as long as you stay defensive where you need to be, and that’s where I think Cisco’s call and their ongoing strategy have some holes—two to be explicit. One is in the area of NFV and the other in SaaS.
It’s really difficult to assess how much risk NFV presents to Cisco’s device business. In theory, you can host anything in the cloud or on a multipurpose CPE box. That’s as true today as it would be in an age of NFV, because most enterprise services based on virtual network functions have multi-year contracts. It’s nice to talk about dynamic provisioning, but how many companies want their VPNs or firewalls turned on and off on a regular basis? If hosted versions of network features haven’t hurt Cisco so far, it may be that they’re a limited threat.
In any event, what Cisco should be able to do is to capture the benefit case for NFV without actually doing it, just as they’ve done with SDN. Nearly all the practical benefits of NFV will come not from displacing existing devices but by automating operations and management. Well, Cisco had plenty of opportunity (and cash) to develop a service management and operations platform that could have delivered nearly all the service agility and operations efficiency of NFV without displacing a single appliance. A creative program to facilitate field installation of firmware features could do most of the rest.
This approach could be combined with Cisco’s cloud thrust, and the combination could create an upside for UCS, draw the fangs of device-replacement advocates, and perhaps even generate some running room for Cisco’s device business by giving carriers lower TCO without lowering capex. How did they miss this?
Then there’s SaaS. On their call, Cisco says that their WebEx is one of the most popular SaaS applications, and in fact it’s one of the most pervasive. Cisco’s had WebEx for a long time (since 2007) and what started as a collaborative resource for online presentations is…well…still pretty much a collaborative resource for online presentations. With Cisco pushing technology frontiers (so said the call) with in-house startups, why have they failed to do anything with a premier SaaS opportunity?
And guess what the best example of a specific SaaS/WebEx miss is? IoT. Cisco has never been able to look at IoT as anything other than a source of traffic. I guess if you’re a hammer, everything looks a bit like a nail to you. Look deep into WebEx, though, and you see an important truth, which is that collaboration happens around something. WebEx succeeded because it let you collaborate around slides.
IoT could provide a rich new source of stuff to collaborate around. Think health care, think utilities and transportation, think just about every vertical market that has “things” in it. Add new logic to WebEx to centralize communication around an arbitrary view of a “thing” or a collection of them, and you have a major new business opportunity.
There are no real technical barriers to Cisco taking advantage of these two opportunities, and I don’t think there’s any real risk to their core business either. Cisco could be a big, even a giant, player in both spaces. To me, this looks like an example of corporate tunnel vision, back to my nail-and-hammer analogy. If they’d think outside the bit (a term that I hold a trademark on, by the way), they’d see that anything that generates real value in a distributed way generates traffic. In contrast, hype to the media generates only ink and clicks.
I don’t know when the operators will start to act decisively on their revenue/cost-per-bit crossover, or whether some have already done that (some tell me they have). That means I don’t know when Cisco’s “macro-economic” conditions will have to be updated to include “the buyer put the wallet away” as a condition. Perhaps neither SDN nor NFV will really matter. Perhaps regulators will mandate operator spending and tax the population to pay for the excess. Or maybe Cisco can ask each employee to leave a tooth under their pillow. Employees need to think about whether they could convince management to look at these two areas. Or check their dental coverage.