Cisco announced it was buying AppDynamics, an application performance monitoring (APM) company, snatching (literally) the company from an IPO that was already oversubscribed. The price tag, $3.7 billion, raised a lot of eyebrows in the financial community. Most agree that Cisco (like everyone in the IT space) needs to get more software-centric, but the question is why this particular software would be so important—and is its importance enough to justify the cost.
It’s pretty difficult to believe that Cisco would do a deal of this size to “buy revenue”, a tactic that some companies with high P/E multiples do. Cisco’s multiple isn’t exceptionally high, and there would have to be a LOT of revenue on the table to justify that price. Since AppDynamics is a startup we don’t have their full numbers, but it’s probably safe to say that current revenues wouldn’t be enough.
So, symbiosis of some sort is the only reason to make a deal like this, and there are two flavors of symbiosis that could be in play. One is that Cisco believes that users will be increasingly drawn to APM and that Cisco has the sales conduits needed to make the most of that opportunity. The other is that APM could be a part of the larger story of the Cisco cloud. Let’s look at these two flavors of symbiosis in the light of industry conditions and trends.
There’s no question that Cisco has sales reach, but there’s a lot of question on the point of the qualifications and determination of the Cisco salesforce to push APM. This is a whole new area for Cisco, though they have worked deals with AppDynamics before. Even server companies often have a problem getting their salespeople to push software effectively, and networking companies (including Cisco) have historically been unsuccessful in making that kind of transition at the sales level.
What Cisco may see as the door-opener in terms of new opportunity is the new role of online customer sales and support. It’s clear from the holiday season just ended that online retail is the wave of the future. It’s also clear that consumers with smartphones are creating a whole new set of relationships with their suppliers. The mobile user, grabbing a moment to buy or ask or find out, doesn’t tolerate uncertain quality of experience. APM dependence is a logical step along the path to online-mobile domination of markets for Cisco prospects.
That’s particularly true if you assume that the new age of mobile consumerism is driving changes in IT and networking, which is the driver behind the second form of symbiosis. If mobile-consumerism is the priority for Cisco’s prospects, then it’s reasonable to assume that an APM product closely linked with Cisco’s network and data center equipment could create a more credible application ecosystem.
While this second symbiotic level improves the revenue return potential for Cisco, it exacerbates the sales issues. It’s one thing for a network company to sell APM and another thing entirely for it to sell solutions. Mobile-consumerism is first and foremost an application software challenge, and this raises an important point not only for Cisco but for the rest of the market. We are driving forward with a totally new vision of the consumer, a vision of constant empowerment that begats very limited spans of attention. You need to be compelling at the moment of interaction, or the moment is lost.
There’s a credible path to a systemic network/server/software solution path here, since this new mobile-consumerism experience set is demanding of all those elements. There’s certainly credible Cisco offerings in the server and network area, but APM isn’t application software, it supports it. That leaves Cisco and the industry grappling with the question of whether another player (like IBM or Oracle or HPE) could come along and start at the application top, the piece closest to the business.
I don’t think Cisco intends to become an application powerhouse, nor do I think they could do that in any reasonable time period even if they wanted to. For the AppDynamics move to succeed, they’d need to establish the notion of an application platform as an abstract IT element that lives above things like the cloud, the data center, and the network. The platform would probably also have to contain other “supporting technology”, which could include collaboration (which Cisco has) but would also likely have to include things like deployment tools—DevOps—that Cisco doesn’t have at the application level.
This approach could be good for Cisco, particularly in the cloud, where networking and IT combine and where the drivers for change in application architecture are already emerging. If there’s a justification for the notion of a “platform” as a new element in IT, then it comes from the cloud. If there’s a place where Cisco could find its voice for the future, it’s the cloud.
But, of course, APM doesn’t create the voice. In fact, it’s not really the first step. There are a half-dozen good DevOps players out there for Cisco to have acquired, and even more players who have application development tools that are suitable to serve as the foundation of an application platform. Why start with APM when there are no applications (at least, no newly architected ones) to manage?
Cisco has historically done M&A in a very specific way. A salesperson used to go up to Chambers and say “Hey, John, I’d have won that Ajax United deal if we’d had a widget.” Chambers would think a moment and then say “Hell, Charlie, then we’ll just go buy one!” Could Cisco have simply followed form, or even have thought that if they were going to have to push solutions that included APM, they’d get to keep all the money if they bought AppDynamics?
There was nothing in Cisco’s blog about the deal that suggests great strategic visions were behind it. There was no focus on the cloud, on the specific directions that mobile-consumerism might take IT. At the positioning level, at least, Cisco lowballed the deal, and unless Cisco has very pedestrian goals for a very expensive property, it needs to do something to create a more compelling application platform vision—because competitors are now on notice.
Dell, HPE, IBM, and Oracle could all field their own offerings in this space, and in fact all three already have products that go more directly to the heart of a mobile-consumerism platform. Given Cisco’s weak positioning, any of them could step in and make things very hard for Cisco in a media sense, and if their offerings could actually deliver on the changes that Cisco only hints at, they could reap some big rewards.
The AppDynamics deal is also perhaps a leading indicator for the way that traditional network vendors will try to become more software-centric. Everyone agrees that software is the way of the future, but everyone also has to acknowledge that commoditization pressure isn’t exclusive to hardware. We have open hardware platforms, but also open source software. This isn’t the time to be doing expensive stuff that doesn’t lead somewhere great, and Cisco has only limited time to prove that’s not what they’ve done.