Looking at the New Cisco (and the Reason Behind It)

Cisco’s apparent reorganization and retargeting of its strategic initiatives is certainly newsworthy, given Cisco’s position both as the premier provider of IP technology and its UCS data center systems.  It’s also newsworthy that Cisco is clearly emphasizing the cloud and IoT over traditional networking missions.  The question is what these newsworthy events mean in the context of the markets, and by association whether Cisco is behaving in a strategic way or just trying a different tactic.

For a decade, Cisco’s implicit story to both enterprises and service provider was simple—more traffic is coming so suck it up and spend on more capacity to carry it.  Forget ROI, forget benefits, even forget costs.  Traffic means transport, period.  As stupid as this may sound when stated as baldly as I’ve stated it, the message has value because it’s simple.  The implicit question being asked of network buyers is “What traffic will you elect not to carry as traffic growth continues?”  That’s a tough question to answer.

I think that two factors have convinced Cisco that their old story was too old for the market.  One is the increased resistance to network spending; the best proof that something is a bad approach is that it’s not working.  The other is the explosion of interest in both SDN and NFV.  Cisco has worked pretty effectively to blunt the immediate impact of both technologies, but in the end they prove that buyers are willing to look outside the box to control cost or improve network ROI.

If all we had to deal with was increased cost pressure, then a lot of Cisco’s old cost-management steps would be enough.  You cut internal cost and waste by consolidating groups who duplicated effort.  You improve cost-efficiency of devices with better semiconductor support.  Those steps have been taken, and they’ve borne some fruit for Cisco, but they apparently have not been enough to future-proof Cisco’s financials.  Thus, we come to the current Cisco moves.

NFV and SDN show that networking in the future will incorporate a lot more hosted functionality rather than just devices.  This isn’t the same thing as saying that the cloud eats the world, a statement attributed to a VC in a news story yesterday.  It’s saying that it’s better to value the functional components of devices than the hardware they run on.  It’s saying not to compete in areas you can’t be competitive, and that are price-driven and margin-less in any event.

If you build a router as a device, your differentiation is largely your software features and anything special you might have in semiconductors to handle the networking-specific tasks.  You don’t then want to have to spend a lot to build a hardware platform that’s not going to be cost-competitive with commodity server platforms just to hold the good stuff.  The long-term direction Cisco is likely plotting is to divide network equipment into two categories—one where the mission justifies customized semiconductor hardware for real feature vale, and one where it does not.  You focus then on devices for the former mission, and for the latter you shift to a hosted model.  Modular software/hardware pricing is clearly a step toward this goal, as is a lot of Cisco’s recent M&A.

Security, provider edge, and enterprise networking in general seem to fall into the second of these two categories, meaning that the real value is features and the best way to deliver those features is through a software license.  This is a big shift for Cisco by itself, but one dictated by market direction.  If anyone is going to offer software-license networking, then the cat’s out of the bag and Cisco has to respond.

The fact that all of enterprise networking does is why Cisco would incorporate something that’s clearly a provider concept—NFV—into their “DNA” (Digital Network Architecture) announcement.  They need a broad model for the enterprise because the enterprise is likely to be where the impact of the transition from device-resident features to hosted features happens first, and most broadly.

There’s nothing wrong with Cisco categorizing the hosting part as “cloud”, nor of course with the media either accepting Cisco’s slant or adopting it on their own.  Most hosting of network features on servers will involve resource pools, and so the cloud label is fair.  It’s also true, despite some of Cisco’s own marketing messages, that IoT if it succeeds will be more a success for the cloud than for connected devices or traffic.  However, it’s important to go back to that “cloud eats the world” comment, because while the label is fine an underlying presumption of cloud-eating-world could be a major problem for Cisco.

Enterprises will probably not be hosting their network features in the public cloud.  Most of their mission-critical applications won’t be leaving the data center, in fact.  If we apply the term “hybrid cloud” to the hybridization of public and private cloud deployments, we probably have an issue.  If we apply the term to public cloud and private IT, then we’re fine.  Cisco’s risk with DNA is not that they don’t support “the cloud” but that they rely too much on cloud-specific internal IT trends.  Way more servers in enterprise data centers will be running virtualization than private cloud.  Dell/VMware, remember, is the king of enterprise virtualization.  Cisco could position itself into a relative backwater of IT evolution if they’re not careful.

They may also have a risk in pursuing an enterprise-centric vision of hosted functionality rather than a more literal implementation of the formal service provider initiatives like SDN and NFV.  If operators do adopt NFV widely and/or accept and support a cloud-centric IoT vision, recall that my model says it would generate over 100,000 incremental data centers worldwide.  That would be an enormous market to miss out on, and a lot of what operators want in NFV would not be present in an enterprise version of NFV—like OSS/BSS integration.

To my mind, the big question with Cisco’s “cloudification” of strategy is the area of external process integration with cloud-feature lifecycle processes.  If lifecycle management manages only the lifecycle of the new stuff, then it won’t integrate into enterprise IT operations any better than it would into service provider OSS/BSS.  We don’t know at this point just how much external process integration Cisco has in mind, either in DNA or in future service-provider-directed offerings.  If it’s a lot, then Cisco is truly committed to a software transformation.  If it’s only a little, then Cisco may still have its heart in the box age of networking, and that would negate any organizational or positioning changes it announces that pledge allegiance to the cloud.

We also don’t know whether Cisco’s DNA-enterprise vision of NFV will be able to support service-provider goals, and depending on the pace of development of NFV and IoT, those goals may mature faster than the enterprises’ own connectivity needs.  The service provider space is also driving the modern conception of intent modeling and data-driven application architectures, things I think will percolate over into the enterprise eventually.  Can Cisco lead, or even be a player, in these critical technologies if they lag with the market segment that’s driving them?

Cisco is changing, there’s no question about that.  There’s no question the reason is that Cisco knows it has to change, and change quickly.  The only question is whether a company that’s prided itself on being a “fast follower” can transition into being a leader.  It’s very difficult for market leaders to lead market change.