Cisco turned in a decent quarter, particularly considering the state of the network equipment market and the growing concern about the global economy. It’s always nice to have good results to tout to investors, and nice in particular when you need to navigate the usually treacherous path toward next-gen technology without trashing your current revenue streams. Many companies wait too long to shift strategies, and Cisco now has a bit of headroom—if they have the will to use it.
Everything Cisco makes is under some form of commoditization pressure as network operators and enterprises alike try to control costs. Further, we have white-box alternatives emerging for switching/routing and open server architectures that could threaten Cisco’s UCS, and competitors Alcatel-Lucent and Nokia have consolidated, forcing Cisco to tighten its alliance with Ericsson to respond. For Cisco, there could be no greater danger than to assume that its happy quarter is replicable in the long run, without some trauma as the company frames a new model for networking.
I think Cisco knows it has to change. The Jasper deal may be showing that Cisco is aligning with the poster child for higher-layer service drivers, IoT, but the fact that they’ve bought into only the limited connection-device management vision with the deal could be a bad sign. They might think that’s all IoT will be, in which case somebody is going to eat their lunch, or they might have had to move quickly to take some position because they’d diddled too long.
What IoT and other industry developments are showing is that service value is flying out of connectivity. This is largely due to the fact that residential broadband is stuck in zero-marginal-cost all-you-can-eat pricing and that mobile broadband is really mostly about watching videos. On the business side, higher-priced connectivity services are really site-connection services not people-connection services, and the number of new sites to connect isn’t really elastic with price—nobody builds offices because it’s cheap to connect them. Since you can’t really do much to feature-differentiate connection services, you can see there’s nowhere to go but up.
Despite the hype, this doesn’t mean going up in OSI layers. The fact is that higher-layer OSI protocols aren’t even “in-network”, they’re on-site by definition, and in any case hardly anyone really knows what the real OSI layers above Level 3 are. We’re really talking about something more like cloud service than network service.
Cisco’s earnings call transcript doesn’t exactly resonate with this higher-layer non-connectivity view. Robbins’ first priority as stated was ACI, then security, third cloud/SaaS services (WebEx, for example) and finally M&A to expand Cisco’s strategic scope. I think Cisco needs to reorder this list while they can, to take advantage of the fact that Cisco has a window here to ride decent performance while looking at the inevitable shift.
Cisco didn’t mention SDN or NFV at all on their call. That’s not automatically a bad thing, because it’s far from clear that the vision of SDN and NFV the industry is moving to will ever compel major changes in costs or revenues, and thus any improvement in the profit-per-bit constriction they face. However, both SDN and NFV are to a degree symptoms of network issues that Cisco does have to face, and failing to mention them means Cisco may be trying to address the future without referencing technologies that operators think are the drivers of that future. NFV, as something the operators themselves started, is a particularly dangerous thing to ignore.
Perhaps, you might think, Cisco is deferring to its new partnership with Ericsson. Well, Cisco didn’t mention that partnership either until a Street analyst asked about it, and in their response they focused on the tactical/sales impact (minimal in the near term according to Cisco) and not on how it might be a pathway to bridging Cisco to the future. That’s in-character for Cisco, always known for a “tomorrow is the focus, not the day after so make your quota” mindset, but risky in two dimensions.
Right now, without anyone really driving the bus, SDN and NFV are both focusing on the low apples of opportunity. That means focus on cost, and cost focus is really problematic for a vendor whose equipment sales are a big part of the cost picture. It’s also building more credibility for white-box and open solutions because nobody is really driving a story of new benefits, new revenues, that’s meaningful or even credible. So we’re actually promoting commoditization.
Cisco also needs to remember that Ericsson is an integrator in these new technology areas. Integrators make money on professional services and they have relatively little incentive to push high-priced hardware because a fixed budget with higher equipment costs inside leaves less for professional services. Anyway, nearly all the major carrier integration projects these days have a strong open-solution target, which doesn’t favor Ericsson pulling Cisco through. Despite Cisco’s comment that there are already deals in the pipeline, Cisco may gain less from the partnership than Ericsson.
Logically, what Cisco needs to be doing is at least epitomized by the NFV benefit case, if not directly related to making it. Operations efficiency and new revenues are the current priorities for NFV, but neither has to be NFV-specific. Cisco has no real position in OSS/BSS, no real position in NFV management and orchestration. It’s hard to see how Cisco would be able to promote new efficiencies and revenues and ignore what operators think is most likely to generate them, but if Cisco at least blew kisses at NFV while addressing efficiency/revenue goals, they could hope to win something.
This is all about new “R” in an ROI sense. If operators have no real hope of raising revenues, they have to lower costs. Conversely, a credible new-revenue position helps a lot in taking pressure off for cost reduction, pressure that could mean spending less on network gear or maybe switching to price-leader Huawei. Who, by the way, has become one of the leaders in carrier SDN and NFV.
The thing is, Cisco has faced fast-moving competitors before, and they may think that this time is no different. They’re wrong. What’s at stake here is the notion of proprietary technology as the foundation for networks. The enemy for Cisco is the “open” movement, from software to server designs. It’s going to take time to get that movement on track, but when and if it finally gels, it’s going to be the worst threat Cisco has ever faced.
Which means Cisco should be focused on minimizing that risk. They can’t expect to get away with Dirty Open Source Tricks, but they do have an easy path forward—speed. If Cisco can accelerate the market instead of hanging back, they could deliver key benefits before an open alternative existed. The smart path for Cisco to take would be to push hard on an NFV approach that embraces Web-layer services to augment basic NFV, delivers on OSS/BSS integration, and accelerates NFV deployment. They have little to lose in a higher-layer-focused deployment of NFV, and in fact if they could hasten deployment they’d likely beat any effort to standardize white-box servers and switches and make key features open-source. If they wait, as they have been, then events overtake them.