In a lot of ways, Cisco is the most important company in networking. They have the largest strategic influence on buyers in my surveys, and they have the most strident and effective marketing. They’ve been no slouch in market performance, either. It’s because of all of this that we need to look hard at their quarterly earnings, and what they said on the earnings call. They might know something, and they’re surely able to communicate.
Street consensus is that Cisco disappointed, though their quarterly numbers matched or even slightly exceeded expectations. What concerned Wall Street was soft guidance and unfavorable trends in sales in many areas. Services did well, but the key product sectors were flat to down. Service provider/commercial sales were a bit improved, but enterprise orders were down 7% y/y, worse than the previous quarter.
The issue for Cisco, IMHO, is the same as it is for Wall Street. Networking has been a kind of supply-side darling for decades, where everyone anticipated the value of improved connectivity and deployed equipment to provide it. Now, service providers are finding return on infrastructure creeping toward zero (or negative), and enterprises have shifted their focus to almost pure cost management. From “Build it and they will come!” to “Build it cheaper or don’t build at all!”, in short. Even though this particular shift has been visible for two decades, everyone has been successful in blinding themselves with hope that it will naturally reverse, or someone else will take the time and money to reverse it.
5G is the focus of the current hope delusion. It’s not that 5G won’t happen, of course; it’s a modernization of the radio network that’s essential for mobile services to continue to grow, and it’s a reasonable (and perhaps compelling) new approach for “wireline”, meaning fixed wireless. The thing is that we’ve promoted 5G to be such a winner for everyone that the value chain needed to generate the victories has become implausible.
Which leaves networking with no clear driver. As Chuck Robbins, Cisco’s CEO, said in their earnings call, “we are seeing longer decision-making cycles across our customer segments for a variety of reasons, including macro uncertainty as well as unique geographical issues.” While he still told the Street that traditional supply-side values will return (“The long-term secular growth trends of 5G, Wi-Fi 6, 400-gig and the shift to the cloud remain and we expect to benefit from them”), Cisco is actually facing the truth internally, I think, and that just might set them apart from the rest of the network vendors. Telling the Street the raw truth is rarely smart in confusing times, so we have to look inside Cisco’s comments to find just what that raw truth is.
Raw Truth Number One: Cisco is expecting that network equipment will not regain its former glory even three or more years out, and that whatever it does regain will come as a result of a complete transformation of the vision of (and mission of) the network. Cisco lays this change at the foot of things the Street and media understand (“The broad adoption of multi-cloud and modern application environments is changing how the world’s largest networks are built, operated and secured, and Cisco is at the center of this transition”), but they do understand it internally.
Which leads us to Raw Truth Number Two: Cisco knows that monolithic network hardware designed around a proprietary model of equipment will fall to open-model networking. Open-model networking means that software and hardware will be disaggregated, and that open architectures will be available for both. I blogged last week on the various network models, and while I’d hardly suggest that Cisco agrees with me, I think they see the same basic points.
In an open-model world, you have three choices: commoditize, differentiate in each disaggregated area, or make money on integration more than on product. I think Cisco is demonstrating it intends to do all three of these things, but with some finesse.
That’s particularly true with the “commoditize” choice. Cisco accepts commoditization in areas where differentiation is difficult, and so I think it intends to focus on promoting areas where Cisco’s capabilities can shine, and focus on contaminating others’ hopes for differentiation where Cisco itself doesn’t have any. Last week, Cisco said the US should not invest in 5G companies, which to nobody’s surprise isn’t what Cisco is. They also announced a partnering with Rakuten to “do the impossible”, and build the “world’s first fully virtualized, fully-automated, cloud-native mobile network.” Obviously, this marks territory on the turf of Nokia, Ericsson, and Huawei.
5G is important less for the boatloads of cash vendors could gain, than for the influence Cisco could lose. The real meat of 5G lies in the radio network and mobility management; beyond that, it’s pretty much just a question of backhaul and metro infrastructure. Cisco doesn’t make the secret sauce of 5G, and so why not change the recipe? Be a good citizen and focus on open networking where your competitors want proprietary advantage. That might also force them to defend their own turf, making it harder for them to try the same recipe-change strategy on you!
“In December, we introduced Cisco Silicon One, a first-ever single unified silicon architecture and the Cisco 8000 carrier class router family built on Silicon One as well as our new IOS XR7 operating system. We also announced new flexible purchasing options that enable customers to consume our technology however they choose.” So, Robbins describes Cisco’s overall differentiation approach. You start by giving yourself distinctive assets in the spaces you’re going to defend, which is disaggregated silicon, hardware, and software.
Your next step is to elevate the decision; I’ve italicized the key points in this quote: “Now, let me share a brief update on our businesses, starting with infrastructure platforms. As the global leader in networking we believe we are well positioned with our intent-based networking portfolio given the strategic investments we’ve been making. Over the past several quarters we’ve made tremendous progress integrating automation, analytics and security across our enterprise networking portfolio, while at the same time shifting to a subscription-based model.” Integration is one of the future business foundations Cisco wants to address, so they’ll say “integrating” and they’ll also emphasize their global experience; you can trust Cisco. Intent-based networking is an umbrella layer to abstract traditional hardware and support evolution, and automation, analytics, and security integration point out the higher-layer requirements and the need for integration. Bet they spent some time wordsmithing this.
One point that cuts across multiple value propositions is the challenge of addressing the commoditizing trend in enterprise network gear. Make it cheaper, remember? Cisco proffers a vision of workplace transformation, meaning productivity enhancement. “we believe we’re the only Company providing a cognitive, highly secure and analytics-driven collaboration platform, which is the foundation for their workplace transformation.” How? “We recently brought to market several key WebEx capabilities which combine context, AI and machine learning to enable our customers and their teams to further enhance their meeting experiences.” That gets both the PR-glitz buzzwords (AI/ML) and the real issue (context) into one sentence. Bravo!
The only place Cisco punted in this whole picture is in the area of addressing transformation of the service providers. There, Cisco is accepting that the open-network model is inevitable: “we launched Silicon One which is at the heart of these new systems called Cisco 8000 that we launched and we also announced that we would be willing to sell our silicon to go into a white-box or sell it just directly to a customer if that’s how they like to procure it.”
Every engagement to Cisco is marketing, messaging, and I poke fun at them for that, but the fact is that they’re doing the right thing here, and doing it far better than anyone else. Sure, Cisco would use a megaphone to whisper sweet nothings into a prospect’s ear, but the prospect would hear it for sure. Cisco competitors don’t bother whispering or shouting, and that’s the on-ramp to Cisco success for this coming, critical, period.
Open-model networking has been available for a decade, and yet it has failed to generate enough of a shift in infrastructure to create a significant digit on an operator’s bottom line. One big reason is trust, because anyone who recommends an approach hardly anyone takes had better be darn confident that they can trust whoever’s going to convert that approach into deployment. To quote a financial network service provider, “You gotta understand my position here; If this doesn’t work there’s a hundred banks I can never work for.” Robbins has the answer: “we’re benefiting from our strong position as our customers’ most trusted partner.”
Is Cisco now unstoppable (again), making themselves a kind of IBM-of-networking that just keeps reinventing itself? There is still a vulnerability, and that’s the overall challenge of return on infrastructure, the growing focus on cost avoidance. There are things that both service providers and enterprises could do to dramatically improve return on their network investments. Cisco has at least taken a positioning step toward workplace transformation for enterprises, but it remains bogged down in the supply-side vision with service providers. If somebody really grabs onto the higher-layer service points and runs with them, it would compromise Cisco’s service provider dominance worse than 5G RAN focus would. It could dribble over into the enterprise space too.
“Judge an enemy by its capabilities, not its intentions” is what Norman Schwarzkopf and others have said. Any of Cisco’s network vendor competitors, and any of the cloud-industry players, have the capability to transform the whole network dialog. The latter group are better positioned to do it than Cisco. This is Cisco’s big long-term risk today.
The big short-term risk is that whatever it tries to do to alleviate the long-term issues may have a further negative impact in the short term. If buyers are holding off decision-making, giving them a harder decision to make isn’t much of a remedy. However, if Cisco had faced today’s truth a decade ago, they might not have either short- or long-term issues to juggle today. They’re doing the only thing possible, which is to work to get things right while convincing everyone they’ve done that already.
Time to get out that megaphone, Chuck.