Do Cisco’s Numbers Spell a Market in Decline?

Cisco reported their results for the quarter, and while the current numbers were good (beating estimates and up year over year) the guidance was tepid.  As a result, Cisco’s stock took a major hit post-market that is off its lows this morning but still down about 7%.  Network equipment competitors also fell, and this is an interesting reflection of the dynamic in the industry.

Cisco is the leader in networking, and like virtually all leaders in tech it’s become more cautious about innovation.  “Fast follower” has replaced “leader” in their self-definition.  In an ordinary market, this would open an opportunity for its competitors.  Innovate, set the bar high, steal market share, and take over the industry lead, or at least challenge for it.  Not now.  Instead competitors were whacked in their stock pricing too.  No leadership is possible, says the Street in post- and pre-market trade at least.  Nobody’s home upstairs.  This explains why Huawei has taken a position in the enterprise that’s clearly simply price-based counterpunching with Cisco.  They need not fear innovation, something that could make their positioning based on price a liability because they’d be selling the wrong product, in effect.  What it doesn’t explain—the question it begs, in fact—is why the heck network vendors ever let it get to this point.  I don’t have an answer.

Operators for the last two years have recognized three specific monetization areas; content, mobile/behavioral, and the cloud.  The first two require an investment that’s probably biased in favor of network equipment in the capex, and the cloud is exactly the opposite.  Absent any rational service-layer strategy (one Tier One we’ve worked with has been trying to cobble a content story together from vendor offers for almost two years now), our fall 2011 survey showed that operators were moving to the cloud.  Why?  Because they knew generally what they needed there.  So with two easy lob pitches to hit, the network vendors took two strikes and waited for the hard inside fastball.

Well, the thing is that there’s still hope.  Stu Elby from Verizon made it clear that OpenFlow was a part of their cloud planning.  Google has actually deployed it.  Both these sources demonstrate that there’s a “service layer” in the cloud too.  The cloud IT players don’t have the solution there either, and so if network operators did have it they could be expected to gain some strategic ground.  I think that’s what Cisco was after with CTO Warrior’s presentation at Interop.  Create a framework that overlays the network, virtualizes everything, supports composition, and you have addressed all three monetization goals…the way operators want them addressed.  The question is whether Cisco’s commitment to this goes beyond PowerPoint.

While all this drama is going on with the giants, little Adva Optical has come out with a successful demonstration (in conjunction with a university) of the use of OpenFlow to control wavelength routing.  This means that you could build a multi-layer network and control paths at all of the layers with a central control point, which is what operators have wanted.  Ericsson, as we’ve noted, has been doing work in this space too.  So the question now is whether Cisco can get their stuff up to speed quickly, whether Ericsson can extend their early lead in OpenFlow/optical integration, whether a small player like Adva will drive the future, whether one of the other network equipment competitors will jump in and do something….  Of course, they’ve done nothing up to now.


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